To The Moon

$McDonald's(MCD)$ plunged 6% after hours after an outbreak of E. coli poisoning linked to its Quarter Pounder burger was named in a warning issued by the US Centres for Disease Control and Prevention (CDC).The outbreak primarily affected customers in Colorado and Nebraska.

The Incredible E. coli Outbreak?

• INITIAL REPORT: The first case was documented on 27 September, and as the number of cases increased, the CDC issued a warning on 22 October 2024, noting that there had been occurrences at McDonald's shops in multiple states associated with McDonald's Quarter Pounder burgers.

• CASE STATISTICS: To date, 49 people have been sickened by Quarter Pounder, 10 have been hospitalised, and one elderly person has died as a result of the infection.The CDC has stated that it believes that the actual number of infected people is much higher than the number of reported cases because many of the mildly ill patients have not sought medical help.

• Pathogen Traceback: preliminary findings suggest that some cases may be linked to sliced onions from a single supplier that provides products to three distribution centres

Escherichia coli (E. coli) is a common bacterium normally found in the intestines of healthy people and animals.While most strains of E. coli are harmless and even beneficial to the digestive system, certain pathogenic strains can cause serious foodborne illnesses, such as Shiga toxin-producing STEC, which can lead to haemolytic uraemic syndrome (HUS), a serious complication that can result in kidney failure and other health problems.

Additionally, E. coli infections can be spread in the following ways:

• Food contamination: Consumption of undercooked meat (especially beef), unpasteurised dairy products, raw fruits and vegetables.

• Water contamination: drinking contaminated water, especially in rural areas or swimming pools.

• Human contact: contact with an infected person, especially when handling vomit or faeces.

• Animal contact/direct contact with animals carrying the bacteria

McDonald's Response

Following the CDC's warning, McDonald's took immediate action by announcing that it was suspending sales of Quarter Pounder and discontinuing the use of freshly sliced onions and fresh beef patties in the affected areas (e.g., Colorado, Nebraska, etc.).

It's worth noting that Quarter Pounder beef patties are only used in McDonald's Quarter Pounder burgers.So it may not affect other Big Macs as much.

Real problem of McDonald's?

Food safety is indeed an important factor affecting restaurants, but judging by this regional manifestation, this is most likely an incident caused by hygiene issues at a regional supplier, not so much that it spreads to other areas.Food safety issues happen all the time, especially very basic hygiene issues like E. coli.

But the real impact on McDonald's includes

1. Quarter Pounder is a relatively expensive product, and the discontinuation of this product due to hygiene issues, or the impact on consumer confidence in its consumption in other regions, may further drive down the company's same-store sales.

2. Consumers may choose not to go to McDonald's until a final investigative report is available.Potentially favourable to other fast food outlets, including $Yum(YUM)$ $Jack In The Box(JACK)$ $Chipotle Mexican Grill(CMG)$ $Restaurant(QSR)$ $Wendy's(WEN)$ $Shake Shack(SHAK)$

3. Last quarter's results, same-store sales were in negative territory, both in the U.S. (-0.7%) and the rest of the world (-1.3%).Consecutive quarters of inflation have significantly depleted the savings of U.S. households, especially low- and middle-income people, who have begun to "downscale" on these basic purchases, opting for cheaper packages (e.g., $5 packages), which in turn has lowered same-store sales.

4. The current valuation is around 27x PE, which is at the upper end of the company's 5-year average and above the industry's average 5-year PE.If the company's current outlook is to rely on the "$5 package" to drive consumption, then the forward-looking valuation is a bit high.