What History Says About Restaurant Promotions and Diseases

Could this be a good buying opportunity?

Jeffrey Seiler
| The Motley Fool

McDonald’s (New York Stock Exchange: MCD) The company’s shares took a hit after the company’s popular quarter pound coins were linked to an E. coli outbreak in several Western and Midwestern states. The USDA believes the likely source of contamination was onions used in the hamburgers.

The contamination caused about 50 people to become ill and one to die. McDonald’s, which has a long history in food safety, has nonetheless vowed to improve its safety protocols.

Meanwhile, the company has withdrawn quarter pound coins from about 20% of its outlets. McDonald’s said it is working with suppliers to be able to bring the Quarter Pounder back to its menu at these locations in the coming weeks.

Restaurant Stockings and Foodborne Illnesses

While foodborne illness outbreaks in large public restaurants are not common, there have certainly been a few instances over the years where this has occurred. Let’s look at some relevant examples and see what this can tell us about McDonald’s and its stock.

Jack in the Box: Perhaps the worst recorded case of foodborne illness occurred at the fast food restaurant Jack in the Box in the early 1990s. Between 1992 and 1993, there were more than 700 illnesses and the death of four children linked to online E. coli contamination linked to undercooked hamburgers.

Sales at the fast-food chain fell for four straight quarters after it said it was to blame for the outbreak in January 1993, and it took the company three years to return to profitability. Meanwhile, the company’s shares fell from $7 at the end of 1992 to a low of $1.69 in February 1995. In May 1997, shares returned to $7.

Chipotle: The largest foodborne incident in the past decade occurred at Chipotle in 2015, when numerous customers became infected with E. coli. Meanwhile, about a month later, more than 100 students in Boston fell ill with norovirus after eating at a restaurant. The company later paid a $25 million fine to settle criminal charges related to the outbreaks.

The incidents have crippled the popular Mexican food chain, which has seen sales plummet. A year after the incident, the company reported a huge 22 percent decline in quarterly numbers. same store salesand its shares fell 45%. Meanwhile, stocks will only fully recover by mid-2019. However, after this the shares will quadruple.

Wendy: The most recent serious foodborne illness occurred at Wendy’s in August 2022, when an E. coli outbreak believed to be linked to romaine lettuce on the sandwiches infected more than 100 people in four states.

However, the incident did not have a major impact on sales, with same-store sales up 7.7% in the third quarter of 2022. Although Wendy’s shares initially fell, they quickly recovered and by the end of 2022 were higher than before the incident.

Taco Bell: Another well-documented case of E. coli occurred at a Yum Brands-owned Taco Bell restaurant near the end of 2006. After more than 70 people fell ill with the salad, sales at the chain fell. Taco Bell’s same-store sales fell in the immediate aftermath of the incident as negative publicity continued to impact restaurant traffic.

The stock fell immediately afterward, but quickly recovered despite subsequent pressure on same-store sales.

What does this mean for McDonald’s?

The first thing that can be concluded from the above cases of foodborne illness is that all of these stocks today are exponentially higher than they were before these cases occurred. Although the timing was different, everyone was able to recover and then thrive. Thus, history suggests that the long-term impact on McDonald’s and its stock will be negligible.

However, in the short term, this will likely have an impact on the company’s same-store sales over the next few quarters. If the incident turns out to be fairly isolated, the stock should recover fairly quickly. The biggest problem with Chipotle was that the first incident was followed by other disease scares, including one in 2018, while the Jack in the Box incident was widespread and resulted in the deaths of children.

The Wendy’s and Taco Bell incidents seem a little more similar to what McDonald’s is currently experiencing. I think investors can continue to wait to see how this plays out over the next quarter or two, but history suggests that buying shares in the coming quarters will be a good idea over the long term.

MCD PE ratio (forward 1 year) data on YCharts

The stock trades at a forward price-to-earnings (P/E) ratio of 23 times next year’s estimates, and is within its recent historical range. Meanwhile, McDonald’s stock typically pegs in a trailing P/E range of 25 to 30, so over the years, as McDonald’s continues to increase its earnings per share (EPS) through new store expansions and higher same-store sales, the stock McDonald’s continues to grow. should continue to be a strong long-term winner.

Jeffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has a position and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: Short December 2024 for $54 at Chipotle Mexican Grill. The Motley Fool has disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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