Which restaurant stock is a better buy?

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In this article, I will compare and analyze McDonald’s (MCD) and Starbucks (SBUX) to determine which restaurant stock is currently a better investment.


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The catering industry is one of the important components of the hospitality industry, which is focused on providing catering services to customers. Restaurants are divided into standalone restaurants, fast food restaurants, chain restaurants, and formal restaurants.

Research and market reports that the global fast food market is expected to reach USD 815.6 billion in the terminal year growing at a CAGR of 5.1% between 2021 and 2026. Market growth is expected to be fueled by increasing revenue available in highly populated countries like China and India.

In this article, I will analyze and compare two popular restaurant stocks, McDonald’s (MCD) and Starbucks (SBUX), to determine which is the best candidate for purchase at the moment.

Founded in 1940, McDonald’s operates and franchises its famous specialty hamburger restaurants in the United States and around the world. As of December 31, 2021, it operated 40,031 restaurants globally. Based in Seattle, Washington, Starbucks is the world’s largest coffeehouse chain that serves as a worldwide roaster, distributor and retailer of specialty coffee. The Company operates through three business segments: North America, International and Channel Development.

Year-to-date (YTD), McDonald’s shares are down 6.6%, while SBUX shares have fallen 32.1% over the same period.

RECENT DEVELOPMENTS

May 3, JPMorgan analyst John Ivankoe raised the company’s price target on McDonald’s shares from $260 to $275 following its favorable first quarter results. The analyst noted that MCD stock “offers relative sanctuary” in a “unstable worldNotably, JPMorgan is keeping its “overweight” rating on McDonald’s shares unchanged.

May 23, Starbucks announced that it had closed its operations in Russia. The company said it would no longer have an operation in Russia, permanently ceasing operations at its 130 stores. SBUX added that it would continue to pay its nearly 2,000 employees in Russia for six months, helping them find new jobs.

Financial overview and analyst estimates

McDonald’s Corporation last published its financial results on April 28. In the first quarter, the company’s total revenue increased 10.7% year-on-year to $5.67 billion, driven by a 13% year-on-year increase in franchise restaurant revenue and a 7% year-on-year increase in company-operated restaurant sales. Additionally, the company was able to beat Wall Street consensus revenue estimates of $100 million. Additionally, the company reported non-GAAP EPS of $2.28, beating Wall Street estimates of $0.11.

Importantly, the stock’s current annualized dividend yield is $5.52 per share, which translates to a dividend yield of 2.21% as of June 3. The company’s payout ratio currently stands at 55.39%. Its dividend payouts have grown at a CAGR of 7.92% over the past five years.

Company EPS expected to rise 2.79% year-over-year to $2.44 in its second fiscal quarter of 2022. However, analysts expect MCD’s revenue to remain flat at $5.86 billion in the current quarter.

In Q2, Starbucks revenue grew 15% year-over-year to $7.6 billion, in line with Wall Street earnings estimates. The revenue growth was driven by a 14.2% year-over-year increase in company-operated store revenue to $6.28 billion, driven by a 7% increase in global same-store sales. Notably, active Starbucks Rewards membership grew 17% in the United States to 26.7 million members in the second quarter. Additionally, the company opened 313 net new stores during the quarter. However, SBUX reported non-GAAP EPS of $0.59, missing Wall Street expectations by $0.01.

Starbucks is expected to reward its shareholders with an annual dividend payout of $1.96 per share, leading to a forward yield of 2.57%, which is above the industry median threshold of 2.43%. Additionally, the company has 12 years of dividend growth, growing its dividends at a 5-year growth rate of 15.11%.

Currently, Wall Street estimates SBUX EPS to fall 24.31% YoY to $0.76 per share in 3Q22. On the other hand, analysts expect its third-quarter revenue to hit $8.14 billion, representing a year-on-year growth of 8.63%.

Options Market Sentiment Comparison

Looking at the September 16, 2022 options channel for both MCD and SBUX, determine the sentiment of the options market by comparing the call/put ratio. As for MCD, the ratio of open calls to open puts at the strike price of $250.00 stands at 1.41x, implying bullish sentiment in the options market. The open call to open sell ratio for SBUX at the strike price of $80.00 is 2.44x, indicating relatively stronger bullish sentiment in the options market.

Conclusion

While both restaurant companies should capitalize on long-term industry growth, I think Starbucks is currently a better investment due to its relatively better financials, higher forward growth rates, and better ratio open calls / put options.


MCD shares were unchanged in premarket trading on Friday. Year-to-date, the MCD is down -6.08%, compared to a -11.85% rise in the benchmark S&P 500 over the same period.


About the Author: Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as a financial analyst and financial journalist. Previously, he was a contributing editor to Seeking Alpha, Talks Market and Market Realist.

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