Shares of fast food giant McDonald's (MCD -0.40%) have been falling as the company deals with an outbreak of E. coli at its restaurants. At least 90 people have become ill due to the outbreak -- including one death -- apparently due to contaminated onions served on its burgers.
As McDonald's moves to address the issue, investors may not be easily convinced. And when you consider the stock has been trading at a high valuation and investors are also concerned about its growth prospects, there is no shortage of reasons for the market to be bearish on this blue chip stock right now.
But is the business in real trouble, or are these just short-term problems for investors? Here's a look at just how worried you should be about McDonald's stock, and whether this recent slide in valuation could make for a good time to invest in the golden arches.
McDonald's shows just 3% growth in its most recent quarter
On Tuesday, McDonald's released its latest quarterly results, which were far from impressive. Revenue of $6.9 billion for the period ended Sept. 30 was up just 3% year over year. And with costs rising at a faster rate than revenue, the company's net income of $2.3 billion went in the other direction, declining by 3%. U.S. comparable sales rose ever so slightly by just 0.3%, but globally, they were down by 1.5%.
Overall, the results were relatively similar to the company's performance a few months earlier, when for the June quarter, McDonald's reported that its comparable sales were down 1% globally, but that the U.S. market was doing slightly better -- its same-store numbers declined by just 0.7%.
Now, with the outbreak of E. coli potentially impacting the company's sales in the current quarter and perhaps longer, there's the possibility that McDonald's numbers may get even worse.
Investors are paying a premium for a slow-growing business
The near-term outlook doesn't look great for McDonald's, given the E. coli outbreak. And while value meals are helping bring some consumers back to its restaurants, that isn't great for gross margins. It could mean that even if sales rise in the future, the bottom line may increase at a far slower rate.
The problem is that with the stock trading at a price-to-earnings multiple of around 26, the business should arguably be doing better than it is for that premium to be justifiable. By comparison, the average stock on the S&P 500 trades at a multiple of 25.
While McDonald's stock isn't egregiously overvalued, it's by no means a cheap buy, either. It is trading in line with its 10-year average, but amid slower growth, McDonald's valuation may still appear to be expensive.
MCD PE Ratio data by YCharts
Should you buy McDonald's stock?
The recent E. coli outbreak has resulted in McDonald's stock effectively giving back its gains for the year and being back to where it started 2024. It can, however, still make for a good long-term buy, because as economic conditions improve, demand may strengthen, and that may result in better sales numbers in the future.
Plus, with a growing dividend that remains solid and yielding a decent 2.4% (higher than the S&P 500 average of 1.3%), investors could have an incentive to buy and hold despite the recent volatility.
I wouldn't call McDonald's a great growth stock to buy, but it can make for a dependable income investment to hold. It may be on a tough path in the weeks ahead as it deals with the E. coli outbreak, but that shouldn't weigh on the stock in the long run.
As long as you have realistic expectations for the business and know that it may take some time for it to recover both from less-than-ideal economic conditions and an E. coli outbreak, then buying the restaurant stock could still be a good move.
