McDonald's (NYSE: MCD) and Yum China (NYSE: YUMC) are two of the largest fast-food companies in the world. McDonald's operates and franchises more than 39,000 restaurants in over 100 countries. Yum China, which was spun off from Yum! Brands (NYSE: YUM) four years ago, operates and franchises about 10,000 restaurants across mainland China.
Most of McDonald's locations are franchised, while most of Yum China's locations are company-owned. The two companies also adopted different strategies in China: McDonald's sold a majority stake in its mainland China and Hong Kong businesses three years ago, while Yum split its entire Chinese segment into a stand-alone company.
McDonald's reduced exposure to China enabled it to dodge the initial COVID-19 outbreak in the country, which caused Yum China's sales to plummet. But Yum China's sales improved after China contained the pandemic, while McDonald's sales tumbled as the pandemic spread worldwide.
Despite those challenges, McDonald's stock has risen about 10% over the past 12 months, as Yum China's stock advanced more than 20%. That growth suggests investors believe the two fast-food giants will recover after the pandemic -- but which stock is the better buy right now?
Image source: Getty Images.
The Golden Arches lose their luster
McDonald's global comparable-store sales rose 5.9% last year, marking its strongest annual growth in over a decade. It attributed that growth to new initiatives -- including its all-day breakfast, a switch from frozen to fresh beef, new regional menu items, renovated stores with digital kiosks, and better online ordering and delivery options.
Its total revenue rose 3% in constant currency terms and its earnings grew 5%. But that stable growth was partly overshadowed by the firing of CEO Steve Easterbrook, who spearheaded many of those initiatives, last November due to inappropriate workplace relationships. He was succeeded by McDonald's USA President Chris Kempczinski.
In the first half of 2020, McDonald's global comps plunged 19% year-over-year, with a 3.4% drop in the first quarter and a 23.9% decline in the second quarter. Its total revenue fell 17% in constant currency terms as its earnings plummeted 43%. It didn't provide any guidance for the rest of the year, but analysts expect its revenue and earnings to decline 9% and 24%, respectively, before rebounding next year -- if the pandemic fully passes.
McDonald's has reopened many of its locations with limited menus (which suspended its all-day breakfast in the U.S.), drive-thru, and delivery options. Those efforts helped it recoup "nearly 90%" of its sales in June against the previous year, but a second wave of COVID-19 infections, which has already started in Europe, could still disrupt that recovery. Despite those unpredictable headwinds, McDonald's total restaurant count still grew 2% year-over-year to 39,020 in the first half of 2020 as many of its franchisees looked past the crisis.
Yum China continues to expand
Yum China's total comps rose 3% in 2019, with 4% growth at KFC and 1% growth at Pizza Hut. Its total revenue rose 9% in constant currency terms, as its adjusted EPS, which excludes a big investment in the online delivery platform Meituan Dianping (OTC: MPNGF), grew 23%.
Image source: Getty Images.
Yum China leveraged the strength of its core brands to expand its smaller Chinese brands, including the hot pot chain Little Sheep, the casual dining chain Huang Ji Huang, the coffee chain COFFii & JOY, and the quick service chain East Dawning. It's also testing out Taco Bell with nine locations. Those secondary brands are still dwarfed by KFC and Pizza Hut, but they still complement its plans to open 800 to 850 new stores this year.
Yum China reiterated that target during its second-quarter conference call, even after its total comps declined 13% in the first half of 2020 -- with a 15% decline in the first quarter and a milder 4% drop in the second quarter. Its adjusted EPS plunged 50% year-over-year in the first half of the year.
On the bright side, the company had reopened 99% of its stores by the end of the second quarter. Yum hasn't provided any guidance for the full year, but analysts expect its revenue and earnings to decline 8% and 39%, respectively. Like McDonald's, Yum China's numbers are expected to rebound next year.
But unlike McDonald's, Yum China's recovery only depends on China's economy, which has mostly stabilized as many other countries struggle to contain the pandemic. A few new clusters have appeared in recent months, but they've been largely contained by aggressive testing and quarantine measures.
The valuations and dividends
Neither fast food stock is cheap right now: McDonald's trades at 28 times forward earnings, while Yum China has a forward P/E ratio of 29. McDonald's pays a forward dividend yield of 2.3%, but Yum China temporarily suspended its dividend earlier this year.
McDonald's might look appealing to income investors, but Yum China's core market is better insulated from a second wave of infections than McDonald's globally diversified business. That key advantage could make Yum China a more compelling investment until the pandemic fully passes.
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