Better Buy for 2022: McDonald's vs. Shake Shack

Despite the continued increase in COVID-19 cases and the impact of food inflation, the offering of services like online ordering, contactless delivery, drive-thru, and the introduction of new vegan recipes have helped fast-food companies to maintain their business. The food at home index rose 6.5% last year, the largest increase since January 1982. This, along with rising consumer spending, bodes well for the restaurant industry. The global fast-food market is expected to grow at 5.1% CAGR to $931.70 billion by 2027. So, both McDonald’s Corporation (MCD) and Shake Shack Inc. (SHAK) should benefit.

MCD and SHAK are two prominent players in the fast-food restaurant industry. MCD 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, SHAK operates as a fast-casual restaurant that offers food and beverages. As of December 30, 2020, it operated 311 Shacks.

While SHAK declined 39% over the past year, MCD gained 20%. Which of these stocks is a better pick now? Let us find out.

Latest Developments

On December 22, 2021, MCD’s McDonald’s USA business selected Starcom, a world-renowned media network within Publicis Groupe, as its lead national media agency. The addition of national media buying and planning to its current scope will enable MCD to enhance customer data analytics and digital marketing across McDonald’s app, website, and CRM channels.

In its fourth-quarter business update, SHAK witnessed average weekly sales of $74,000 compared to $72,000 in the third quarter of 2021. SHAK also opened its first-ever drive-thru locations in Maple Grove, Minnesota, and Lee's Summit, Missouri, and is looking forward to expanding its drive-thru footprint going forward. The company opened 13 net domestic Company-operated Shacks and six net licensed Shacks in the fourth quarter of 2021.

Recent Financial Results

MCD’s revenue for the fiscal 2021 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 came in at $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 2021 third quarter ended September 29, 2021, SHAK’s total revenue increased 48.7% year-over-year to $193.90 million. The company’s loss from operations came in at $2.65 million, indicating a 61.1% decline from the prior-year period. While its adjusted pro forma net loss decreased 54.4% year-over-year to $2.01 million, its adjusted pro forma loss per share declined 54.6% to $0.05. The company had $321.42 million in cash and cash equivalents as of September 29, 2021.

Past and Expected Financial Performance

MCD’s revenue and total assets grew at CAGRs of 2% and 15.7%, respectively, over the past three years.

MCD’s EPS is expected to grow 55.5% year-over-year in the fiscal year 2021, ending December 31, 2021, and 7.8% in fiscal 2022. The company’s revenue is expected to increase 21% year-over-year in fiscal 2021 and 6.4% in fiscal 2022. MCD’s EPS is expected to grow at a 21.6% rate per annum over the next five years.

In comparison, SHAK’s revenue and total assets increased at CAGRs of 15.7% and 34.5%, respectively, over the past three years.

Analysts expect SHAK’s EPS to remain negative in fiscal 2021 ended December 29, 2021, and rise 185.7% in fiscal 2022. Its revenue is expected to grow 41.1% year-over-year in fiscal 2021 and 30.9% in fiscal 2022. The company’s EPS is expected to decline at a rate of 11.5% per annum over the next five years.

Valuation

In terms of non-GAAP P/E for the next fiscal year, SHAK is currently trading at 525.40x, 1994.9% higher than MCD’s 25.08x. In terms of forward EV/EBITDA, MCD’s 19.44x compares with SHAK’s 55.26x.

Profitability

MCD’s trailing-12-month revenue is almost 32.5 times SHAK’s. MCD is also more profitable, with a 32.3% net income margin versus SHAK’s negative value.

Furthermore, MCD’s ROA and ROTC of 11.3% and 13.6%, respectively, compare favorably with SHAK’s negative values.

POWR Ratings

While MCD has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, SHAK has an overall D grade, equating to a Sell. 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 in sync with its lower volatility compared to broader markets. MCD has a 0.60 beta. SHAK’s D grade for Stability reflects its higher volatility. SHAK has a 1.52 beta.

MCD has an A grade for Quality, consistent with its higher-than-industry profitability ratios. MCD’s 30.4% trailing-12-month levered free cash flow margin is 426.5% higher than the 5.8% industry average. SHAK’s D grade for Quality is in sync with its negative trailing-12-month levered free cash flow margin.

Of the 44 stocks in the B-rated Restaurants industry, MCD is ranked #14, while SHAK is ranked #41.

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

The Winner

Despite the spike in COVID-19 cases, the offering of contactless or home delivery services and rising consumer spending should benefit both MCD and SHAK. However, relatively lower valuation and higher profitability 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 $256.20 per share on Thursday afternoon, up $0.98 (+0.38%). Year-to-date, MCD has declined -4.43%, versus a -4.47% 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.

More...