Wall Street analysts cut ratings on McDonald's stock after E. Coli outbreak

Investing.com -- Wall Street analysts are cutting their ratings on McDonald’s (NYSE:MCD) stock after an e. coli outbreak linked to the restaurant chain's Quarter Pounder hamburgers led to the death of one person and sickened 49 people in the United States.

The company’s shares tumbled nearly 7% in premarket trading Wednesday.

Following the news, Baird analysts downgraded McDonald’s shares to Neutral from Outperform, raising concerns over the threat to consumer sentiment and McDonald's US comparable sales, a key driver of investor sentiment. 

McDonald's has responded by halting the use of certain ingredients in its restaurants.

“We see risk that concerns about McDonald's food safety could pose a major headwind on short-term demand trends, with the impact likely dependent on how long the issue takes to resolve and how widespread the media attention become,” Baird analysts said.

The analyst compared the situation to Chipotle (NYSE:CMG)'s E. coli and Norovirus outbreaks in late 2015, which resulted in significant declines in the company's comparable sales, but suggested that the impact on McDonald's might be less severe due to different circumstances.

Baird also lowered its price target on McDonald’s stock from $320 to $290

Moreover, Guggenheim analysts slashed their rating on McDonald's from Buy to Neutral and adjusted its price target from $290 to $285.

The downgrade reflects modestly trimmed earnings per share (EPS) expectations for 2025 while maintaining a 23x price target multiple for the shares.

“With 3Q24 U.S. sales momentum, MCD was shaping up to be one of the few restaurants with a clear line of sight into a beat and raise cycle for 2025, coupled with an expected launch of a new value platform slated for announcement in 1H25,” Guggenheim’s team said in a note.

“But media attention on a food safety issue announced yesterday after market close adds risk and with shares down only mid-single digits in post market trading, we worry that those risks are not being accurately reflected in the initial reaction,” it added.

Analysts continue to believe in the long-term strength of McDonald's business moats in the US, thought they remain “concerned that near-term sales challenges may now cause downward pressure on shares.”