McDonald's Tumble Is Not a Good Entry Now, May Face Long Headwind; Baird Downgrades and Barclays Cautious
1min read McDonald's shares fell nearly 7% in premarket trading on Wednesday following an E. coli outbreak linked to the restaurant chain's Quarter Pounder hamburgers. While the long-term prospects for the company appear intact, Wall Street analysts warn that it's not a good time to buy the dip.
The outbreak has resulted in the death of one person and has sickened 49 people in the U.S., with cases starting in late September and continuing into October.
Historically, E. coli outbreaks have significantly impacted sales at affected companies. For instance, Chipotle Mexican Grill took a year and a half to stabilize after its 2015 outbreak, while Jack in the Box saw sales decline for four straight quarters following its 1993 incident, noted Raymond James analyst Brian Vaccaro.
Baird Analyst David Tarantino downgraded McDonald's to neutral from outperform, citing that the food safety issue could weigh on short-term sentiment and comparable store sales.
"While we are confident McDonald's ultimately can effectively manage through the E. coli issue successfully, the elevated risk related to the near-term demand outlook for the U.S. gives us some pause at the same time we are seeing signs of an increasingly challenging economic backdrop outside the U.S.," Tarantino wrote.
Despite his positive long-term outlook on the stock, given its strong fundamentals and business model, Tarantino expressed uncertainty over how soon the company can resolve this issue and the extent of media attention it will receive. He cut his price target to $290 from $320 a share and lowered his earnings estimates for the fourth quarter and 2025.
Barclays analyst Jeffrey Bernstein retained his overweight rating on McDonald's but noted that shares might underperform in the short run. "Given McDonald's ubiquitous presence across many markets around the world, traditional and social media will likely report on these outbreaks. In terms of the stock impact, time is of the essence for McDonald's to limit and contain the outbreaks in a swift and decisive manner."
Bernstein views next week's earnings report as an opportunity for management to alleviate investor concerns but expressed worries about a wider withdrawal across the quick-service industry in the near term, given McDonald's prominence.
