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Starbucks vs McDonald's: Which is a Better Restaurant Stock?

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The Zacks Retail-Restaurant industry has had a decent run in the past year. The industry has gained 21% in the timeframe compared with the S&P 500’s rally of 25.6%.

Despite most restaurateurs grappling with soft traffic, the industry is likely to witness impressive sales growth in 2020, backed by partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, digital innovation, rollout of self-service kiosks and loyalty programs.

Considering the trend-driven nature of the industry, restaurateurs have been constantly innovating items for consumers while maintaining complete transparency about ingredients. Moreover, restaurant operators are focusing on driverless delivery systems to drive sales. This is expected to bring down expenses substantially as it does away with delivery personnel.

In line with the industry’s growth, leading restaurant companies — Starbucks Corporation (SBUX - Free Report) and McDonald's Corporation (MCD - Free Report) — are trying out different strategies to generate profits. With both the 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 Starbucks have gained 42.3% in the past year, while McDonald's risen 14.4%.

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 24.82X compared with the S&P 500’s 18.88X. McDonald's has an edge with a lower forward 12-month P/E ratio of 24.41 compared with Starbucks’s figure of 28.65X.



Earnings History and Projected Growth

Starbucks’ earnings have surpassed the Zacks Consensus Estimate in three of the trailing four quarters by 7.7%, on average. Meanwhile,McDonald's has missed the consensus mark in three of the preceding four quarters by 0.4%, on average. Starbucks anticipates 2020 fiscal earnings to improve 11.5%, while McDonald's 2020 earnings are expected to grow 8.1%.

Fundamental

Solid global footprint, successful innovations, best-in-class loyalty program and digital offerings bode well for Starbucks. Moreover, the company’s strategic efforts have been driving traffic growth. Notably, traffic, which was down in first-half of 2019, improved in the third and fourth quarter. Meanwhile, Starbucks' business is rapidly expanding in China, courtesy of innovative store designs and the success of the MSR program. The company believes that China and the Asia-Pacific region will drive business growth over the next five years.

McDonald's various sales and digital initiatives and positive comps bode well. The company’s increased focus on delivery and accelerated deployment of EOTF restaurants in the United States are noteworthy. McDonald’s has been regularly rewarding shareholders through share repurchases and dividends.

Our Take

Our comparative analysis shows that although McDonald's has an edge over Starbucks in terms of valuation, the higher projected EPS growth puts Starbucks in the lead. Also, in terms of price performance, Starbucks has clearly outperformed McDonald's. Fundamentals of both the companies look solid.

Key Picks

Better-ranked stocks worth considering in the same space include Domino's Pizza, Inc. (DPZ - Free Report) and Dunkin' Brands Group, Inc. (DNKN - Free Report) . Both the stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Domino's Pizza and Dunkin' Brands have an impressive long-term earnings growth rate of 13.7% and 10.9%, respectively.

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