Restaurant Stocks Plunge, but Beef Industry Not Expected to Suffer

Restaurant stocks, led by hamburger giant McDonald's Corp. (MCD), fell sharply Wednesday after the first case of mad cow disease was detected in the United States, but agriculture experts say the beef industry likely will not suffer — as long as the case remains an isolated incident

McDonald's stock closed down 5.2 percent while Wendy's International Inc. (WEN) fell 4.7 percent, with several steakhouse chains suffering similar drops. Shares of beef and chicken processor Tyson Foods (TSN) were off 7.7 percent, even after the company said it was not affected by the case.

"This reaction was predictable. But if it stands as is, with one case, and the USDA makes efforts to shore up confidence, then I think this is a non-event on the consumer demand side of the equation," said Jonathan Waite, restaurant analyst with McDonald Investments.

The impact may be brief if the disease is contained quickly, some analysts said.

"I really don't think the American consumers will react that negatively," said Dr. Jan Busboom, a professor of meat science at Washington State University. "They'll listen to what's going on, and they'll make sound judgments."

Demand for beef has been high in the U.S., partly because of the popularity of high-protein, low-carbohydrate diets, and the supply has been small because drought in the West has forced some ranchers to reduce their herds to survive.

McDonald's said Tuesday its supply chain is not linked to the case of mad cow disease, a brain-wasting disorder, which was discovered in a single cow in Washington state. Even so, it lost about $1.7 billion in market capitalization in the first few minutes of trading on Wednesday.

Analysts expected a short-term dip in restaurant stocks that are heavily dependent on beef, such as McDonald's and Wendy's, and smaller steakhouse chains like Outback Steakhouse Inc. (OSI) and Rare Hospitality International Inc. (RARE), operator of LongHorn Steakhouse restaurants.

Some analysts even said there could be a long-term benefit for restaurants as beef prices slide from recent highs.

"That will increase domestic supply, which is good for pricing," said Matthew DiFrisco, analyst with Harris Nesbitt Gerard.

The wild card is consumer response.

DiFrisco noted that fears of a mass rejection of products in the news often turn out to be overblown. "American consumers tend to believe what they hear, and if they hear that it's not in the food supply, you probably won't see a drop-off in demand," he said.

But investors are betting that many Americans will opt for turkey and chicken instead of beef, at least for a while. That sentiment sent shares of Pilgrim's Pride Corp. (PPC) , the No. 2 U.S. poultry producer, up nearly 12 percent to close at $16.84.

Restaurant companies specializing in non-beef meals will likely be protected -- and could even benefit -- from any backlash associated with the mad cow discovery, Smith said. He cited Darden Restaurants Inc. (DRI) and Landry's Restaurants Inc. (LNY), which both operate seafood chains.

"Beef is not one of the major proteins in our restaurants," said Mike Bernstein, a spokesman for Darden, operator of the Red Lobster seafood chain and the Olive Garden Italian-themed restaurants. Darden also owns the smaller Smokey Bones barbecue chain.

When mad cow was found in Canada earlier this year, Darden saw no impact at its 32 Canadian Red Lobsters or its five Olive Gardens, Bernstein said. The situation was helped by assurances from the Canadian government that beef was safe to eat, he said.

Reuters and the Associated Press contributed to this report.