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2 Top Ranked Restaurant Stocks with Different Business Models
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Analysts have been forecasting a recession since the start of the year, yet these restaurant stocks say otherwise. With ongoing banking turmoil, and rapidly shifting interest rate policy it wouldn’t be surprising to see a weakening economy, but 2023 has demonstrated that the economy and the market can do very different things.
Normally, if we were creeping towards a recession, investors would expect discretionary spending to fall, and thus spending at restaurants. But sales are growing, and analysts’ estimates are being revised higher for both stocks.
Chipotle Mexican Grill (CMG - Free Report) and McDonald’s (MCD - Free Report) have top Zacks ranks and strong price momentum. Additionally, because of their differing business models, and stock type they make for complementary additions to most investors’ portfolios.
Image Source: Zacks Investment Research
Chipotle Mexican Grill
Chipotle, who revolutionized the restaurant industry with its introduction of the fast-casual franchise, has been on an absolute tear this year, up 47% YTD. Chipotle’s stock has far exceeded the returns of the broad market over the last five years, compounding at an annual rate of 37% over that period.
Image Source: Zacks Investment Research
CMG currently boasts a Zacks Rank #1 (Strong Buy) indicating upward trending earnings revisions. Analysts are in near unanimous agreement in upgrading Chipotle’s earnings estimates, with current quarter earnings being revised 5% higher in the last two months.
Image Source: Zacks Investment Research
Chipotle has benefitted from a steady climb in its margins over the last five years. This is particularly impressive considering the challenges inflation has posed for labor intensive and will as commodity related businesses. With increasing scale, and continued optimization of its systems, CMG continues to improve its business fundamentals.
Additionally, as an occasional consumer of Chipotle, I can attest to the fact that $20 burrito bowls are now the norm when I visit. Clearly, CMG hasn’t been afraid to raise prices, but it hasn’t affected demand as customers continue to visit, nonetheless. Q1 sales grew 17% YoY and the current quarter is projecting 13% growth.
Image Source: Zacks Investment Research
Currently trading at a one-year forward earnings multiple of 47x it is well above the industry average of 27x, and below its five-year median of 55x. This is a premium valuation, but CMG is an exceptional company.
Chipotle needs to maintain the strong growth numbers it has put up over the past decade to hold this high valuation though. However, with 3,200 locations globally they certainly have room for growth, especially when compared to McDonald’s who has ten times more restaurants.
Image Source: Zacks Investment Research
McDonald's
McDonald's is not quite the high-flyer that Chipotle is, but what it lacks in growth it makes up for in sturdiness, consistency, and history. Additionally, over the last five years it has managed to outperform the broad market, doubling investors’ money over that time.
Image Source: Zacks Investment Research
Analysts are quite bullish on the restaurant giant, upgrading earnings estimates across timeframes. Sales growth is expected to be steady, projecting 8% growth for the current quarter, and 7% growth for the current year.
Image Source: Zacks Investment Research
McDonalds and Chipotle are two stocks that make for an interesting comparison because of the differing business models. Chipotle is a restaurant operator, while McDonald’s is primarily a franchisor. This allows MCD to have higher margins, and different business goals.
They also differ vastly in their growth trajectories. Over the last ten years CMG has more than doubled its annual sales, while MCD has seen a decline of 14% over that period. MCD has seen a recent bounce in growth since 2020. But then how has McDonald’s stock performed so well? Two factors, stock buybacks, and multiple expansion.
Through considerable buyback programs, MCD has dramatically reduced the total number of shares outstanding. Shares have been reduced by more than 25% over the last decade.
Image Source: Zacks Investment Research
Additionally, because of McDonald’s history and consistency, it offers a dividend yield of 2%, which it has increased for 46 years consecutively. This stability is highly desired by investors, and they are willing to pay a higher valuation for it. Thus, earnings multiple expansion.
We can see MCD forward earnings multiple has steadily climbed from 16x to 27x over the last decade. Today trading at 27x one-year forward earnings it is in line with the industry average and above its 10-year median of 23x.
Image Source: Zacks Investment Research
Bottom Line
Chipotle fits the mold of a maturing growth stock with tremendous future capacity, with a proven concept and business model. McDonald’s is the dividend aristocrat that utilizes financial engineering and strong brand history to serve shareholders. Two different stocks, with very different return profiles and business fundamentals. This is a good thing as each stock can serve its own purpose in an investment portfolio.
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2 Top Ranked Restaurant Stocks with Different Business Models
Analysts have been forecasting a recession since the start of the year, yet these restaurant stocks say otherwise. With ongoing banking turmoil, and rapidly shifting interest rate policy it wouldn’t be surprising to see a weakening economy, but 2023 has demonstrated that the economy and the market can do very different things.
Normally, if we were creeping towards a recession, investors would expect discretionary spending to fall, and thus spending at restaurants. But sales are growing, and analysts’ estimates are being revised higher for both stocks.
Chipotle Mexican Grill (CMG - Free Report) and McDonald’s (MCD - Free Report) have top Zacks ranks and strong price momentum. Additionally, because of their differing business models, and stock type they make for complementary additions to most investors’ portfolios.
Image Source: Zacks Investment Research
Chipotle Mexican Grill
Chipotle, who revolutionized the restaurant industry with its introduction of the fast-casual franchise, has been on an absolute tear this year, up 47% YTD. Chipotle’s stock has far exceeded the returns of the broad market over the last five years, compounding at an annual rate of 37% over that period.
Image Source: Zacks Investment Research
CMG currently boasts a Zacks Rank #1 (Strong Buy) indicating upward trending earnings revisions. Analysts are in near unanimous agreement in upgrading Chipotle’s earnings estimates, with current quarter earnings being revised 5% higher in the last two months.
Image Source: Zacks Investment Research
Chipotle has benefitted from a steady climb in its margins over the last five years. This is particularly impressive considering the challenges inflation has posed for labor intensive and will as commodity related businesses. With increasing scale, and continued optimization of its systems, CMG continues to improve its business fundamentals.
Additionally, as an occasional consumer of Chipotle, I can attest to the fact that $20 burrito bowls are now the norm when I visit. Clearly, CMG hasn’t been afraid to raise prices, but it hasn’t affected demand as customers continue to visit, nonetheless. Q1 sales grew 17% YoY and the current quarter is projecting 13% growth.
Image Source: Zacks Investment Research
Currently trading at a one-year forward earnings multiple of 47x it is well above the industry average of 27x, and below its five-year median of 55x. This is a premium valuation, but CMG is an exceptional company.
Chipotle needs to maintain the strong growth numbers it has put up over the past decade to hold this high valuation though. However, with 3,200 locations globally they certainly have room for growth, especially when compared to McDonald’s who has ten times more restaurants.
Image Source: Zacks Investment Research
McDonald's
McDonald's is not quite the high-flyer that Chipotle is, but what it lacks in growth it makes up for in sturdiness, consistency, and history. Additionally, over the last five years it has managed to outperform the broad market, doubling investors’ money over that time.
Image Source: Zacks Investment Research
Analysts are quite bullish on the restaurant giant, upgrading earnings estimates across timeframes. Sales growth is expected to be steady, projecting 8% growth for the current quarter, and 7% growth for the current year.
Image Source: Zacks Investment Research
McDonalds and Chipotle are two stocks that make for an interesting comparison because of the differing business models. Chipotle is a restaurant operator, while McDonald’s is primarily a franchisor. This allows MCD to have higher margins, and different business goals.
They also differ vastly in their growth trajectories. Over the last ten years CMG has more than doubled its annual sales, while MCD has seen a decline of 14% over that period. MCD has seen a recent bounce in growth since 2020. But then how has McDonald’s stock performed so well? Two factors, stock buybacks, and multiple expansion.
Through considerable buyback programs, MCD has dramatically reduced the total number of shares outstanding. Shares have been reduced by more than 25% over the last decade.
Image Source: Zacks Investment Research
Additionally, because of McDonald’s history and consistency, it offers a dividend yield of 2%, which it has increased for 46 years consecutively. This stability is highly desired by investors, and they are willing to pay a higher valuation for it. Thus, earnings multiple expansion.
We can see MCD forward earnings multiple has steadily climbed from 16x to 27x over the last decade. Today trading at 27x one-year forward earnings it is in line with the industry average and above its 10-year median of 23x.
Image Source: Zacks Investment Research
Bottom Line
Chipotle fits the mold of a maturing growth stock with tremendous future capacity, with a proven concept and business model. McDonald’s is the dividend aristocrat that utilizes financial engineering and strong brand history to serve shareholders. Two different stocks, with very different return profiles and business fundamentals. This is a good thing as each stock can serve its own purpose in an investment portfolio.