McDonald’s (NYSE: MCD) stock has plunged following the release of some very concerning news. An E. coli outbreak involving its famous Quarter Pounder burgers spooked investors, and that sent the stock plummeting by 5% in the following trading session.
The question for investors is how it affects the stock. Although Chipotle (NYSE: CMG) recovered from a similar outbreak when it won back customers’ confidence, investors should not assume they will have a correspondingly large “buying opportunity” with McDonald’s stock. Here’s why.
Investors sold off McDonald’s following a report from the Centers for Disease Control (CDC) detailing an E. coli outbreak. It affected customers across 10 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 passed away.
The CDC has just released this information, and the full extent of the outbreak may not yet be known. Still, out of caution, McDonald’s has removed the Quarter Pounder from the menu in affected areas as it investigates the outbreak. Investors may also hear additional news when McDonald’s releases its earnings for the third quarter of 2024.
Whatever happens, the event brings more uncertainty to McDonald’s stock. It may remind restaurant stock investors of the outbreaks Chipotle suffered in the middle of the last decade.
Admittedly, Chipotle investors who bought amid the outbreaks earned significant returns. Still, with so much uncertainty, investors should not rush to either buy or sell this stock, and should also not see this as a “buying opportunity.”
Aside from a natural reluctance to profit from tragedy, investors should not assume this will become another situation like Chipotle’s past outbreaks. For one, Chipotle does not pay a dividend. In contrast, McDonald’s is one of the more solid dividend stocks in the S&P 500. Its annual payout, which will soon rise to $7.08 per share, offers a dividend yield of almost 2.4%, nearly double the S&P 500 yield of around 1.25%.
Additionally, that dividend has risen annually since its introduction in 1976. With that track record, McDonald’s is unlikely to end that streak over an outbreak, making the stock a more compelling hold than Chipotle.
Investors should also consider the differing business models. Chipotle owns its restaurants and depends primarily on restaurant sales for its revenue.
This is not the case with McDonald’s. In the first half of 2024, McDonald’s earned about 61% of its revenue from franchising. This revenue consists of franchise-related fees and the rent McDonald’s collects from franchise owners.
McDonald’s derived only about 38% of its revenue from restaurant sales. This does not negate its obligation to win back the confidence of its customers, but it blunts some of the revenue losses from the outbreak.
Moreover, the restaurant stock‘s financial performance should concern investors. In the first half of the year, revenue of almost $13 billion was up just 2% yearly. Net income fell 4% yearly during that time to just under $4 billion amid flat operating income growth and rising interest costs. Thus, McDonald’s is likely to face more pain in the near term.
Finally, investors need to watch the valuation. The company’s price-to-earnings (P/E) ratio is about 26, closely corresponding to the company’s 10-year average earnings multiple. That could drop as investors assess the fallout of the outbreak.
Amid current conditions, investors should consider McDonald’s a hold.
Admittedly, most of its revenue stream is not directly affected by the outbreak, and its dividend will keep many investors in the stock. As Chipotle’s history shows, some investors may want to look at this situation as an opportunity to buy.
However, such a move could hurt investors if the outbreak is worse than reported. Moreover, they’ll need to watch the company for actions it will take to restore customer confidence. Considering 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 has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
