Why McDonald's Dragged the Dow Lower Today

Chipotle Mexican Grill surges in after-hours trading; Potbelly is no Tesla Motors

Jul 21, 2014 at 6:23PM

Nine out of 10 sectors ended lower in the stock market today, as investors looked to quarterly earnings for guidance. Although McDonald's (NYSE:MCD) won't report its earnings until tomorrow morning, the stock still managed to drag the Dow Jones Industrial Average (DJINDICES:^DJI) lower Monday after some unflattering quality maintenance issues with its meat. 22 of the Dow's 30 members lost ground, and the Dow itself fell 48 points, or 0.3%, to end at 17,051.

Shares of the world's largest fast-food chain lost 1.5% today after Chinese media reported on late Sunday that one of McDonald's largest meat suppliers in the country, Shanghai Husi Food, was selling the company expired beef and chicken. To its credit, McDonald's acted swiftly to suspend purchases from the supplier, but to some extent the damage is already done. Aside from the PR nightmare McDonald's is facing, the allegations raise serious health concerns for its customers in China; restaurants in the area may also suffer through shortages as McDonald's scrambles to investigate the situation and land new suppliers.


These simple burritos are churning out big profits for investors. Image Source: Chipotle

Interestingly enough, McDonald's was once the largest investor in Chipotle Mexican Grill (NYSE:CMG), which prides itself on organic ingredients and naturally raised meats. McDonald's helped the company morph from a small burrito restaurant into a national chain that helped start the casual dining craze. McDonald's probably wishes it didn't fully divest from Chipotle in 2006 after the company's IPO, because the stock has gone absolutely gangbusters since then. In late 2006 the company was worth $1.8 billion. As of today's close it was worth 10 times that amount, and with the stock soaring more than 9% after-hours Monday it's added nearly another $1.8 billion in value in the last few hours alone. That's because people, plainly and simply, cannot get enough of it. Revenue soared by 28% in the quarter, earnings per share came in at $3.50 against estimates for $3.09, and same-store sales growth rocketed 17% higher in the period.

Potbelly (NASDAQ:PBPB) hopes and prays that it can enjoy the fairytale-esque ascent to ubiquity Chipotle's been able to achieve. But the sandwich-maker is on a very different path from its burrito-making cousin. First and foremost, Potbelly isn't quite profitable yet. That's OK for a young, small company like Potbelly. Tesla, one of the darlings of the stock market in recent years, still hasn't posted a full-year profit. But Tesla doesn't make sandwiches, which can be slapped together in a kitchen by any idiot on the planet. Tesla makes electric cars and designs its own batteries and is run by a modern-day Thomas Edison (or Nikola Tesla). Potbelly, even though shares advanced 1.6% today, is a subpar investment opportunity with pedestrian growth on the horizon, at best.

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John Divine has no position in any stocks mentioned. You can follow him on Twitter, @divinebizkid, and on Motley Fool CAPS, @TMFDivine.

The Motley Fool recommends Chipotle Mexican Grill, Ford, and McDonald's and owns shares of Chipotle Mexican Grill and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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