McDonald's or Starbucks: Which Stock is More Appetizing?

Although the coronavirus pandemic has adversely impacted the restaurant industry on a global scale, the industry has shown some resilience by adapting to the changing needs induced by the pandemic. Notably, this includes modifications in business models as well as streamlining of corporate overheads.

In the current scenario, companies are counting on off-premise businesses to drive sales. To support this model, companies have resorted to menu rationalization, enhanced operating procedures and made IT upgrades. Moreover, restaurant operators are focusing on driverless delivery systems to augment sales. Meanwhile, restauranteurs are adhering to outdoor dining options and curbside pickups, thereby, maintaining social-distancing protocols.

However, with the resurgence of COVID-19 cases, companies are still witnessing instances of government restrictions on operating hours, limited dining capacity and, in some cases, mandated dining room closures. Nonetheless, with the rollout of coronavirus vaccines, the industry’s front-line workers and customers are likely to get a sigh of relief in 2021.

Meanwhile, it is worth noting that the Zacks Retail-Restaurant industry has had a decent run on the bourses in the past six months. The industry has rallied 24.8% in the said time frame compared with the S&P 500’s growth of 21.7%.

Leading restaurant companies like Starbucks Corporation SBUX and McDonald's Corporation MCD have been adopting and deploying strategies to generate profits.

Let’s analyze and find out whether Starbucks or McDonald's, both carrying a Zacks Rank #3 (Hold) at present, is better-positioned right now.

Price Performance

Starbucks stock has rallied 43.1% in the past six months, while McDonald's shares have gained 14.5%.

Shares of Starbucks have been benefiting from operating fundamentals such as solid global footprint, successful innovations and digital offerings.

Earnings History and Growth Projection

Starbucks beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average surprise being 21.6%. Meanwhile, McDonald's beat estimates in two of the trailing four quarters, while missing the same in the remaining two quarters. Overall, its average negative surprise was 1.3%.

Starbucks has an impressive long-term earnings growth rate of 13.8%. The same for McDonald's is anticipated to be 8.1%.

Fundamentals

Starbucks has been benefiting from robust digitalization. The company introduced its mobile order and pay feature — Starbucks Now — to multiple platforms in the Alibaba Digital Economy, which includes Taobao, Amap, Koubei and Alipay. Starbucks customers can also use the Starbucks Now feature to pre-order and pay for their favorite beverage and food online before in-person pick-up at local stores. This will likely help Starbucks in expanding presence in China as Alibaba Digital Economy has a user base of nearly 1 billion. In China, Starbucks delivery program is available in 84% of its stores.

Although the company’s operations have been negatively impacted by the coronavirus pandemic, it is witnessing faster-than-anticipated sales recovery in the United States. In fourth-quarter fiscal 2020, its comps fell 4% for September compared with a decline of 65% recorded five months ago. In the United States, comps slumped 9% in the fourth quarter compared with a decline of 41% in the third quarter. Transactions volumes in the United States continue to witness sharp improvement.

The company anticipates global comparable sales to increase between 18% and 23% in fiscal 2021. Moreover, it anticipates the Americas and U.S. comparable store sales to increase 17% to 22% for fiscal 2021. International comps for fiscal 2021 are expected to be 25-30%.

Moreover, Starbucks is focusing on expanding its footprint. Despite the pandemic, the company opened 130 and 260 net new stores in the third and fourth quarters of fiscal 2020, respectively. Moreover, it opened 1,400 stores in fiscal 2020. The company anticipates inaugurating nearly 2,150 (850 stores in the Americas and 1,300 internationally) news stores and 1,100 (50 stores in the Americas and 1,050 internationally) net new stores worldwide in fiscal 2021.

Coming to McDonald's, the company has been focusing on drive-thru, delivery and take-away. Prior to the outbreak, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now accounts for approximately 90% of sales. Moreover, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option. To provide enhanced experience and convenience to customers, McDonald’s has been increasingly focusing on delivery. The company provides delivery from more than 28,000 restaurants in more than 75 countries.

During third-quarter 2020, strong drive-thru and delivery sales got reflected in Australia sales despite restricted operating conditions due to a rise in COVID-19 cases. Notably, the majority of orders came through digital channels such as mobile app and self-order kiosks. Also, solid comps were witnessed in Japan. As of Sep 30, 2020, most of the company’s restaurants were open globally.

Meanwhile, McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding presence in existing markets and entering new markets. The company’s expansion efforts continue to drive performance. Currently, it has roughly 39,096 restaurants worldwide. Despite the pandemic, the company opened about 300 restaurants in China through September.

Moreover, in an effort to attract customers, the company continues to focus on menu innovation. During the third quarter, it introduced a spicy flavor with regard to the Chicken McNuggets. In October, the company unveiled the McCafé Bakery line, offering apple fritter, blueberry muffin, cinnamon roll and its McCafé Coffee. Going forward, McDonald's is committed to expanding its chicken offerings by leveraging food-line extensions of customer favorites. To this end, it plans to introduce Crispy Chicken Sandwich in the United States in early 2021. It also intends to work on operational and formulation changes to improve the taste of its burgers.

Our Take

Our comparative analysis shows that Starbucks has an edge over McDonald's in terms of share price appreciation and projected EPS growth rate. However, the fundamentals of both companies look solid. Taking all the factors into account, we believe that Starbucks is better-positioned than McDonald's at the moment.

Key Picks

Some better-ranked stocks in the same space are Jack in the Box Inc. JACK, Ruth's Hospitality Group, Inc. RUTH and FAT Brands Inc. FAT, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Jack in the Box has a three-five year earnings per share growth rate of 10.6%.

Ruth's Hospitality and FAT Brands’ earnings for 2021 are expected to surge 264.6% and 127%, respectively.

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