Evercore ISI Reiterates Outperform Rating on McDonald's (MCD)
Evercore ISI analyst David Palmer reiterated an Outperform rating and $340.00 price target on McDonald's (NYSE: MCD).
The analyst comments "After the close yesterday, the CDC announced an E. coli outbreak that was linked to McDonald’s Quarter Pounders. This outbreak which has so far resulted in 49 sick, 10 hospitalized, and 1 dead. McDonald’s issued a press release following the announcement (see HERE) including a video from US president Joe Erlinger. The food safety issue has so far been regional — with most of the sicknesses reported in Colorado and Nebraska. It appears the E. coli issue is from fresh onion slices that are placed on quarter pound burgers, but the company is also pulling fresh beef quarter-pound burgers in the impacted states (see Figure 1). A reputation for food safety. In our 22 years of covering McDonald’s, we cannot remember a major food safety issue at the chain (although there was an E. coli issue with the chain’s salads in 2018). To some degree, we suspect the US consumer has come to view McDonald’s as the safest of fast food options. That reputation, together with a limited regional exposure, could make the sales impact both short-lived and limited. While the number of e. coli cases is likely much larger than the reported amount, we view the last reported case being October 11th as a silver lining. We hope that headlines will be limited going forward given that 1) the last reported illness was 11 days ago (see Figure 2), and 2) McDonald’s is limiting further exposure with supply chain tracing and the removal of fresh beef and onions from food supply in several states. Past outbreaks at restaurants provides a framework for a range of potential outcomes. While there have been dramatic food safety issues in US quick service history (e.g., Jack in the Box in 1993 and Chipotle in 2015), many E. coli issues result in single digit sales declines over a number of weeks (e.g., Wendy’s in 2022). However, it is worth noting that Taco Bell’s E. coli outbreak in 2006 as well as a concurrent infestation issue at one location in the Northeast led to an 11% SSS decline in 1Q of 2007 for the system. In this case, the fatality and McDonald’s prominent brand could cause an outsized sales impact in the near-term. That said, we believe McDonald’s supply chain tracing will help it limit additional outbreaks. At this point, the outbreak is much smaller than Chipotle’s in 2015. Chipotle’s 2015 food safety issues were five separate incidents, which we detail here: First case: E. coli outbreak in Seattle in July, 2015) The initial food safety issue of 2015 included 5 individuals who got sick from E. coli and 2 hospitalizations, which stemmed from a single Chipotle location in Seattle. Second case: E. coli outbreak in California in August, 2015) The second food safety issue stemmed from a Chipotle location in Simi Valley where 80 Chipotle customers and 18 employees developed symptoms, but further lawsuits stated that there were up to 234 victims. Third case: Salmonella outbreak in Minnesota in August, 2015) There was a reported outbreak among people who had eaten at 17 different Chipotle restaurants in Minnesota with over 100 victims, of which 17 were hospitalized. It was later ascertained that the cause was contaminated tomatoes, but it could not be determined whether the contamination occurred at the source or during packaging. Fourth case: E. coli outbreak in October & December, 2015 in Washington & Oregon) This outbreak spread to over 13 states with 60 individuals testing positive and 22 needing to be hospitalized. Fifth case: Norovirus in Boston in December, 2015) The last case gained headlines as 120 Boston College students became sick after eating from a Chipotle in Boston, which was eventually traced back to a particular sick employee."
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Shares of McDonald's closed at $314.69 yesterday.