On Tuesday, after the close, news broke that McDonald’s (MCD) was implicated in a recent E. coli outbreak that has sickened dozens, hospitalized 10 and resulted in one death.
The CDC connected the outbreak to McDonald’s Quarter Pounders, and in response, McDonald’s has discontinued the use of quarter-pound beef patties and slivered onions in the impacted region.
The news pulled shares down by nearly 10% overnight Tuesday, although, at the time of writing, shares have recouped half those losses and are 5% lower intraday.
Given the quick rebound in shares, it’s worth considering whether the initial overnight sell-off was an overreaction or, conversely, whether the bounce back is a knee-jerk reaction from investors who have been conditioned to “buy the dip.”
With that in mind, let’s take a look at a handful of restaurant stocks that have experienced similar outbreaks and reactions to see how such episodes affected shares.
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Jack in the Box (JACK)
For investors of a certain age, the McDonald’s news almost certainly calls to mind one of the first major E. coli outbreaks in the U.S., the Jack in the Box outbreak in the early ‘90s.
Newly inaugurated President Bill Clinton blamed the E. coli outbreak for “bringing the exotic-sounding bacterium out of the lab and into the public consciousness,” after hundreds were sickened in late 1992 and early 1993.
The CDC connected the outbreak to Jack in the Box in January 1993, and shares of JACK lost as much as 43% of their value between December 1992 and March 1993.
The stock spent the remainder of the year consolidating about 20% below its highs until it succumbed to continued pressures from public awareness and lawsuits that culminated in a fall of more than 70% (from December highs) in early 1995.
What McDonald’s is experiencing now is not a repeat of Jack in the Box’s fall.
The Jack in the Box saga was a wake-up call for food safety that resulted in E. coli becoming a reportable disease for state health departments and prompted changes to FDA food-handling practices, raising the internal temperature minimums for cooked ground beef from 140 degrees to 155 degrees.
Jack in the Box faced allegations of widespread food mishandling which, coupled with issues at their suppliers, resulted in both the restaurant and the suppliers doling out multi-million-dollar settlements.
Unless subsequent news breaks that McDonald’s has been systematically disregarding food safety practices (which seems highly unlikely), this is not an instructive case for investors.
Chipotle (CMG)
Chipotle Mexican Grill faced its own reputation-bruising E. coli outbreak(s) in 2015 that began in July in Seattle and would eventually garner national headlines when as many as 13 states were impacted in the waning months of the year.
These outbreaks, coupled with unrelated salmonella and norovirus outbreaks, prompted major food safety questions about the brand and ultimately drove shares down by more than 30% in the final quarter of 2015.
As with Jack in the Box, the immediate damage was muted until wider concern about corporate practices and persistent headlines (as well as legal settlements) became an albatross for shares.
To wit, the following quote from U.S. News aptly sums up the sentiment in February 2018, when shares bottomed after disappointing earnings and more than two years of investor concern:
Unfortunately for shareholders, the food safety crisis has morphed from a temporary nightmare into a permanent blemish on the brand and its popularity. It’s been less than seven months since the most recent crisis, a norovirus outbreak at a Virginia location that sickened more than 100 people.
For Chipotle, a string of mostly unrelated illness outbreaks simply reinforced the message that the firm was no longer a safe place to eat, and that message persisted for years.
When those concerns lifted, CMG was able to engineer an impressive turnaround, and shares have risen nearly 800% since that February low.
Wendy’s (WEN)
Wendy’s faced its own E. coli outbreak in July and August of 2022 that resulted in more than 100 ill patrons, with 52 hospitalized.
As you can see in the chart above, Wendy’s was coming off a period of weakness in which shares had fallen by more than 25% due to weakness in the sector (McDonald’s fell 10% in the first quarter itself), declining interest in the breakfast offerings, and a cold winter that was a big drag on store traffic.
But aside from an immediate 10% decline from July to October, the concerns about E. coli passed quickly for Wendy’s, and shares were trading higher by year’s end.
The key difference, and the most important takeaway for McDonald’s shareholders, is that unlike Jack in the Box and Chipotle, Wendy’s issues were not reflective of poor (and widespread) food handling policies or processes.
Of course, McDonald’s is currently trading near all-time highs, as opposed to coming off a correction (less rebound potential), but the Wendy’s outcome is something of a best-case scenario.
For long-term shareholders, the recent outbreak news shouldn’t be an immediate sell signal, especially given McDonald’s rapid response.
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