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.

Famoussignage
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.

G

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.

B

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.

An early Chipotle Mexican Grill opportunity is rare
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers