Could This New Virus Wreak Havoc on These Restaurant Chains?

Investors in McDonald’s, Bob Evans Farms, and Famous Dave’s should be on the lookout.

Mar 24, 2014 at 4:11PM

It's not like McDonald's (NYSE:MCD) doesn't have enough problems domestically with competitors such as Burger King launching sneak attacks from every direction. Now a new potential viral problem has appeared. While most restaurants could feel its effect to varying degrees, McDonald's (NYSE:MCD), Bob Evans Farms (NASDAQ:BOBE), and Famous Dave's (NASDAQ:DAVE) may catch the bug worse than most.

Source:  Famous Dave's

The squealing development
According to a report from USA Today, "The highly contagious porcine epidemic diarrhea virus, known as PEDv," is a fatal virus that has killed an estimated 5 million piglets so far and has spread to 27 states. Pork supplies are expected to dwindle by 10% this summer resulting in a 25% spike in wholesale prices.

While this is considered a temporary problem, predicting how widespread a virus can become or long a virus will last can be more difficult than predicting the weather. To make matters worse, reports say that the virus thrives and spreads more easily in warmer temperatures. The unusual cold may have slowed down the spread of this virus temporarily.

Expert Craig Rowles, an Iowa producer and veterinarian, believes the virus still has a long way to go and that it will keep prices of all types of bovine products at unusually high levels. This means ribs, pork, bacon, sausage, etc. will either rise in price for restaurants, which will eat into their earnings, or restaurants will have to hike their prices, possibly turning patrons away. Rowles believes prices will spike through 2015 and possibly afterward.

A famous problem
For a chain like Chipotle Mexican Grill (NYSE:CMG), this likely doesn't pose much of a problem. Pop into any Chipotle Mexican Grill and you'll notice that customers order pork much less frequently than they order chicken or beef. With a 26% gross profit margin last quarter and a nearly 10% bottom-line after-tax net margin, Chipotle Mexican Grill appears well-insulated from a material hit.

Famous Dave's faces quite the opposite situation. Here's a chain that primarily serves BBQ ribs from pigs. The good news is that the overwhelming majority of Famous Dave's food costs for 2014 have been locked in through contracts, and the company actually expects 5.5% deflation in food costs this year. The bad news is that Famous Dave's mostly enters its food contracts on an annual basis. This means that in 2015, Famous Dave's could see an enormous leap in food inflation as its contracts expire.


Source: Bob Evans

What a pigsty
Investors in Bob Evans Farms need to take heed. Recall back in early December when Bob Evans reported fiscal second-quarter results? The non-GAAP earnings missed analyst estimates badly by 36% and declined 33% from last year. Bob Evans Farms blamed the shortfall on higher prices from "bacon and other pork-related items, bakery, and poultry." Since Bob Evans Farms couldn't handle those cost jumps on bacon in that quarter, it may be in for a world of hurt this coming summer and beyond.

No going McHog wild
McDonald's has been fighting an uphill battle to return to domestic sales growth. For the third quarter domestic sales were up 0.7%, but for the fourth quarter they plunged 1.4%. In January and February the pain continued with 3.3% and 1.4% drops, respectively.


Source: McDonald's

Now the profit line could become another worry for McDonald's. Consider that 25% of its business takes place during the breakfast hours, when bacon and pork sausage litters the menu. A sustained pop in pig meat could deliver quite a sting. As the largest purchaser of pork products in the U.S., McDonald's has felt pain before from fast-rising commodity prices. You probably shouldn't expect to see a cheap McRib sandwich on the menu later this year.

Follow the news about the swine virus and stay ahead of the game. If prices for pork-related items soar, Fools might consider staying on the sidelines with Famous Dave's, Bob Evans Farms, and McDonald's until the situation gets under control.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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