Big Mac Is Getting Stale

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

McDonald’s (MCD)

Jim: We review one of the most recognized brands on the planet, and even though we all poke fun at Dow stock McDonald’s claims of selling “billions” of hamburgers, the company’s numbers do boggle the mind. It has nearly 25,000 restaurants in 114 countries, including China, and it serves roughly 35 million people every day.

Mike: So at any given moment, Jim, what portion of the global population would you say is standing on line, shifting from foot to foot, waiting for the guy in front to decide whether his order is gonna be super-sized or not?

Jim: And to think it all started with a little store in San Bernardino. Anyway, a year ago this company was in super-sized trouble.

Mike: And deserved it.

Jim: People hated its food. Its earnings and market share were slumping. Management was under siege. Its stock went as stale as a day-old Chicken McNugget. Its army of franchisees was carping. And rivals Burger King, Carl’s Jr. and others were--excuse the phrase--eating its lunch.

Mike: Right, but now we’re being asked to believe that there’s haute cuisine coming soon from McDonald’s to change all of this?

Jim: It’s more like just hot, Mike, not haute. Amid all these problems, McDonald’s CEO quit a year ago and was replaced by a bean counter, Jack Greenberg. To his credit, he’s launched a campaign to turn McDonald’s around, and his moves include a program called “Made for You,” in which McDonald’s kitchens will be overhauled to make its food hotter and fresher.

Mike: In effect, it’s a stab to get McDonald’s counter folks to make it your way, to steal a catch phrase from Burger King.

Jim: Exactly.

Mike: Greenberg has done other things too, like trying to soothe the ruffled feathers of the franchisees. They were getting increasingly annoyed at McDonald’s ferocious expansion, which began to impinge on their business. And let’s just say it: This company had an arrogant attitude toward those people, who actually own and run many of its outlets.

Jim: Not only arrogant, but hidebound in terms of its corporate culture. Greenberg’s taken a whack at that, too, by hiring executives from outside.

Mike: And McDonald’s needs the help. The stream of new products that flopped and the list of crummy promotions that have come out of headquarters at Oak Brook, Ill., is as long as your arm.

Jim: It’s astonishing, really, for a company with McDonald’s massive resources, not the least of which is its brand recognition.

Mike: Remember the “Arch Deluxe”? I had one once.

Jim: And?

Mike: It was repulsive.

Jim: One also wonders how far McDonald’s would have fallen if it weren’t so appealing to kids.

Mike: It’s definitely become a kid-driven, promotion-driven restaurant chain.

Jim: But Greenberg’s changes have thrilled Wall Street up to this point. McDonald’s stock has soared 60% over the last 12 months, and it just split 2 for 1.

Mike: So it now trades in the mid-40s, or about 32 times earnings.

Jim: All well and good, but this stock has had its run, and I wouldn’t buy it today.

Mike: I couldn’t have said it better. Look, having two kids, I’ve spent more than enough time inside these stores. McDonald’s can talk all it wants about “Made for You” and other new products and the fact that it will have a chicken product with actual chicken in it. But the bottom line is: When I think about a McDonald’s meal, it’s frankly pretty unappetizing, and until that changes dramatically, I can’t see it getting traffic gains.

Jim: Think of all the kids who love McDonald’s for the toys. And now think of how much more money McDonald’s would make if the kids’ parents actually wanted to go there. McDonald’s stock would jump faster than you can say “Ray Kroc.”

Mike: Yeah, but there are secular trends working here as well. McDonald’s might say it’s going to bring out a veggie burger or some such because people are wary of eating too much meat and fat. But you know that it’s going to be cooked in oil or otherwise be just as fat-bloated as a hamburger. It’s just not part of the lifestyle of many parents today to eat this kind of food on a regular basis.

Jim: By the same token, though, this is an age when millions of Americans--especially parents--have fled their kitchens for fast food. This should be an age when McDonald’s flourished as never before. Yet it failed to exploit the opportunity.

Mike: McDonald’s will stay fairly healthy--don’t forget, this company gets more than half of its earnings from overseas--but it’s not going to enjoy great growth.

Jim: I don’t see any significant growth, either, even after it rolls out some of the new products they’ve got planned. Like this new bagel-type breakfast sandwich, and a cheeseburger that will have bacon.

Mike: Imagine, a cheeseburger with bacon. What a pacesetter.

James Peltz (james.peltz@latimes.com) and Michael Hiltzik (michael.hiltzik@latimes.com) can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

McDonald’s

Monday: $45.50