While fast food restaurants are usually described as belonging to the consumer discretionary sector, demand for the industry’s products is rarely out of season.
MCD Vs CMG: Who Has The Better Sales?
Before flattening out at the peak of the coronavirus pandemic, McDonald’s revenues had witnessed a steady multi-year decline from about 2014 onwards.
Naturally, the onset of the health crisis didn’t help arrest that trend when the company lost sales after being forced to close the majority of its dine-in restaurants.
However, since the general reopening of the economy in 2021, the Golden Arches has seen its top line recover. Its global comparable sales rose 10.9% throughout 2022, with the International Operated Markets segment growing 13.3% over that time.
MCD’s profits also surged in the fourth quarter too, increasing 26% in constant currency to $2.59. Moreover, the business is clocking some of the best margins it’s ever had, with its EBITDA and gross profit fractions hitting 52.7% and 57.0%, respectively.
On the other hand, while Chipotle’s sales aren’t as large as McDonald’s on an absolute basis – CMG is a smaller company, after all – they have been accelerating much faster than MCD’s the last few years.
For example, Chipotle’s total revenues grew 14.4% in 2022 to $8.6 billion, which was all the more impressive considering it reported a massive 26.1% rise in the same metric in 2021.
That said, the burrito chain needs to be more adept at turning its superior sales into bottom-line earnings. Its EBITDA margin is significantly lower than McDonald’s at just 17.0%, while its levered free cash flow ratio of 8.14% is way behind its burger-retailing rival at 22.8%.
Potential For Growth
A key factor behind McDonald’s excellent financial performance of late has been its focus on doubling down on the so-called 4D’s – i.e., its digital, delivery, drive-thru, and development goals.
Indeed, MCD has managed to leverage its digital efforts in such a way as to lower costs and streamline its overall operation. For instance, it has refurbished its UK and Ireland restaurants with “outdoor digital drive-thru displays” and established a “long-term global strategic partnership” with DoorDash to fulfill its online orders.
Meanwhile, Chipotle’s management team believes the firm has a compelling opportunity to expand its present store count. The brand opened 236 over the last year to bring its total at year-end to 3,187, with Chairman and CEO Brian Niccol, claiming that this could more than double “to 7,000 restaurants over the long term.“
In addition, CMG has announced it will introduce a new fresh eatery concept, Farmesa. The project is a partnership with Kitchen United Mix and will feature a fully digitized ordering process with delivery responsibilities delegated to third-party outfits.
Chipotle Is Expensive
One crucial difference between McDonald’s and Chipotle stock is that Chipotle trades at a steep valuation compared to its industry peer.
In some ways, that’s not a surprise. Chipotle’s PE multiple stands at around 50x today, having dropped less than that on only a handful of occasions in the last five years.
In fact, CMG had an earnings ratio of 170x in December 2020, indicating what sort of premium the market was willing to pay for the business back then.
Conversely, although McDonald’s stock is much cheaper at 33x, this is comparatively expensive in contrast to its typical price. Indeed, in early 2022, MCD was changing hands for just 22x its trailing twelve-month earnings.
Is McDonald’s Dividend Unsustainable?
While McDonald’s and Chipotle are great companies, each is exposed to specific threats that could undermine their desirability as future stock picks.
To begin with, unlike Chipotle, McDonald’s pays its shareholders a dividend. Although the yield on that distribution is reasonably modest at 2.24% right now, the cost to the business certainly isn’t.
In fact, MCD’s dividend liabilities deprive the firm of $4.2 billion per year, despite it only generating just $6.2 billion of net income. This means the company has a payout ratio of close to 70%, which is unusually – and possibly unsustainably – high.
Moreover, even if McDonald’s can continue to pay its distribution, that still takes away critical cash reserves that could be used to fund expansionist projects.
For Chipotle, the dangers are less concrete and more unpredictable. Its Farmesa play could go the way of its many other attempts to branch out, such as the high-profile failures of ShopHouse and Tasty Made.
Worryingly, CMG also missed analyst expectations in the fourth quarter, which is concerning given the otherwise stellar year it had enjoyed before then.
McDonald’s Vs Chipotle Stock: Which Is The Best?
McDonald’s discounted valuation makes it an attractive proposition for value investors, while its income-producing quarterly distribution is a plus point for those seeking dividend returns.
Nonetheless, CMG has done something that many other companies have found difficult or impossible to achieve. It has boosted both its sales and profitability at a time when consumer activity has slowed due to high inflation and rising interest rates.
Ultimately, the two companies cater to a different clientele – and their fortunes could reflect that reality in the years to come. For example, while McDonald’s suffered under lockdowns, Chipotle actually thrived.
Furthermore, the businesses are profitable and have room for growth, making either enterprise a great choice for almost anyone’s portfolio.
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