McDonald's Kicked in the Mouth

McDonald's is having problems in Europe thanks to concerns over "mad cow" disease and foot-and-mouth disease. First-quarter earnings will take a hit, but the real risk to McDonald's is that one or both of the diseases -- and the concomitant panic -- will jump the Atlantic.

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By Paul Larson (TMF Parlay)
March 14, 2001

Today we found one of the world's top news stories finding its way onto the U.S. financial news scene. An outbreak of the highly contagious foot-and-mouth disease in Britain and on the Continent, combined with continuing fears over "mad cow" disease, has greatly reduced the attractiveness of meat products for many Europeans. Not surprisingly, the world's largest end-distributor of meat products is seeing a bite taken out of its earnings.

McDonald's (NYSE: MCD) announced this morning that its first-quarter earnings per share will come in $0.04 or $0.05 below previous forecasts, largely courtesy of the problems in Europe. Also affecting McDonald's earnings slightly are currency adjustments from local currencies to U.S. dollars: Global top-line revenue measured in U.S. dollars was flat in the first two months of 2001, at $6.2 billion, even though sales measured in terms of local currencies were up 4%.

The earnings impact
McDonald's now expects earnings per share for the first quarter to be $0.29 or $0.30. According to I/B/E/S, the mean estimate for McDonald's before today's warning called for $0.33 in the first quarter, flat with what the company earned last year.

Before today's revelation, McDonald's was expected to earn $1.61 per share for the full fiscal year, up from the $1.47 per share it earned in 2000. Earnings estimates for the full year ahead will obviously be scaled down in the coming days to reflect the first quarter's impact. But McDonald's said that adjusting for currency issues, the company is "optimistic about returning to double-digit earnings-per-share growth for the last nine months of the year."

McDonald's fights back
Instead of sitting on its hands, McDonald's is taking several steps to get consumers back into its European restaurants. The company is quickly enhancing its menu variety away from meat products, and increasing marketing expenses to spread the message that McDonald's has high standards for food safety.

In an effort to prop up earnings, McDonald's is also reducing its capital expenditures in several emerging markets that are in an economic slump, as well as cutting overhead costs.

The real risk
The real risk to McDonald's at this point is that foot and mouth, or even mad cow, will spread to the U.S. Luckily for us, these diseases have been largely contained within Britain and Europe, and the U.S. Department of Agriculture has been aggressively trying to keep the diseases out of America. This morning, the USDA banned all meat imports from Europe.

Nevertheless, the risk remains that one or both of the diseases will jump the Atlantic, make the news, and drastically curtail beef consumption among North Americans. It is a risk investors in McDonald's -- and other food companies -- should keep a close eye on. (For more on the consumer goods business, check out our InDepth page on the subject.)

Even in a worst-case scenario where the U.S. beef market implodes, McDonald's is still in a position to survive and even thrive. The company is not just in the hamburger business: It is in the business of selling convenience. People will always have to eat, and speed will never go out of style.

Paul Larson grew up five minutes away from McDonald's headquarters in suburban Chicago, but he has never owned the stock. You can see Paul's complete stock holdings online. The Motley Fool is investors writing for investors.