Restaurant Shares Rally From Mad Cow Lows

Investor concerns that consumers would shun beef after last month’s discovery of the first U.S. case of mad cow disease appear to have evaporated as shares of steakhouses and hamburger chains have snapped back to their previous levels.

In the days after the Dec. 23 announcement, restaurant stocks fell hard on fears that meat from a cow with the deadly brain-wasting disease, formally known as bovine spongiform encephalopathy, had entered the food chain.

Humans can contract a form of the disease known as variant Creutzfeldt-Jakob disease by eating infected beef.

But in recent weeks, restaurant firms that rely on beef for a big part of their sales, including McDonald’s Corp. and LongHorn Steakhouse owner Rare Hospitality International Inc., have reported that the mad cow discovery has not affected sales.

McDonald’s shares, among the hardest hit by the news, closed at $24.64 on the New York Stock Exchange on Tuesday. They had tumbled 5.2% to $23.96 on Dec. 23.

Rare Hospitality shares also have bounced more than 5% from their mad cow trough, and shares of San Diego burger chain Jack in the Box Inc. have rallied 11% since the sell-off, and at $22.97 as of Tuesday were 6.6% higher than on Dec. 22.

“Certainly, the fears have been put to rest in the near term,” analyst Matt DiFrisco of Harris Nesbitt Gerard said.

At the same time, however, DiFrisco said the stocks are no longer being propped up by hopes that a widespread overseas ban on U.S. beef would send beef prices plummeting.

That counters a bet made early in the crisis by some investors that mad cow would actually benefit restaurants by lowering costs and boosting their profit margins.

At the SG Cowen Consumer Conference in New York on Tuesday, steakhouse operators Smith & Wollensky Restaurant Group Inc. and Outback Steakhouse Inc. as well as Jack in the Box reiterated that mad cow had not hurt customer traffic.

However, Smith & Wollensky President Jim Dunn said the disease had made the company a little leery of expanding too quickly. “We have seen no negative effects, but we are being very cautious,” Dunn said.

Jack in the Box, which is overhauling its menu and restaurants, hasn’t changed its plans, President Linda Lang said.

Outback Steakhouse told investors that beef prices, despite having dropped somewhat, would stay high. Chief Financial Officer Bob Merritt stood by the company’s decision, made prior to the mad cow announcement, to contract its beef supply for 2004 at prices about 9% to 10% higher than last year.