McDonald's provides update on E. coli breakout as shares drop amid scandal

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McDonald's (MCD) is working on damage control as news of an E. coli outbreak tanked the stock as much as 7% on Tuesday.

About one-fifth of McDonald's US restaurants are not offering Quarter Pounders or onions as a result of the outbreak, Yahoo Finance has learned. That's roughly 2,700 restaurants, based on 13,484 total US locations as of the second quarter.

While the CDC posted a food safety alert on Tuesday, McDonald's learned of the outbreak late last week, per company spokespeople. The company quickly removed two ingredients from affected restaurants at that time, when the reported cases were lower. Currently, there are 49 cases, including one death.

That number is likely much higher. It takes three to four weeks for the CDC to determine whether a sick person is part of an outbreak. From Sept. 27 to Oct. 11, the timeline that the CDC reported, McDonald's is expected to have sold about 1 million Quarter Pounders in the affected geography.

McDonald's hasn't pinpointed the source of the outbreak yet, but it may be the onions.

According to spokespeople, the beef patties came from multiple suppliers, so an outbreak would mean cross-contamination across the board. Also, E. coli is usually killed at 160 degrees, and McDonald's safety protocols call for burgers to be cooked at 175 degrees. However, all impacted locations source their onions from a single facility.

This would be the first time onions would be linked to E. coli, a CDC spokesperson confirmed to Yahoo Finance. The agency is "still investigating to determine the ingredient linked to illness so we don’t yet have enough information to say it’s onions or beef."

EFFINGHAM, IL - MARCH 30:  A Quarter Pounder hamburger is served at a McDonald's restaurant on March 30, 2017 in Effingham, Illinois. McDonald's announced today that it will start making the burger with fresh beef patties instead of the frozen beef that it currently uses.  (Photo Illustration by Scott Olson/Getty Images)
A Quarter Pounder hamburger is served at a McDonald's restaurant on March 30, 2017, in Effingham, Ill. (Illustration by Scott Olson/Getty Images) · Scott Olson via Getty Images

Some are quick to remember Chipotle's (CMG) E. coli outbreak, which affected several ingredients from 2015 to 2018, and resulted in a $25 million FDA fine for the company.

McDonald's is trying to shut down the comparison. Given the lower number of reported cases, the company believes the problem occurred further upstream in the supply chain and is likely isolated to two ingredients. The CDC pointed out it hasn't impacted other ingredients.

In a note to clients, TD Cowen analyst Andrew Charles said it's "likely premature to compare" the two. The burrito chain experienced two unrelated food safety issues, E. coli and norovirus, in Q4 of 2015. At the time, Chipotle couldn't identify the source quickly, and it took the company several years to recover in terms of same-store sales.

Calling it a "low conviction guess," Charles said McDonald's sales headwind will likely persist for roughly one month.