McDonald's becomes a hot stock

Shares rise 25% since July 14 as sales rebound

3Q results are likely to beat analysts' forecasts

October 13, 2006|By John Schmeltzer | John Schmeltzer,Chicago Tribune

Shares of McDonald's Corp., the world's largest restaurant operator, have rebounded in the past few months to levels not seen in more than six years.

The climb comes on the heels of a 50 percent boost in the company's dividend and pressure from a hedge fund manager threatening a proxy fight.

The company's stock has risen more than 25 percent from the July 14 close of $33.04 to yesterday's closing price of $42.23 on news that its September sales were stronger than expected and third-quarter profits would exceed the predictions of analysts.

The upside surprise from the world's largest fast-food chain prompted several analysts to upgrade McDonald's stock. The last time the company's stock was at these levels was in the summer of 1999.

Morningstar Inc., a financial-services company, said the sudden increase justifies the firm's belief that the stock had room to rise.

"We were very bullish on McDonald's at the end of May," said John Owens, Morningstar's restaurant analyst, noting Morningstar had boosted its rating of the stock to five stars.

"We felt the stock was undervalued," he said, noting that, like other restaurants, McDonald's was being unfairly punished because of high oil and gasoline prices.

But Janna Sampson, co-manager of the AmSouth Select Equity Fund and director of portfolio management at Oakbrook Investments, said it also didn't hurt that William A. Ackman, general partner of Pershing Square Capital Management LP, was "pounding on the table," threatening a proxy fight.

Ackman, who declined to comment for this article, has said that McDonald's shares are still undervalued by more than a third, despite their recent rise. He has said the company's stock is worth $61 a share, and repeatedly has called for McDonald's to sell its interest in nearly 2,000 company-owned restaurants.

Ackman has been soliciting investors to help him buy as much as $2 billion in McDonald's shares to help wage the proxy fight.

The latest rise in the firm's stock occurred yesterday, when McDonald's said it would easily beat Wall Street's third-quarter earnings estimates. New offerings, including premium coffee and a snack wrap, were drawing more customers, it said.

Analysts had predicted that McDonald's would earn 63 cents per share, according to financial-service company Thomson Financial. McDonald's, however, said its earnings were expected to be 68 cents, or nearly 8 percent higher, and 17 percent higher than a year ago.

The company also disclosed that its European sales, which had been struggling for the past two years, rose 7.6 percent for the recent quarter, and U.S. sales were up 4.1 percent.

The disclosure that McDonald's had completed the disposal of its stake in Chipotle Mexican Grill Inc. also helped boost the stock price.

McDonald's said shareholders traded 18.6 million McDonald's shares for 16.5 million Chipotle shares, an 82.2 percent stake. The exchange reduced McDonald's shares outstanding by about 1.5 percent. McDonald's spun off Chipotle in an initial public offering in late January.

James A. Skinner, McDonald's chief executive, said the quarter's sales figures demonstrate that the changes the company has pushed for three years are "powering sustainable momentum in our business with every area of the world once again posting strong comparable sales growth."

"We are increasing relevance, enhancing menu variety and improving customer convenience," Skinner said.

John Schmeltzer writes for the Chicago Tribune.

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