On Wednesday, Raymond James reiterated its Market Perform rating on shares of McDonald's Corporation (NYSE:MCD) following news of an E. coli outbreak. The outbreak, which is linked to the fast-food giant's quarter pounders, has been reported across 10 states, with the majority of cases in Colorado and Nebraska. McDonald's stock experienced a drop of approximately 10% after the market closed today, later paring some losses to trade down 7%.
The U.S. Centers for Disease Control and Prevention, along with other federal agencies, are investigating the outbreak. McDonald's has responded by removing slivered onions from select state restaurants and temporarily ceasing the sale of the quarter pounder in affected areas. The company assured customers that other menu items, including various beef products, remain unaffected and available.
To date, there have been 49 reported cases, resulting in 10 hospitalizations and one fatality—an older adult in Colorado. The cases began emerging in late September and have persisted into October. Historical data shows varied impacts of E. coli outbreaks on restaurant businesses, with some experiencing minimal effects on comparable sales, while others have seen significant downturns.
McDonald's, which operates a highly franchised business model with its U.S. segment accounting for a substantial portion of revenue and EBIT, is less vulnerable to swings in comparable sales than company-owned models. An estimated 1% change in U.S. comparable sales could equate to a roughly $0.10 impact on annual EPS. By comparison, during Chipotle (NYSE:CMG)'s E. coli outbreak in 2015, the company's EPS saw a dramatic decline.
In other recent news, McDonald's has been grappling with an E. coli outbreak linked to its Quarter Pounder hamburgers, causing hospitalizations and one fatality. The fast-food giant responded swiftly by replacing the implicated onions and beef patties and temporarily halting the sale of Quarter Pounder hamburgers in the affected locations. Amid these developments, analyst firms BTIG and Baird have maintained a Neutral rating on McDonald's shares, citing potential impacts on consumer traffic and U.S. comparable sales.
In a significant business shift, CITIC Ltd divested its 19.23% stake in Fast Food Holdings, which operates McDonald's China and Hong Kong businesses, for $430.3 million. Meanwhile, Loop Capital Markets maintained a Buy rating on McDonald's shares, citing growth that surpassed expectations in the third quarter. Other analyst firms such as Truist Securities and UBS also raised their price targets for McDonald's shares, anticipating strong performance.
These recent developments underscore the evolving situation for McDonald's Corporation, with analysts from BMO Capital Markets and J.P. Morgan expecting the company to recover quickly if no further incidents occur. However, Baird has noted that it would reconsider its stance once there is better visibility on sales outcomes.
InvestingPro Insights
In light of the recent E. coli outbreak affecting McDonald's, investors may find value in examining some key financial metrics and insights from InvestingPro. Despite the current challenges, McDonald's maintains a strong market position with a market capitalization of $225.74 billion. The company's resilience is reflected in its dividend history, with an InvestingPro Tip noting that McDonald's has raised its dividend for 49 consecutive years.
From a financial perspective, McDonald's reported a revenue of $25.76 billion over the last twelve months as of Q2 2024, with a healthy gross profit margin of 56.97%. This strong financial foundation may help the company weather the current crisis. Additionally, an InvestingPro Tip highlights that 10 analysts have revised their earnings upwards for the upcoming period, suggesting confidence in the company's ability to manage the outbreak's impact.
It's worth noting that McDonald's stock is trading near its 52-week high, with a one-year price total return of 26.52% as of the most recent data. This performance, coupled with the company's history of maintaining dividend payments, underscores its long-term stability in the face of short-term challenges.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips that could provide valuable insights into McDonald's current situation and future prospects.
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