Better Buy: Chipotle vs. McDonald's
Consumers are spending freely at fast-food restaurants these days. That preference for eating away from home has helped shares of both Chipotle Mexcian Grill (NYSE: CMG) and McDonald's (NYSE: MCD) outperform the S&P 500 so far in 2022.
But investors have divergent views over the prospects for these two businesses, which are increasingly clashing in the drive-thru and delivery spaces. Let's take a closer look at which of the two stocks seems more appetizing as a long-term investment today.
Robust growth
Both companies are benefiting from a selling environment that's characterized by strong demand for fast food. Chipotle's recent earnings report showed an 8% increase in comparable-store sales through late September. McDonald's noted a 10% spike in its global business over the same period, and a 6% jump in the U.S. market.
Consumers are looking for quick, convenient ordering and pickup options these days, and that preference has Chipotle and McDonald's competing more directly. Nearly all of the 43 new restaurants the former opened in Q3 featured a drive-thru platform, which is an area that McDonald's has typically dominated. "These formats continue to perform very well," Chipotle CEO Brian Niccol said in a press release.
McDonald's sounded a similarly positive tone, saying in a late October report that fast-food consumers are responding well to its latest promotions and are increasingly ordering home deliveries. "Our teams around the world continue to execute at a high level," CEO Chris Kempczinski said.
Inflation proof
While both chains are succeeding in passing along higher prices, McDonald's is the clear leader in this area. The company has generated $6.8 billion of operating profit over the last nine months. And, while profitability has declined compared to a year ago, its 43% operating margin is more than double Chipotle's 12%. Still, Chipotle's margins are expanding, as rising prices aren't denting demand.
MCD Operating Margin (TTM) data by YCharts
Investors who prioritize cash flow will prefer McDonald's stock, too. Its franchised selling model provides unusually high cash returns. Combined with its larger global base of restaurants, that financial strength is a key reason why Mickey D's is a Dividend Aristocrat, having raised its payout in each of the last 45 years. Investors can now add one more year to that impressive streak. McDonald's just boosted its quarterly dividend by 10% to $1.52 per share.
The better deal
The advantages of McDonald's in areas like global growth and profitability have translated into a premium valuation for the stock. Its shares are trouncing the S&P 500 in 2022, while Chipotle's returns are closer to the wider market's 20% slump.
There are good reasons to prefer Chipotle's stock right now, including a much lower valuation of 5 times annual sales compared to McDonald's price-to-sales ratio of 8. Chipotle also has more room to expand its sales base over the next few years. Management is aiming to add around 250 new locations this year and almost 300 new stores in 2023. Increasingly, these locations will be in more rural areas that the company can serve with drive-thru offerings.
But it's hard to compete with the clear benefits that McDonald's offers as a long-term investment. A market-leading profit margin, gushing cash flows, and a huge global selling footprint help make it a winner through many types of selling environments.
And its growing dividend can cushion returns during those inevitable economic slumps. Between these two attractive stocks, McDonald's seems more appetizing today.
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Demitri Kalogeropoulos has positions in Chipotle Mexican Grill and McDonald's. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
