McDonald’s Stock Takes Heat Despite Earnings Beat as E. Coli Outbreak Casts Shadow

• McDonald’s stock was down slightly on Tuesday after releasing Q3 earnings.
• The fast food chain beat analysts estimates.
• It announced that last week’s E. Coli outbreak has been contained and was due to onions, not beef.

The fast food chain beat and revenue estimates.

McDonald’s (NYSE:) has been dealing with the fallout in recent weeks of an E. Coli outbreak in about 10 U.S. states, including Colorado and Nebraska, caused by slivered onions in its Quarter Pounder burger.

The good news is that the outbreak has been contained and the Quarter Pounders will return to the menu, after being pulled in the affected states. But they won’t include onions for now.

However, while the outbreak did not impact Q3 sales, the numbers were just okay for McDonald’s in Q3.

It remains to be seen what the outbreak, which occurred last week, will have on Q4 results. According to reports, it caused about 75 illnesses, some 22 hospitalizations, and was linked to one death. It led to some lawsuits, as well.

The uncertainty about the potential impact of the E. Coli outbreak likely caused McDonald’s stock to sputter on Tuesday, trading at just under $297 per share and mostly flat on the day. It is down about 6% since last week.

Earnings Beat Estimates

McDonald’s had solid revenue numbers in the quarter, as they rose 3% year-over-year to $6.87 billion. That topped estimates of $6.82 billion.

Net income in Q3 dropped 3% to $2.26 billion, while earnings per share dipped 1% to $3.13 per share. But on an adjusted basis, earnings were $3.23 per share, which was up 1% year-over-year and beat estimates of $3.20 per share.

However, there were some mixed results for comparable or same store sales. Globally, comparable store sales were down 1.5% year-over-year, but in the U.S., they ticked up 0.3%.

In the U.S., sales were boosted by higher average check growth, partly offset by slightly negative comparable guest counts. A key driver in the U.S. was its $5 value meals and effective marketing.

“We wanted to see three things from the $5 meal deal: first, improved brand perceptions around value and affordability; second, making sure it connected with a single user, especially the lower-income consumer; and third, a shift in guest counts to drive both the short and long-term health of our business,” said CFO Ian Frederick Borden on the call. “The $5 meal deal has done just that and continue drawing customers back into our restaurants throughout the quarter, maintaining an average check north of $10 and being profitable for our franchisees.”

The overall decline was due to soft numbers in international markets, where comparable sales fell 2.1% in international operated markets, led by declines in France and the U.K. In international developmental licensed markets, sales dropped 3.5%, impacted by war in the Middle East and lower numbers in China.

Overall, revenue in restaurants the company owns rose 4% to $2.66 billion, while revenue from franchises increased 1% to $4.1 billion. Operating costs and expenses climbed 6% year-over-year to $3.7 billion, leading to a 1% decline in operating income to $3.19 billion.

“Making This Right”

McDonald’s executives began the call addressing the E. Coli outbreak that occurred last week.

“While the situation appears to be contained and though it didn’t affect Q3 numbers, it’s certainly an important development which I know is on many of your minds,” President and CEO Chris Kempczinski said on the call.

He said this is McDonald’s first serious public health issue in more than 40 years. The CEO called the situation, “wrenching for us” and “deeply concerning.” After being informed by the CDC of the matter, they linked the cases to slivered onions from one facility at its Taylor Farm supplier in Colorado. The company stopped sourcing onions from this facility and found no contamination in its beef.

“On behalf of the entire system, we are sorry for what our customers have experienced. We offer our sincere and deepest sympathies, and we are committed to making this right. One of our core values is to do the right thing, and that has been and will be our guide as we address this situation,” Kempczinski said.

No Material Impact

McDonald’s executives said the company was confirming its previous outlook and did not expect any material impact from the E. Coli situation.

However, Kempczinski did acknowledge the company’s performance has fallen short of expectations in 2024.

In an already challenging environment, McDonald’s could face slower sales in Q4, potentially from the E. Coli fallout, which may have impacted traffic.

Given the uncertainties, and the somewhat elevated valuation with a P/E ratio of 26, it’s probably a stock to put on the backburner right now.

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