CONSUMER STAPLES: McDonald's (Baa1/BBB+) outbreak of E.coli from burgers (#2)

-8% in pre-market

€ up to +7, £ up to +4 - steepening in both

• Re. BS it is levered gross/net 4.0x/3.9x - may seem high but it does $26b in revenue on a impressive 45% EBIT margin. Latter is something it has worked on (+15ppt since 2014) including by increasing higher margin franchising mix (95% of stores vs. ~80% a decade ago).
  • Note the effective margin, if we look at franchised stores + owned store turnover ($120b), was 9.3%. Company owned stores run a higher 15% margin.
• Re. this year - stagnating sales (Q2 -1%) which it was blaming on macro. It was taking steps to move price points lower ($5 meal deal etc).

Re. RV:

• In £ we point investors to Haleon (Baa1/BBB+) - a firm consumer healthcare name that gives up no spread for the rotation - screens value this year even agnostic of above news.
• In € levels are bit more interesting but there are still rotations with no give up in General Mills and top-end of brewers (Carlsberg - pending M&A supply). We would exercise caution on Carrefour ahead of earnings.
• Those not prepared to wait/see levels attractive; you will be taking a view on case numbers being somewhat contained - may have less impact on fines (historical cases have been larger with still small fines) but will determine brand damage. 40% of revenues in the US.
• Equity analyst are skewed bullish, most only see a near-term earnings hit
• Q3 earnings come 29th Oct - it will be unaffected BUT we will get 1-week of trading conditions colour that are unlikely to be anything but negative.

From earlier; https://marketnews.com/consumer-staples-mcdonald-s-baa1-bbb-outbreak-of-e-coli-from-burgers