Dear Mr. Berko:

In March 1999 I bought 100 shares of McDonald’s at $96. I now have 200 shares because it split within a couple of months after I bought it. Then in June 2001 I bought 200 more shares at $35, figuring it had hit bottom. I had written you and you said to sell the stock at $35 and don’t buy any more. As you can see I did not follow your advice. Please tell me what’s wrong with this company and if I should sell my stock or average down once again.

W.F., Crossville, Tenn.

Dear W.F.:

You didn’t follow my advice the first time and I doubt you’ll follow it now. I recall your long, long letter of several years ago and I think you’re married to McDonald’s. However, this answer is also for similar questions from Cleveland, Kankakee, Ill., Columbus, Ohio, Portland, Ore., and Cincinnati.

McDonald’s Corp. (MCD-$25.89) has been accorded the coveted Five-Star rating by Morningstar and that’s impressive. However, I doubt that anyone at Morningstar has ever ordered a meal at any of MCD’s thousands of locations.

Yes, management has been cleaning house, whittling costs, trying to make employees more productive, plugging leaks, eliminating redundancies, putting price pressures on its vendors and improving its ordering systems. The company has closed more than 450 bad stores while another 500 underperforming stores may be gone soon. While this cost-cutting and retrenching has been taking place, the company has beefed up local advertising budgets, increased spending on national advertising and promoted a large number of new menu items.

McDonald’s has superb food that presents well and tastes swell. This is one reason why revenues and earnings have risen very nicely during the first two quarters of 2004 and why same-unit revenues increased by more than 8 percent this year.

But I think this new growth is unsustainable for two reasons:

1. With stiff competition from other (just as good) chains plus cannibalization among its own units, MCD will have a difficult time growing its domestic business. In fact, Standard & Poor’s suggests that the company has saturated the domestic market and that competition is sucking away its long-term profitability. As a result, MCD must expand overseas to maintain an acceptable revenue growth. This move could be an unacceptable drain on resources, people and profits.

2. MCD has a serious staffing problem that will drag on revenues and earnings like an anchor. “They never smile and don’t give a darn if I place an order or not,” said D.L. from Cincinnati. Other readers have told me that it’s difficult to communicate clearly with a server, that orders are frequently wrong and on numerous occasions the wait time between entering the door and being served can stretch as long as 15 minutes. The drive-through is worse because once you leave, it’s too late to turn back to request a missing cheeseburger, shake or order of fries.

Your MCD might move a few points higher from here or even fall a few points. But I doubt that in your lifetime the stock will ever move back to the $48 level unless the company gets a cash buy-out offer from Sherwin Williams, U.S. Steel or Pfizer.

In my opinion, as well as those wiser than I, this company has reached the level of incompetence. Many of MCD’s managers, servers and local senior people are a clear, poignant example of what I call the “dumbing down of America.” While there will be further gains in revenues and earnings, they will be difficult to achieve and might not have meaningful impact on share price.

MCD is a great company that needs to make a major acquisition with enormous and conspicuous long-term growth potential. Assuming this will not be the case, I think the share price will be as flat as a Papa John’s thin-crust pizza.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.