McDonald’s: Outbreak Should Be Quickly Contained; We Expect Modest Comparable Sales Impact

Key Morningstar Metrics for McDonald’s

• Fair Value Estimate: $292.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

We expect McDonald’s MCD to move quickly to quell the impact of a food safety scare in a handful of its US restaurants. After an E. coli outbreak that has sickened dozens of people in 10 states, including one person who died, the firm has pulled its quarter pounder burger—the suspected source of contamination—from stores that source from the affected distribution centers.

Importantly, McDonald’s appears to have traced the outbreak to a single supplier of slivered onions, suggesting things should be contained expediently. We expect to lower our expectations for a 1% comparable decline in the fourth quarter by a few percentage points following the news—like the impact Wendy’s WEN experienced after its small 2022 outbreak—resulting in a low-single-digit projected cut to our fair value estimate of $292 per share. The market’s reaction, which sent shares falling 5%-6%, appears slightly overstated, leaving shares trading in a range we’d consider fairly priced.

Food safety issues are a key environmental, social, and governance risk for restaurateurs, given that their brand strength rests heavily on consumer trust. That said, considering larger brands’ sprawling store footprints and diverse supplier bases, small outbreaks happen every couple of years. Consumers tend to be most forgiving when management is transparent, takes quick remedial action, can definitively source the issue, and avoids repeating mistakes. Under such circumstances, food safety scares rarely have a long-term impact on brand health. Importantly, this appears to be the base case for McDonald’s. However, the situation is fluid, and a longer-term failure to remedy concerns could result in a more punitive and longer-lasting hit to comparable-store sales than we currently project.