Dear Mr. Berko:

My wife wants to buy 300 shares of McDonald’s. I know you don’t like the stock, but its revenues, earnings and dividends have done very well in the past half-dozen years. My wife read that Vornado (a big investment firm) owns 15 million shares of the company and she thinks that McDonald’s will make an acquisition of a major restaurant chain, which might be the reason Vornado bought all those shares. So please tell me what you think and let me know if I should follow my wife’s advice and buy the stock.

A.B., Oklahoma City

Dear A.B.:

I haven’t liked McDonald’s Corp. (MCD-$34.47) since it split 2-for-1 in 1999, then traded at $50 a share. I do like MCD’s menu, especially its breakfast burritos; the meat loaf and chicken at Boston Market are superb, and so are the vittles at Chipotle Mexican Grill.

Yes, I know that MCD’s revenues have increased 50 percent since 1999, earnings have grown 41 percent and the dividend has more than tripled. However, MCD’s net profit margins have fallen 18 percent since then, its long-term debt has risen 40 percent and return on shareholder equity has fallen 30 percent. Though earnings per share have increased 41 percent, from $1.39 to an expected $1.95 this year, total net profits grew only 22 percent. The per-share growth is higher because MCD has bought back over 100 million shares in the last few years.

MCD is a mature company, and revenue growth is not expected to exceed 2 percent a year for the foreseeable future. So I don’t think the Vornado Realty Trust (VNO-$85.39) purchase of 15 million shares of MCD was based on revenue and earnings growth or the purchase of a competitor.

Vornado is a very successful real estate investment trust that in the past decade has increased its asset base from $500 million to more than $11 billion via the purchase of office buildings, retail properties, shopping centers, refrigerated warehouses, dry warehouses and hotels. VNO also owned a large position in Toys “R” Us under $15 a share, which it later sold for $26.75, as well as a 4.3 percent of Sears prior to its purchase by Kmart Holdings. I doubt that MCD will be merged into some other corporate structure or become part of a buyout plan via one of Wall Street’s private equity firms such as Kohlberg, Kravis & Roberts.

VNO’s purchase of MCD shares is more a factor of the hamburger chain’s real estate holdings. MCD has more than 30,000 fast-food restaurants and a lot of that ground is owned by the company. In fact, some on the Street think that the bricks and dirt could be worth $12 to $16 a share, and that those numbers are not reflected in MCD’s stock price. Some on the Street would have MCD spin off its real estate holdings in the form of a real estate investment trust whose assets would consist of all the real estate owned by MCD. Call it a McDonald’s REIT, Mickey D’s Properties or Hamburger USA, these properties, which are carried on MCD’s books at pennies on the dollar, represent billions of dollars of value, which is not reflected in the price of the common stock.

So VNO’s $500 million investment for the purchase of 15 million MCD shares could earn a cool profit of between $180 million and $240 million. That’s a nice way to make a 35 percent to 50 percent return on a buck!

The folks at VNO scored home runs when they took large positions in Toys “R” Us and Sears. I doubt they bought Sears or Toys “R” Us on a fancy or a whim. Rather I think they bought Sears and Toys because they had good information.

So far, VNO is two for two. I suspect that the VNO folks have information good enough to give them the confidence to invest 500 million big ones, and that kind of money ain’t small potatoes. So as my dad once said, “If you don’t know where you are going, you have two choices: stop going or follow the leader.” In this instance, I think it’s a wise bet that VNO knows exactly where it’s going, why it’s going there and what it’s going to get when it arrives. So I’m comfortable with your wife’s advice (not her reasons) to buy 300 shares of McDonald’s and I suspect that within a year or sooner, you might be glad you did.

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

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