McDonald’s (NYSE:MCD) Share prices have fallen following the publication of very worrying news. An E. coli outbreak involving the famous Quarter Pounder burgers spooked investors, sending the stock plummeting 5% in the next trading session.
The question for investors is what impact this will have on the shares. Although Chipotle (NYSE: CMG) having recovered from a similar breakout as it regained customer confidence, investors should not assume they will have a correspondingly large ‘buying opportunity’ with McDonald’s stock. This is why.
Investors sold McDonald’s after a report from the Centers for Disease Control (CDC) detailing an E. coli outbreak. It affected customers in ten states, with the outbreak hitting Colorado the hardest. According to the agency, at least 49 people became ill as a result of eating these burgers, one of whom tragically died.
The CDC just released this information and the full extent of the outbreak may not yet be known. Still, out of an abundance of caution, McDonald’s has removed the Quarter Pounder from its menu in affected areas while it investigates the outbreak. Investors can also hear additional news when McDonald’s reports its third-quarter 2024 earnings results.
Whatever happens, the event brings more uncertainty to McDonald’s stock. It could remind restaurant stock investors of the outbreaks Chipotle suffered in the middle of the last decade.
Granted, Chipotle investors who bought during the outbreaks saw significant returns. Still, given the high uncertainty, investors should not rush into buying or selling this stock or view it as a ‘buying opportunity’.
Aside from a natural reluctance to profit from a tragedy, investors shouldn’t assume this will be another situation like Chipotle’s previous outbreaks. First off, Chipotle doesn’t pay a dividend. In contrast, McDonald’s is one of the more solid dividend stocks in the US S&P500. The annual payout, which will soon rise to $7.08 per share, offers a dividend yield of nearly 2.4%, nearly double the S&P 500’s yield of about 1.25%.
Moreover, that dividend has increased annually since its introduction in 1976. With that track record, McDonald’s is unlikely to end that streak after a breakout, making the stock more attractive than Chipotle.
Investors should also consider the different business models. Chipotle owns its restaurants and relies primarily on restaurant sales for its revenue.
This is not the case at McDonald’s. In the first half of 2024, McDonald’s earned about 61% of its revenue from franchising. These revenues consist of franchise-related fees and the rent that McDonald’s collects from franchisees.
McDonald’s only got about 38% of its revenue from restaurant sales. This does not diminish its commitment to regaining the trust of its customers, but it does mitigate some of the revenue losses caused by the outbreak.
Additionally, the restaurant stock’s financial performance should worry investors. In the first half of the year, sales of nearly $13 billion were up only 2% annually. Net profit fell 4% annually over that period to just under $4 billion, due to flat revenue growth and rising interest costs. So McDonald’s will likely face more pain in the near term.
Finally, investors should keep an eye on valuation. The company’s price-to-earnings (P/E) ratio is around 26, which closely matches the ten-year average of the company’s earnings. That could drop as investors assess the impact of the outbreak.
Under current conditions, investors should view McDonald’s as a hold.
Granted, most of the revenue stream isn’t directly affected by the outbreak, and the dividend will keep many investors in the stock. As Chipotle’s history shows, some investors may want to view this situation as a buying opportunity.
However, such a move could hurt investors if the outbreak is worse than reported. Additionally, they should monitor the company for actions it takes to restore customer trust. Given all the uncertainty, staying on the sidelines is probably the best course of action for now.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: Short December 2024 put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
McDonald’s shares plummeted after an E. coli outbreak. Should you respond to the uncertainty? was originally published by The Motley Fool
