Investing

Can McDonald's (MCD) Stock Double in the Next 4 Years After its E.Coli Outbreak?

Rich Duprey

Published: November 13, 2024 10:46 am

The road to recovery for McDonald’s (NYSE:MCD) was abruptly cut short by an e.coli outbreak at its restaurants. 

Shares that had surged 30% between the fast-food restaurant’s July low and its October high, fell sharply after the U.S. Centers for Disease Control traced an outbreak of the bacteria back to the onions McDonald’s used on its Quarter Pounder burgers.

While the restaurant operator tries to contain the fallout from the outbreak, the stock is currently stagnant. Investors may wonder whether this is an opportunity to snap up some MCD stock cheap or has the damage been too much.

24/7 Wall St. Insights:

• McDonald’s (MCD) stock tumbled recently after an e.coli outbreak was identified in its Quarter Pounder burgers.
• Numerous food chains have suffered food-borne illness problems, some irredeemably so, but McDonald’s contamination issue should be a short-lived, one that it can readily recover from.
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An industry replete with recurring food issues

Food-borne illnesses are never something a restaurant wants associated with its business. Damaged reputations can be hard to repair and regaining customer confidence can take time. Some never recover.

Mexican food chain Chi-Chi’s, for example, ended up going bankrupt in 2004 after a hepatitis A outbreak the year before irreparably undermined its business. Numerous other companies have had their reputations severely damaged.

One of the most notable in recent memory was Chipotle Mexican Grill‘s (NYSE:CMG) e.coli contamination incident in 2015. Its stock lost over 60% of its value over the ensuing two years as same-store sales cratered due to customers abandoning the chain. While it subsequently went on a tremendous run higher afterward, gaining nearly 1,000%, it was a long, lonely period for investors.

The initial fallout for McDonald’s doesn’t seem especially disastrous, although 50 people fell ill and there has been one tragic death. Because the culprit was quickly identified, the food item was isolated, and McDonald’s stopped sourcing onions from the grower, the damage may have been contained. It could result in a relatively quick turnaround.

A solid business to fall back onto

The restaurant operator’s business is fundamentally strong. As is well known, most of McDonald’s restaurants are franchises, businesses that it licenses to owner-operators for which it collects rents and royalties. More than half of its restaurants operate under this conventional license. The corporation actually owns only around 5% of its restaurants with the remainder paying McDonald’s royalties or royalties plus a percentage of profits.

That’s important because although it looks like McDonald’s revenues aren’t growing fast, it is still producing substantial profits that are increasing. Its cash profits are also rising with free cash flow rising at double-digit compounded annual growth rates over the past five years.

That’s enabled McDonald’s to increase its dividend at a fairly consistent annual rate of 8% for the past decade. In 2013, the dividend was $3.12 per share, but today has increased to $7.08 per share, offering a yield of 2.2% annually.

While MCD stock isn’t nearly as cheap as it was back in July, its current price remains attractive. The food-borne illness issue shouldn’t be a significant roadblock to McDonald’s, and barring further outbreaks (a problem Chipotle had a decade ago), the restaurant chain should get back on track.

Key takeaway

With that said, I don’t foresee a double coming in the next few years. McDonald’s just isn’t that kind of growth stock. It is more of a slow-and-steady investment that continually rewards investors with dividends and stock buybacks.

The restaurant chain remains a good, long-term investment for your portfolio. I don’t expect it to go on a decade-long growth spurt as Chipotle did, but McDonald’s will reward you for your patience.