Better Buy for 2022: McDonald's vs. Chipotle

McDonald's Corporation (MCD) in Oak Brook, Ill., operates and franchises McDonald's restaurants internationally. Its restaurants offer various food products and beverages and a breakfast menu. The company operates 39,198 restaurants. In comparison, Denver, Colo.-based Chipotle Mexican Grill, Inc. (CMG) owns and operates Chipotle Mexican Grill restaurants. It owns and operates approximately 2,900 restaurants in the United States, Canada, the United Kingdom, France, and Germany.

The resurgence of COVID-19 cases and high food prices are putting immense pressure on the restaurant sector. According to the U.S. Bureau of Labor Statistics, the cost of food in the United States increased 6.3% in December 2021. However, the cost of eating at home is climbing faster than the cost of dining out, which could help the restaurant industry reclaim some consumer spending as it recovers from the worst of its pandemic blues. According to the Department of Labor, food-at-home prices rose 6.5% in December over the last 12 months, compared with a 6% rise in the cost of eating out during the same period. Furthermore, Bank of America Securities analyst Sara Senatore recently wrote that the inflation gap could make restaurants more appealing to consumers. Therefore, both MCD and CMG should witness steady gains.

MCD stock has gained 23.3% in price over the past year, while CMG has returned 10.9%. Also, MCD’s 13% gains over the past nine months are significantly higher than CMG’s 1% returns. Moreover, MCD is the clear winner with 6.7% gains versus CMG’s negative returns in terms of the past three months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Sept. 23, 2021, MCD's board of directors declared a quarterly cash dividend of $1.38 per share of common stock payable on December 15, 2021, to shareholders of record at the close of business on Dec. 1, 2021. This represents a 7% increase over the company's previous quarterly dividend. The dividend increase reflects confidence in its  Accelerating the Arches growth strategy and a continued focus on driving long-term profitable growth for all stakeholders.

On Dec. 16, 2021, CMG announced its first Chipotlane Digital Kitchen restaurant in Cuyahoga Falls, Ohio. The prototype offers a Chipotlane and walk-up window for efficient digital order pickup. Tabassum Zalotrawala, Chief Development Officer, Chipotle, said, "Our portfolio of approximately 300 Chipotlanes perform with the highest margins across the board, so we continue to evolve our restaurant design with formats such as the Chipotlane Digital Kitchen to best suit our growing digital business."

Recent Financial Results

MCD’s revenues increased 14% year-over-year to $6.20 billion for its fiscal third quarter, ended Sept. 30, 2021. The company’s operating income grew 18% year-over-year to $2.99 billion, while its net income came in at $2.15 billion, representing a 22% year-over-year increase. Also, its non-GAAP EPS was $2.76, up 24% year-over-year.

CMG’s revenues increased 21.9% year-over-year to $2 billion for its fiscal third quarter, ended Sept. 30, 2021. The company’s operating income grew 123.8% year-over-year to $239.68 million, while its adjusted net income came in at $199.82 million, representing an 86.7% year-over-year increase. Its adjusted EPS was  $7.02, up 86.7% year-over-year.

Past and Expected Financial Performance

MCD’s revenue and levered FCF have grown at CAGRs of 2% and 30.5%, respectively, over the past three years. Analysts expect MCD’s revenue to increase 12.4% for the quarter ending March 31, 2022, and 6.4% in fiscal 2022. The company’s EPS is expected to grow 15.6% for the quarter ending March 31, 2022, and 7.8% in fiscal 2022. And  its EPS is expected to grow at a 21.6% rate per annum over the next five years.

In comparison, CMG’s revenue and levered FCF have grown at CAGRs of 14.8% and 12.2%, respectively, over the past three years. The company’s revenue is expected to increase 15.4% for the quarter ending March 31, 2022, and 14.2% in fiscal 2022. Its EPS is expected to grow 27.4% for the quarter ending March 31, 2022, and 32.1% in fiscal 2022. Also, CMG’s EPS is expected to grow at a 44.6% rate per annum over the next five years.

Profitability

MCD’s trailing-12-month revenue is 2.13 times what CMG generates. MCD is also more profitable, with gross profit and net income margins of 53.71% and 32.33%, respectively, compared to CMG’s 38.77% and 9.88%. However, MCD’s 11.33% and 13.63% respective ROA and ROTC are higher than CMG’s 8.08% and 9.26%.

Valuation

In terms of forward non-GAAP P/E, CMG is currently trading at 62.89x, which is 125.8% higher than MCD’s 27.85x. And CMG’s 39.53x forward EV/EBITDA ratio  is 98.2% higher than MCD’s 19.94x.

So, MCD is relatively affordable here.

POWR Ratings

MCD has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, CMG has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

MCD has an A grade for Quality. This is justified given MCD's 30.43% trailing-12-month EBITDA margin, which is 426.5% higher than the 5.78% industry average. In comparison,  CMG has a Quality grade of B.

Also, MCD has a B grade for Stability, which is in sync with its 0.60 beta. In comparison, CMG has a C grade for Stability, which is consistent with its 1.26 beta.

Of the 45 stocks in the B-rated Restaurants industry, MCD is ranked #15. In comparison, CMG is ranked #32.

Beyond what I have stated above, we have also rated the stocks for Sentiment, Value, Growth, and Momentum. Click here to view all the MCD ratings. Also, get all the CMG ratings here.

The Winner

The Restaurant industry is expected to benefit significantly from rising demand with the reopening of economies. And while both MCD and CMG are expected to gain, we think it is better to bet on MCD now because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Restaurants industry here.

MCD shares were trading at $261.96 per share on Thursday afternoon, up $1.04 (+0.40%). Year-to-date, MCD has declined -2.28%, versus a -1.89% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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