Restaurant Stocks Fall on Mad-Cow Disease Discovery - TheStreet

Updated from 10:26 a.m. EST

The first

case of mad-cow disease in the U.S. dragged down restaurant and meat-processing stocks Wednesday. But many analysts predict only a near-term downturn for U.S. restaurants, citing the muted response from American consumers to a similar case in Canada this year.

Both

McDonald's

(MCD) - Get Report

and

Wendy's

(WEN) - Get Report

closed significantly lower Wednesday, though better than their lows for the day. At the end of the holiday-shortened session, McDonald's shares fell $1.32, or 5.3%, at $23.96, while Wendy's shares were down $1.87, or 4.9%, at $37.71.

"We would not panic-sell these stocks if the case remains isolated, given that these stocks rebounded after the Canadian case was found to be isolated and as the diseased U.S. cow has not entered the human food chain," said Goldman Sachs analyst Coralie Witter.

But while many restaurant stocks recovered from the day's lows, several meat-processing companies remained sharply lower.

"In the past, U.S. consumers have not changed their behavior with food safety problems," said Credit Suisse First Boston analyst David Nelson. But the analyst thinks U.S. beef exports, 7% of which goes to Japan and South Korea, will be "severely curtailed."

Tyson's

(TSN) - Get Report

profit is about 30% from beef packing, Nelson said, while beef packing is about 10% of profits at

Smithfield Foods

(SFD)

. Tyson shares closed down $1.08, or 7.8%, at $12.90, while shares of Smithfield Foods were down 11 cents, or 0.5%, at $22.15.

Other stocks pressured by the news included

Outback Steakhouse

(OSI)

and

Lone Star Steakhouse and Saloon

(STAR) - Get Report

. Outback fell $2.23, or 5%, to $42.40, while Lone Star shares were off 50 cents, or 2.2%, at $22.73, while

Smith & Wollesnky

(SWRG)

was down 23 cents, or 3.7%, to $6.05

About a dozen countries, including Japan, Mexico and Russia, imposed bans on imports of U.S. beef and beef products.

UBS analyst David Palmer said the impact from the mad cow case will be largely positive for restaurant stocks. "The negative publicity will likely be fleeting and therefore the consumer response minimal, and importers of U.S. beef will likely ban our supply, which could send prices down 20% or more," he wrote in a Wednesday research note.

Palmer thinks that because the disease is likely restricted to one cow and because of the American consumer's generally muted response to the May 2003 mad cow case in Canada, the long-term effects on restaurant stocks will be minimal.

In a prepared statement Wednesday, Wendy's said: "The identified cow is called a 'downer,' or one that cannot walk. Wendy's has a strict policy prohibiting the processing of downer cows in our beef supply. Additionally, our beef supply is not affiliated with the meat plants where the single cow was detected."

The company added: "We will continue to follow the strict safeguards and guidelines we established years ago, and we remain very confident that Wendy's beef is safe and wholesome."

Palmer thinks the potential 20% drop in U.S. beef prices could be good news for companies such as McDonald's, Wendy's,

Brinker International

(EAT) - Get Report

and

Applebee's

(APPB)

, which likely would have had higher beef costs in 2004.

This could then be an opportunity to scoop up shares of McDonald's and Wendy's, he said.

Shares of Brinker closed down 18 cents, or .6%, at $32.65, while Applebee's shares were down 34 cents, or nearly 1%, at $38.58.

SG Cowen analyst Paul Westra agrees that restaurant stocks will face downward movement for about 10 days, just as they did in May after the announcement of Canada's mad cow case.

Westra also believes the news could be good for Outback Steakhouse and

RARE Hospitality

(RARE) - Get Report

due to the expected decline of beef prices. Shares of Rare were lately down $1.88, or 7.4%, at $23.69.

In 1996, beef sales fell about 40% amid the mad cow disease outbreak in the U.K. Long term, the effect was a 4.5% decline in beef consumption in the region, noted J.P. Morgan analyst Pablo Zuanic. Though most analysts do not think Tuesday's case is of the same caliber.

Meanwhile, the beneficiaries of such a drop in beef demand could be

Kellogg

(K) - Get Report

and

General Mills

(SYMBOLGIS)

, noted Zuanic. He cited potentially lower grain prices. Also,

Kraft

(KFT)

could benefit from demand for meat imitations, such as its Morningstar farms and Boca vegetarian brands, he said.

Upward pricing pressure could be seen on lean hogs and poultry, however.

Shares of Kellogg finished up 25 cents, or 0.7%, at $37.65, while shares of General Mills were up 69 cents, or 1.6%, at $45.04. Kraft's stock was down 5 cents, or 0.2%, at $31.54.

Shares of research and clinical diagnostics company

Bio-Rad Laboratories

(BIO) - Get Report

were also benefiting, climbing about 20% after it was upgraded by Robert W. Baird Wednesday morning to outperform from neutral and its target price boosted to $73 from $54.

The brokerage believes the Hercules, Calif.-based company is the leader in testing for mad cow disease with about 50% to 60% of worldwide market share. Shares of Bio-Rad rose $10.04 to $59.82.

"Bio-Rad's product line provides high sensitivity and automation capability," wrote analyst Aaron Geist. "If the USDA mandates widespread testing, automation will be critical."

He continued: "We now view the U.S. market as an enormous opportunity for Bio-Rad and could approach $300 million to $400 million annually."