McDonald’s Stock Tumbles on E. Coli Outbreak — Analysts Debate the Implication

McDonald’s (NYSE:MCD) shares tumbled 5% in Wednesday’s trading session and you can probably lay the blame on the onions.

More to the point, the Centers for Disease Control and Prevention (CDC) connected the fast-food chain’s Quarter Pounder burgers to an E. coli outbreak. According to the CDC, the outbreak has spread to 10 states, resulting in 10 hospitalizations and one death. The CDC noted that “most” of the 49 reported cases involved individuals who had eaten a McDonald’s Quarter Pounder.

It looks like the bacteria source appears to be slivered onions, mainly used in Quarter Pounder burgers and supplied by a single provider serving three distribution centers. As a precautionary measure, McDonald’s has temporarily removed Quarter Pounders from menus in the affected areas. All other menu items remain unaltered and are still available, while the company collaborates with suppliers to restock Quarter Pounders in the coming weeks.

So, investors have been dropping shares in response. Assessing the situation, J.P. Morgan’s John Ivankoe notes the stock is now trading on “emotion/worry vs what we believe should result in no long term damage to the brand.”

Anticipating the obvious query, Ivankoe has a readymade response. “We know we are going to be asked a direct question here so we will answer it, with the stock down 5% (at the time of writing) we are buyers of MCD.”

“Certainly,” the 5-star analyst went on to say, “we are anticipating this company’s leading supply chain will make quick fixes to this problem as already messaged, and don’t expect this to engulf the US or certainly international (which has its own supply chain business).”

Accordingly, Ivankoe rates MCD shares an Overweight (i.e., Buy) (To watch Ivankoe’s track record, click here)

Ivankoe’s positive sentiment is not one shared by Baird’s David Tarantino, an analyst ranked in the top 2% of Wall Street stock experts. While Ivankoe swatted away the potential implications, Tarantino takes a far less favorable view of the situation. The 5-star analyst thinks the outbreak could pose a “major threat to consumer sentiment and MCD’s U.S. comps (key driver of investor sentiment).”

“We also highlight risk to the near-term setup for IOM (international operated markets)/IDL (international developmental licensed) segments given signs of an increasingly tough global macro backdrop,” Tarantino went on to say. “With uncertainty now creeping in across all segments, we find difficulty calling for near-term upside for the shares. We will look to return to a more constructive rating as sales visibility improves.”

The upshot of all that is a downgrade from Tarantino, who has now reduced his rating from Outperform (i.e., Buy) to Neutral. Tarantino’s price target is also lowered – from $320 to $290, suggesting the shares are fully valued. (To watch Tarantino’s track record, click here)

Turning now to the general Wall Street take, the consensus view here is that this stock is a Moderate Buy, a rating based on 18 Buys vs. 7 Holds. Given the $317.81 average target, shares are expected to appreciate by 8% over the next year. (See MCD stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.