McDonald's Share Drop Due to E. coli Outbreak

By Ananya Mariam Rajesh

(Reuters) – Shares of McDonald's (NYSE:MCD) fell nearly 6% in premarket trading on Wednesday after an E. coli outbreak linked to the restaurant chain's Quarter Pounder hamburgers resulted in the death of one person and sickened 49 people in the U.S.

The outbreak was reported in 10 states, with at least 10 people hospitalized, according to the U.S. Centers for Disease Control on Tuesday. The cases began surfacing in late September and persisted into October.

"This public health scare is the last thing McDonald's needs given that it's already been struggling to drive growth," said Susannah Streeter, Hargreaves Lansdown's head of money and markets.

The E. coli O157:H7 strain that caused the McDonald's outbreak is known to lead to severe illness and is the same strain linked to a 1993 incident at Jack in the Box (NASDAQ:JACK), which resulted in the deaths of four children.

Preliminary findings from McDonald's suggest the outbreak might have originated from slivered onions used in the Quarter Pounder, sourced from a single supplier serving three distribution centers.

Previously, two significant E. coli outbreaks—at Chipotle Mexican Grill (NYSE:CMG) in 2015 and Jack in the Box in 1993—substantially impacted sales for those companies. Chipotle required a year-and-a-half to stabilize, while Jack in the Box experienced four consecutive quarters of sales decline, noted Raymond James analyst Brian Vaccaro.

In July, McDonald's reported an unexpected worldwide sales drop—the first decline in over three years—due to deal-seeking consumers resisting higher-priced menu items.

Analysts indicate that McDonald's fourth-quarter sales might face pressure from this outbreak, though it remains uncertain whether it will be worse than previous E. coli incidents.

The company's prompt actions to identify the outbreak's source and replenish supplies are expected to mitigate the impact, according to J.P. Morgan analysts, who do not predict this will have widespread ramifications in the U.S. or internationally.

McDonald's has taken measures to remove slivered onions and beef patties related to the Quarter Pounder, temporarily halting their sale in affected regions.

"…while it is still early, historical precedent indicates that comparable sales pressures can decline quickly and prove to be temporary, provided there is no recurrence," remarked Andrew Strelzik, an analyst at BMO Capital Markets.

This incident comes at an unfortunate time for McDonald's and its investors, as U.S. comparable sales had just started to gain momentum following the introduction of $5 value meals.