From Smartmoney
Say What?
No Bull
By Roben Farzad
January 26, 2001
The Call:
On Jan. 18, Mitchell Speiser of Lehman Brothers issued a note urging caution on shares of McDonald's (MCD) ahead of the multinational fast-food empire's fourth-quarter report. With Mickey D's shares trading at a seven-month high of $34.69 — and approaching a valuation level "not crossed in a year" — the analyst warned: "The uncertainties surrounding fourth-quarter earnings and challenging first-quarter 2001 comparisons are being overlooked." Accordingly, he remained "cautious on the shares going into the fourth-quarter earnings-per-share release," which he predicted could disclose a penny-a-share disappointment. In addition, he wrote, "Mad Cow disease is still a public-relations nightmare," and given that the scare has spread from the U.K. to Europe generally, "this time, it may have a more pronounced effect."
While Speiser did not alter his Strong Buy rating nor his conservative $42 year-end price target, he was hardly inclined to see his clients super-size their weighting in the stock — adding that he wouldn't be surprised to see McDonald's suffer a "10%-plus correction."
The Reality:
On Wednesday, Jan. 24, McDonald's revealed that fears about Mad Cow disease — also known as bovine spongiform encephalopathy — had contributed to a 10% decline in European sales. This in turn led to a fourth-quarter net income drop of 7%: 34 cents a share rather than First Call/Thomson Financial's projected 35 cents. For you fast-food trivia junkies out there, the last time McDonald's quarterly profit actually dropped was in the second quarter of 1998. To make matters worse, word got out that an infected cow had been found at a supplier's slaughterhouse in Italy and — in a development that suggested the scare could spread to American soil — the Food and Drug Administration quarantined some Texas cattle on Thursday on suspicions that feed standards intended to protect against the disease may have been breached. All told, McDonald's, the largest purchaser of beef in the U.S., saw its stock shed more than 13% by week's end, closing Friday at $29, or 16% away from where Speiser urged restraint. |
