McDonald's again defies the skeptics

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McDonald's Corp. (MCD) chief executive Jim Skinner today vowed to keep prices at the world's largest restaurant chain as low as they are currently, cementing a big advantage the company has over its rivals.

"Our pricing power is not what it was," said Skinner today on the company's earnings conference call. "Right now we are holding the line on pricing."

McDonald's, which last raised prices in October 2008, has weathered the economic downturn better than most U.S. companies, and the third quarter was no exception.
Net income at the Oak Brook, Illinois-based company rose six percent to $1.26 billion, or $1.15 a share, compared with $1.19 million, or $1.05 a share. Revenue fell 3.5 percent to $6.05 billion. Analysts surveyed by Thomson Reuters expected the home of the Quarter Pounder to earn $1.11 per share on revenue of nearly $6.10 billion.

"I think you still have got some upside," said Gary Bradshaw, of Hodges Capital Management in Dallas ,which owns McDonald's shares among its $800 million in assets, in an interview. "Most restaurants are seeing negative trends in their traffic. Yet, you have McDonald's here with positive same store sales for better than 55 months. Barring any big dips in the economy, you could see McDonald's shares at over $70 over the next 12 to 18 months."

Results were strong around the world. Global comparable sales increased 3.8 percent with the U.S. up 2.5 percent, Europe up 5.8 percent and Asia/Pacific, Middle East and Africa up 2.2 percent. New menu items such as the premium Angus Third Pounder and McCafe espresso-based coffee drinks boosted U.S. operating income by six percent. Operating income rose 10 percent in Europe and 21 percent in Asia/Pacific, Middle East and Africa.

The results from the Golden Arches bode well for smaller rivals including Burger King Holdings Inc. (BKC) and Wendy's International Inc. (WEN), all of which are benefiting from consumers trading down from more expensive restaurants such as diners because they are worried about the economy. Shares of the two chains rose along with McDonald's.

McDonald's, though, continues to take share from all of its rivals, said Morningstar analyst RJ Hottovy in an interview with DailyFinance.

"McDonald's has several advantage over its smaller competitors," he said, including its ability to buy supplies in massive quantities at low prices."

The company is benefiting from its new products such as McCafe, which many on Wall Street see as serious threat to Starbucks Corp. (SBUX). Some of that talk may be overblown.

"It's still a pretty successful launch but -- pardon the pun -- they are losing some steam," said Hottovoy, who likes McDonald's long-term,

For October, the company expects consolidated comparable sales to remain positive. Same-store sales in the U.S. are expected to be down to slightly negative. Wall Street shrugged off the declaration, which would be the first time the closely watched figure went negative in more than six years.

Skinner denies his company is recession proof. But once again, it has proven to be recession resistant.
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