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MCD Vs SBUX: Which Stock is Better Placed at the Moment?
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The restaurant industry is benefiting from improvement in demand, menu innovation, robust off-premise sales, sales-building efforts and digital initiatives. However, high wages and food cost inflation remain major concerns.
Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, and the rollout of self-service kiosks and loyalty programs continue to drive growth. Restaurant operators are focusing on driverless delivery systems to augment sales amid the COVID-19 crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as companies do away with delivery personnel.
However, the restaurant industry has been facing declining traffic for quite some time now. A rapid increase in menu prices and COVID-19 are the primary reasons behind traffic erosion. Restaurant operators are grappling with high costs of operations.
Intense competition, high wages and food cost inflation are concerning. The industry is persistently bearing increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure the company’s margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye, tri-tip and salmon, is hurting the industry.
In line with the industry's growth, leading restaurant companies — McDonald's Corporation (MCD - Free Report) and Starbucks Corporation (SBUX - Free Report) — are trying out different strategies to generate profits. With both companies carrying a Zacks Rank #3 (Hold), let's analyze and find out which is poised better with respect to different parameters.
Price Performance and Valuation
Shares of McDonald's have gained 12.3% in the past year, whereas Starbucks stock has risen 24.8%.
On the basis of the forward 12-month P/E ratio, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 25.45X compared with the S&P 500's 19.52X. McDonald's has an edge with a lower forward 12-month P/E ratio of 26.17 than Starbucks' figure of 27.79X.
Image Source: Zacks Investment Research
Estimated Earnings & Revenues
Arguably, earnings growth is of utmost importance in determining a stock's potential, as surging profit levels indicate strong prospects (and stock price gains).
For the current year, McDonald's earnings per share and sales are expected to improve 3.9% and 4.7%, respectively, year over year. Starbucks’ earnings per share and sales are likely to increase 15.2% and 11.2%, respectively, year over year. Hence, this round goes to Starbucks.
Fundamentals
McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding its presence in existing markets and entering new ones. Its expansion efforts continue to drive performance.
Despite unfavorable scenario, the company continues to expand its global footprint. It is planning to open more than 1,900 restaurants globally in 2023, including 400 in the United States and IOM segment, and 1,500 (including nearly 900 in China) in the IDL market. The company expects net restaurant unit expansion to contribute 1.5% to 2023 systemwide sales growth in constant currencies.
The company continues to impress investors with robust comps growth. In fourth-quarter 2022, global comps advanced 12.6% compared with 12.3% gain reported in the prior-year quarter. This marks the eighth consecutive quarter of comps growth.
In the fourth quarter, comps in the United States, international operated markets and international developmental licensed segment rose 10.3%, 12.6% and 16.5%, respectively. The company gained from robust performance in Japan and Brazil.
Then again, Starbucks is benefiting from expansion efforts. In first-quarter fiscal 2023, Starbucks opened 459 net new stores worldwide, bringing the total store count to 36,170. In fiscal 2023, the company expects store count in the United States and China to grow 3% and 13%, respectively, on a year-over-year basis. The company expects global store growth to be nearly 7%. Capital expenditure in fiscal 2023 are estimated to be $2.5 billion.
The company’s North America comps have impressed investors for the eighth straight quarter and rose 14% in the fiscal first quarter. The segment benefited from 10% growth in company-operated comparable store sales, new store growth and higher contribution from licensed store sales. Average ticket and transaction increased 9% and 1%, respectively.
Despite the dismal performance in China, the company reiterated its guidance for fiscal 2023. Consolidated revenues are anticipated to grow 10-12% on a year-over-year basis. The company anticipates non-GAAP EPS growth to be at the low end of 15-20%.
Our Take
The fundamentals of both companies are solid. However, earnings growth and share price performance provide Starbucks a slight edge over McDonald’s.
Arcos Dorados currently sports a Zacks Rank #1 (Strong Buy). ARCO has a long-term earnings growth rate of 7.8%. Shares of the company have declined 8.3% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2024 sales and EPS suggests growth of 8% and 11.4%, respectively, from the year-ago period’s reported levels.
Bloomin' Brands flaunts a Zacks Rank #1 at present. BLMN has a long-term earnings growth rate of 12.3%. The stock has risen 23% in the past year.
The Zacks Consensus Estimate for Bloomin' Brands’ 2024 sales and EPS suggests growth of 2.4% and 5.5%, respectively, from the year-ago period’s reported levels.
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MCD Vs SBUX: Which Stock is Better Placed at the Moment?
The restaurant industry is benefiting from improvement in demand, menu innovation, robust off-premise sales, sales-building efforts and digital initiatives. However, high wages and food cost inflation remain major concerns.
Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts has been acting as a catalyst. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, and the rollout of self-service kiosks and loyalty programs continue to drive growth. Restaurant operators are focusing on driverless delivery systems to augment sales amid the COVID-19 crisis. This is anticipated to reduce expenses substantially and ensure safety amid the pandemic as companies do away with delivery personnel.
However, the restaurant industry has been facing declining traffic for quite some time now. A rapid increase in menu prices and COVID-19 are the primary reasons behind traffic erosion. Restaurant operators are grappling with high costs of operations.
Intense competition, high wages and food cost inflation are concerning. The industry is persistently bearing increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure the company’s margins. The rise in meat and seafood costs, including ribs, prime rib, ribeye, tri-tip and salmon, is hurting the industry.
In line with the industry's growth, leading restaurant companies — McDonald's Corporation (MCD - Free Report) and Starbucks Corporation (SBUX - Free Report) — are trying out different strategies to generate profits. With both companies carrying a Zacks Rank #3 (Hold), let's analyze and find out which is poised better with respect to different parameters.
Price Performance and Valuation
Shares of McDonald's have gained 12.3% in the past year, whereas Starbucks stock has risen 24.8%.
On the basis of the forward 12-month P/E ratio, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 25.45X compared with the S&P 500's 19.52X. McDonald's has an edge with a lower forward 12-month P/E ratio of 26.17 than Starbucks' figure of 27.79X.
Image Source: Zacks Investment Research
Estimated Earnings & Revenues
Arguably, earnings growth is of utmost importance in determining a stock's potential, as surging profit levels indicate strong prospects (and stock price gains).
For the current year, McDonald's earnings per share and sales are expected to improve 3.9% and 4.7%, respectively, year over year. Starbucks’ earnings per share and sales are likely to increase 15.2% and 11.2%, respectively, year over year. Hence, this round goes to Starbucks.
Fundamentals
McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding its presence in existing markets and entering new ones. Its expansion efforts continue to drive performance.
Despite unfavorable scenario, the company continues to expand its global footprint. It is planning to open more than 1,900 restaurants globally in 2023, including 400 in the United States and IOM segment, and 1,500 (including nearly 900 in China) in the IDL market. The company expects net restaurant unit expansion to contribute 1.5% to 2023 systemwide sales growth in constant currencies.
The company continues to impress investors with robust comps growth. In fourth-quarter 2022, global comps advanced 12.6% compared with 12.3% gain reported in the prior-year quarter. This marks the eighth consecutive quarter of comps growth.
In the fourth quarter, comps in the United States, international operated markets and international developmental licensed segment rose 10.3%, 12.6% and 16.5%, respectively. The company gained from robust performance in Japan and Brazil.
Then again, Starbucks is benefiting from expansion efforts. In first-quarter fiscal 2023, Starbucks opened 459 net new stores worldwide, bringing the total store count to 36,170. In fiscal 2023, the company expects store count in the United States and China to grow 3% and 13%, respectively, on a year-over-year basis. The company expects global store growth to be nearly 7%. Capital expenditure in fiscal 2023 are estimated to be $2.5 billion.
The company’s North America comps have impressed investors for the eighth straight quarter and rose 14% in the fiscal first quarter. The segment benefited from 10% growth in company-operated comparable store sales, new store growth and higher contribution from licensed store sales. Average ticket and transaction increased 9% and 1%, respectively.
Despite the dismal performance in China, the company reiterated its guidance for fiscal 2023. Consolidated revenues are anticipated to grow 10-12% on a year-over-year basis. The company anticipates non-GAAP EPS growth to be at the low end of 15-20%.
Our Take
The fundamentals of both companies are solid. However, earnings growth and share price performance provide Starbucks a slight edge over McDonald’s.
Key Picks
Some better-ranked stocks in the Zacks Retail-Wholesale sector are Arcos Dorados Holdings Inc. (ARCO - Free Report) and Bloomin' Brands, Inc. (BLMN - Free Report) .
Arcos Dorados currently sports a Zacks Rank #1 (Strong Buy). ARCO has a long-term earnings growth rate of 7.8%. Shares of the company have declined 8.3% in the past year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Arcos Dorados’ 2024 sales and EPS suggests growth of 8% and 11.4%, respectively, from the year-ago period’s reported levels.
Bloomin' Brands flaunts a Zacks Rank #1 at present. BLMN has a long-term earnings growth rate of 12.3%. The stock has risen 23% in the past year.
The Zacks Consensus Estimate for Bloomin' Brands’ 2024 sales and EPS suggests growth of 2.4% and 5.5%, respectively, from the year-ago period’s reported levels.