McDonald's vs. Jack in The Box: Which Fast Food Stock is a Better Buy?

McDonald’s Corporation (MCD) and Jack in the Box Inc. (JACK) are two prominent players in the fast-food restaurant industry. MCD, which is based in Oak Brook, Ill., operates and franchises McDonald’s restaurants that serve mainly locally relevant fast food, soft drinks, and other beverages worldwide. As of December 31, 2020, the company operated 39,198 restaurants. In comparison, JACK, which is headquartered in San Diego, Calif., operates and franchises Jack in the Box quick-service restaurants that offer a variety of hamburger chains and other breakfast items. As of September 27, 2020, it operated and franchised 2,241 Jack in the Box quick-service restaurants.

Online food ordering, contactless delivery services, drive-thru, and new vegan recipes have helped fast-food companies combat COVID-19 pandemic-driven impacts to their businesses. Even though food prices are rising due to supply chain bottlenecks, fast-food companies should see rising sales thanks to pent-up demand. The global fast-food market is expected to grow at a 4.5% CAGR to $773.44 billion by 2027. So, both MCD and JACK should benefit.

While JACK lost 5.9% in price over the past three months, MCD has surged 6.5%. MCD is a clear winner with 17.7% gains versus JACK’s negative returns in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On November 17, 2021, MCD announced a strategic partnership with DoorDash, Inc. (DASH), an online food ordering and food delivery platform, and Uber Technologies, Inc.’s (UBER) Uber Eats, an online food ordering and delivery platform, to support the growth of MCD’s McDelivery business. MCD expects the agreement to drive sales, benefit the company franchisees and help generate more profit and cash flow.

On October 20, 2021, JACK awarded seven development agreements to open 47 new restaurants. These agreements will help JACK grow in existing and new markets, indicating a solid return to development. JACK is looking forward to growing further with its current franchisees and adding new operators to its family.

Recent Financial Results

MCD’s revenue for the fiscal third quarter, ended September 30, 2021, increased 14.5% year-over-year to $6.20 billion. The company’s operating income came in at $2.99 billion, up 18.2% from the prior-year period. Its net income was $2.15 billion for the quarter, representing a 22% rise from its year-ago period. Its non-GAAP EPS increased 24.3% year-over-year to $0.13. The company had $4.31 billion in cash and equivalents as of September 30, 2021.

For its fiscal third quarter, ended July 4, 2021, JACK’s revenues increased 11.2% year-over-year to $269.46 million. The company’s earnings from operations came in at $67.38 million for the quarter, indicating a 9.5% rise from the prior-year period. While its net earnings increased 23% year-over-year to $40.03 million, its EPS increased 26.1% to $1.79. The company had $84.22 million in cash as of July 4, 2021.

Past and Expected Financial Performance

MCD’s revenue and net income have grown at CAGRs of 2% and 11.8%, respectively, over the past three years. The company’s EPS has increased at a 13.8% CAGR  over the past three years.

Analysts expect MCD’s EPS to grow 55.5% in the current year and 7.7% next year. Its EPS is expected to grow at a 21.6% rate per annum over the next five years, and its revenue is expected to increase 12.3% year-over-year in the current year and 12.2% next year. In comparison, JACK’s revenue and net income have increased at CAGRs of 6.6% and 6.8%, respectively, over the past three years. The company’s EPS has grown at a CAGR of 21.8% over the past three years.

JACK’s EPS is expected to rise 54.4% year-over-year in the current year and 0.8% next year. The stock’s EPS to grow at an 18.2% rate per annum over the next five years, and its revenue is expected to grow 13% year-over-year in the current year and 2.5% next year. Valuation

In terms of non-GAAP forward PEG, MCD is currently trading at 1.82x, which is 100% higher than JACK’s 0.91x. In terms of forward EV/Sales, JACK’s 3.72x compares with MCD’s 10.03x.

Profitability

MCD’s trailing-12-month revenue is almost 20.11 times JACK’s. MCD is also more profitable, with a 53.7% gross profit margin versus JACK’s 36.4%.

Furthermore, MCD’s net income and levered free cash flow margins of 32.3% and 30.4%, respectively, compare with JACK’s 14.7% and 17.9%.

POWR Ratings

While MCD has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, JACK has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

MCD has a B grade for Stability, which is consistent with its lower volatility than the broader market. It has a 0.58 beta. JACK’s C grade for Stability is in sync with its higher volatility than the broader market. JACK has a 1.77 beta.

In terms of Quality, MCD has been graded an A, which is consistent with its higher-than-industry profitability ratios. MCD’s 32.3% trailing-12-month net income margin is 392.7% higher than the 6.6% industry average. In comparison, JACK’s B grade for Quality is in sync with its relatively lower profit margins. It has a 14.7% trailing-12-month net income margin, which is 123.9% higher than the 6.6% industry average.

Of the 43 stocks in the B-rated Restaurants industry, JACK is ranked #25, while MCD is ranked #15.

Beyond what we have stated above, our POWR Ratings system has also rated MCD and JACK for Growth, Momentum, Value, and Sentiment. Get all JACK ratings here. Also, click here to see the additional POWR Ratings for MCD.

The Winner

Rising consumer demand for fast-foods and a strengthening food delivery system should drive sales growth for MCD and JACK ahead of the holiday season. However, its higher profit margins and better analyst sentiment we think make MCD a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Restaurants industry.

MCD shares were trading at $251.79 per share on Friday morning, down $1.69 (-0.67%). Year-to-date, MCD has gained 19.37%, versus a 26.98% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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