McDonald’s slides as analysts debate if the E. coli sell-off is an overreaction

McDonald’s (NYSE:MCD) traded lower in early action on Wednesday after disclosing that initial findings from an investigation into an E. coli outbreak indicate that a subset of illnesses may be linked to slivered onions used in the Quarter Pounder and sourced by a single supplier that serves three distribution centers.

Baird downgraded McDonald’s (MCD) to a Neutral rating from Outperform. “While we are confident MCD 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.,” warned analyst David Tarantino.

J.P. Morgan said it is buyers of the restaurant stock. Analyst John Ivankoe said McDonald’s (MCD) is currently trading on “emotion/worry vs. what we believe should result in no long-term damage to the brand.”

Barclays kept an Overweight rating on McDonald’s (MCD) in place. Analyst Jeffrey Bernstein sees MCD shares underperforming in the near-term as the outbreak impacts consumer confidence. “In terms of the stock impact, time is of the essence for McDonald’s to limit & contain the outbreaks in a swift & decisive manner,” he noted.

TD Cowen analyst Andrew Charles said the firm’s quick franchisee checks suggested McDonald’s (MCD) is on top of the issue and that it seems largely contained. Charles said it is only natural to expect a short-term impact on sales. Based on the food contamination analogies of Chipotle (CMG) in 2015 and Jack in the Box (JACK) in 1993, Charles and his team estimate that every 1% annualized change in U.S. same-store sales will lead to a $0.09 EPS impact. TD Cowen sees a worst-case scenario hit to Q4 EPS of $0.37.

Morgan Stanley said there could be a knee-jerk reaction to the development. “If the issue is, in fact, confined to a single vegetable supplier, as noted, we think that is probably the best outcome in this type of situation. It does not suggest a process problem in restaurants or an issue with beef supply, which could be broader and sometimes more severe,” stated analyst Brian Harbour. “As such, while this creates some business disruption in the short term in select markets, we don’t think this is a medium/longer-term threat to MCD’s business stability or reputation,” he added.

Shares of McDonald’s (MCD) were down 7.00% to $292.66 in premarket trading.