Shares of McDonald’s (NYSE: MCD)The company’s reputation took a hit after its well-known quarter pounders were linked to an E. coli outbreak across several states in the West and Midwest. The U.S. Department of Agriculture suspects that the onions used in these burgers may be the main cause of the contamination.

So far, approximately 50 individuals have reported illness, with one fatality attributed to this outbreak. Despite having a solid track record in food safety, McDonald’s has committed to enhancing its safety measures.

In response, McDonald’s has removed quarter pounders from around 20% of its locations.

McDonald’s has announced that it is collaborating with its suppliers to reintroduce quarter pounders to the menu at certain locations in the upcoming weeks.

Restaurant Stocks and Foodborne Illnesses

Although significant foodborne illness outbreaks are rare among large publicly traded restaurant chains, there have been several notable instances over the years. Let’s examine some relevant cases to gain insights into McDonald’s and its stock performance.

Jack in the Box: One of the most severe cases of food-borne illness took place at Jack in the Box in the early 1990s. From 1992 to 1993, over 700 people became ill, and tragically, four children lost their lives due to an E. coli outbreak caused by undercooked hamburgers from the restaurant.

Following the company’s admission of responsibility for this outbreak, sales at Jack in the Box plummeted for four consecutive quarters.

January 1993 marked the start of a challenging period for the company, which took three years to regain profitability. During this time, its stock plummeted from approximately $7 at the close of 1992 to a low point of $1.69 in February 1995. However, by May 1997, the stock had climbed back up to $7.

Chipotle: One of the most significant food safety crises in recent years happened at Chipotle in 2015 when many customers fell ill due to E. coli contamination. About a month later. After over 100 students in Boston fell ill with norovirus linked to the restaurant, the company faced serious consequences, ultimately agreeing to pay a $25 million settlement for criminal charges connected to the outbreaks.

These events severely damaged the well-known Mexican restaurant chain, leading to a significant drop in sales. A year later, they reported a staggering 22% decrease in same-store sales for that quarter, with their stock price plummeting by 45%. It wasn’t until mid-2019 that the stock began to recover fully. However, it subsequently experienced remarkable growth and increased fourfold.

Wendy’s: In August 2022, Wendy’s experienced a significant outbreak of E. coli, which was linked to romaine lettuce used in its sandwiches. This outbreak affected over 100 individuals across four states. Despite the severity of the situation, Wendy’s sales remained robust; their same-store sales increased by 7.7% in the third quarter of 2022. Although there was a brief dip in share prices following the news, they swiftly bounced back and ended up higher by the close of 2022.

Taco Bell: Taco Bell, part of Yum Brands, has also faced notable E. coli outbreaks in the past.

Brands faced a significant challenge at the end of 2006 when over 70 individuals fell ill after consuming contaminated lettuce. This incident led to a noticeable decline in sales for Taco Bell, particularly in the quarters that followed, as the adverse publicity continued to impact customer traffic to its locations.

Although the stock experienced an immediate drop in response to the situation, it rebounded relatively quickly despite ongoing challenges with same-store sales.During an earnings call, the CEO of the company expressed regret over the E. coli outbreak, stating, “We are truly very sorry.”

Implications for McDonald’s

From the recent outbreaks of food-related illnesses, it’s clear that despite these challenges, the company’s stock prices have significantly increased compared to their levels prior to the incidents. Though the timing of recovery differed among them, all have bounced back and thrived. Therefore, historical trends suggest that any lasting effects on McDonald’s and its stock performance will likely be minimal.

In the short term, this situation is expected to affect the company’s same-store sales for the upcoming quarters. If it turns out that this incident is limited in scope, the stock price should bounce back swiftly. Chipotle faced significant challenges when its first incident was succeeded by additional health-related concerns, one of which occurred in 2018. In contrast, Jack in the Box dealt with a large-scale crisis that tragically resulted in fatalities among children.

The events involving Wendy’s and Taco Bell appear to be somewhat similar to what McDonald’s is currently facing. It seems reasonable for investors to hold off and monitor how things develop further.As we look ahead to the upcoming quarters, historical trends suggest that investing in this stock could be beneficial for long-term growth.

Currently, the stock is trading at a projected price-to-earnings (P/E) ratio of 23 based on next year’s estimates, which falls within its recent historical range. Historically, it tends to stabilize at a trailing P/E range of 25 to 30. This indicates that as McDonald’s continues to increase its earnings per share (EPS) over time, there may be more opportunities for value appreciation.

With the recent expansion of new stores and an increase in same-store sales, the company’s stock is likely to remain a strong performer over the long term.

Geoffrey Seiler does not hold any shares in the stocks mentioned. The Motley Fool has investments in and recommends Chipotle Mexican Grill, as well as advising on shorting December 2024 $54 puts for this company. They also have a policy regarding disclosures.

The Motley Fool collaborates with YSL News to provide financial news, insights, and commentary aimed at empowering individuals to manage their finances effectively. Their content is generated independently of YSL News.

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