If you're a long-term Drip investor, you're probably not too worried about today's stock market. Sure, you keep an eye on things. You know the tenacious bear has ruled for 30 months now, and counting. You've probably seen the value of your holdings drop.
But at the same time, there's a bright side. When stock prices are depressed, you're able to buy bigger slices of good companies than you are when the bull is in charge. If you've done your homework and found solid, lasting companies, you probably have a smile on your face each time you mail in your check to buy more shares.
With that in mind, it's probably worth taking a look at a couple of American icons that have fallen on hard times lately, McDonald's (NYSE: MCD) and International Business Machines (NYSE: IBM). Both have rock-solid reputations, and it's certainly not a stretch to assume they'll be around for the next few decades. As we look at each, we'll try to find out why the stocks are depressed, and whether the businesses will continue to suffer in the long term.
Fallen arches
Any company that has served over 100 billion meals has to be doing something right. Indeed, McDonald's is the world's No. 1 fast-food chain, with more than 30,000 restaurants in 121 countries.
Unfortunately, the company has also done some things wrong. Besides having to swim against the tide of a worldwide economic slowdown and smarter competition, management has made a few mistakes on its own. The most notable has been a deteriorating relationship with its franchisees, which make up about three-fourths of all McDonald's units.
The top brass at Mickey D's instituted a "Made for You" food preparation program that significantly increased waiting times. That and a few other changes did not sit well with the franchise owners.
Meanwhile, McDonald's became concerned about the quality of experience at the franchise units. Fortune magazine obtained a memo sent from headquarters to franchisees in the Raleigh, N.C., region that detailed "alarming research" conducted by anonymous shoppers hired by the company. The biggest complaints were of slow wait times, rude service, and unprofessional employees.
Finally, some believe McDonald's pushed expansion too hard in the late 1990s, going from about two new store openings per day to seven. As a result, it probably lost a good measure of control over operations. "Everything from the cleanliness of the store to the way hamburgers are placed on the grill for efficiency has been compromised," according to a story in The Washington Post.
These problems cannot be understated. The issue before us today is whether they can be repaired. Situations like this take a long time to develop, and there are no quick fixes.
Management is obviously not sitting on its hands. The aforementioned memo laid out steps for franchise owners to enact immediately in order to improve service, and it set up a series of regional meetings to further address the problem. If owners don't improve, they could face banishment. "When an owner-operator is not meeting minimum standards," said McDonald's USA President Mike Roberts, "we must and will act swiftly to remove them from the system."
To battle competitors like Burger King and Wendy's (NYSE: WEN), the company will be lowering some prices later this year, and will introduce a new "dollar menu" featuring selected items for a buck. And, for the first time in several years, it will roll out a national advertising campaign next month -- a $20 million blitz covering television, radio, and newspapers.
Like most everything investing-related, so much boils down to competent management. It has identified problems, but the hard part is fixing them. And, to be honest, it hasn't done much lately to inspire confidence.
But let's consider a few things here. The McDonald's brand is as golden as its arches. That brand did not develop out of incompetence; using its first-mover status, the company has out-managed and out-maneuvered all other fast-food chains over the decades. It's still a cash cow, generating $782 million in free cash flow in 2001.
The stock price is at a seven-year low, and fully 60% off its all-time high. That's incredible for a non-tech company with one of the top brands in the world. This is clearly one beaten-down stock with a lot of bad news already priced in. My feeling is that it would take awful management to foul this up, and that patient investors should give this one a long look.
Big blew
Things aren't quite as bad for IBM, but they're bad enough. Big Blue has the flu and is sitting near a four-year low -- 53% off its all-time high. Like McDonald's, IBM has one of the strongest brands in existence. No company in the world provides more hardware or services to the computer industry, and it's second only to Microsoft (Nasdaq: MSFT) in software sales.
IBM is down in the dumps these days on worries that corporations are cutting back on computer services. Last week, its biggest competitor, Electronic Data Systems (NYSE: EDS), issued a chilling warning, saying it would earn only $0.12 to $0.15 a share in the third quarter -- nowhere near the $0.74 it expected. Electronic Data said that not only are there fewer new sales, but existing customers are also spending less.
When investors swallowed that news, they were sickened enough to chop the company's stock price in half. Others in the sector, including IBM, Sun Microsystems (Nasdaq: SUNW), Computer Sciences Corp. (NYSE: CSC), and Accenture (NYSE: ACN), dropped about 10% in sympathy.
If corporate spending on computer outsourcing is going into its own little bear market, IBM's sales and earnings will suffer. But a company spokesman, commenting on the Electronic Data earnings warning, told Bloomberg, "Based on what we understand, and given the substantial miss, the key issues appear to be unique'' to Electronic Data.
Here we have a company saying outright that things aren't as bad as they seem. Paraphrased, IBM is saying, "Don't lump us in with Electronic Data." But can we trust management?
Unfortunately, I can't confidently answer "yes" to that. It has been less than forthright with its accounting practices in the past couple of years, and Fool writer Whitney Tilson, for one, thinks that exposes the stock price to plenty of downside risk.
My take on IBM is that it's probably best to wait this one out until we see more definitive trends in corporate outsourcing -- and whether its accounting will come back to haunt it.
Do you have any beaten-down blue chips on your watch list? If so, feel free to share them with us on the Drip Investing - Companies discussion board!
Last week, Rex Moore saw a sign that read "Clean restrooms ahead." So he did. At time of publication, he owned shares of Microsoft. His profile and the Fool's disclosure policy are on the bestseller list in the Philippines.
