Fund managers are flipping over McDonald's stock

The manager of the top international stock-and-bond fund for thepast decade has made his largest investment ever in a restaurantstock: McDonald's Corp.

Jean-Marie Eveillard of Arnhold & S. Bleichroeder Inc., New York,stepped up purchases after one of his analysts was impressed by themodern decor and salads at the McDonald's restaurants in France hevisited on vacation nine months ago. He added about half a millionshares in the past three months, raising his stake to 2.45 millionshares valued at about $35.6 million.

Eveillard, a 63-year-old native of France, searches for stockspriced at a discount to the value of their assets. He and other so-called value managers say McDonald's, after its stock plunged 70percent in four years, might recover when new Chief Executive JamesCantalupo improves its U.S. business.

"Consumer surveys show McDonald's is at the bottom of the pilewith slow service and food quality," said Eveillard, who helps manage$3.5 billion at Bleichroeder. "Management in the next 18 months can,if not fix the problem, make substantial improvements."

Eveillard's First Eagle Global Fund has returned 10 percent a yearthe past decade and 12.5 percent annually over two decades, withholdings led by timberlands owner Rayonier Inc. and gold producerNewmont Mining Corp. He also runs the First Eagle Gold Fund, the top-performing mutual fund in 2002 among 13,603 funds tracked byMorningstar Inc.

He estimates McDonald's assets are worth about $30 a shareincluding $10 a share in real estate. McDonald's shares closed at$15.80 Monday, up $1.25.

Investment firms Dodge & Cox Funds, Capital Research andManagement Co. and Harris Associates LP, which purchase stocks theyconsider to be cheap, have been buying McDonald's shares, which fellto a nine-year low last month. Dodge & Cox doubled its holdings inthe fourth quarter to 36.6 million shares, Capital Research added 6million shares, and Harris bought 3 million more.

Kevin Grant, who helps manage more than $25 billion for Harris,said, "They have made mistakes with the quality of customer service,and management is addressing them. The valuation certainly looksattractive."

McDonald's shares trade at about 11 times their past year'searnings, half the average price-earnings multiple of the past decadeand less than a third of its peak valuation of March 1999.

In the fourth quarter, McDonald's had its first quarterly losssince going public in 1965 because of costs to close restaurants.Sales worldwide of restaurants open at least 13 months have fallenfor 12 straight months through February.

"Fast food is out of favor," said Fred Sears, chief investmentofficer of Eastern Point Advisors, which manages about $120 millionand has been buying McDonald's shares. "The American appetite is veryfickle. As soon as they get customer service in line, we think thestock will do very well."

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