MCD vs. QSR: Which Fast Food Stock is Better?
In this article, I evaluated two fast food stocks, McDonald’s (MCD) and Restaurant Brands International (QSR). A closer look suggests a bullish view on McDonald’s and a neutral view on Restaurant Brands.
Known for its golden arches, McDonald’s is one of the world’s most popular fast food chains, with more than 30,000 franchised locations in over 100 countries worldwide. Restaurant Brands International operates several fast food chains, including Burger King, Popeye’s and Tim Horton’s.
McDonald’s shares are down 8% year-to-date and 4% over the past year, while Restaurant Brands shares are also down 8% year-to-date, though they have remained roughly flat over the past 12 months.
Although both stocks are down by equivalent percentages since the start of the year, there is a significant gap between their valuations. We compare their price-to-earnings (PE) ratios to assess their respective valuations.
The overall valuation of the restaurant sector is distorted by the extreme price-to-earnings ratios of names like Cava Group (CAVA), which trades at a P/E of around 223.2x. Thus, a comparison with the rest of the sector is not really useful as both companies are traditional players rather than rising stars in the market.
McDonald’s
With a P/E of 23.6x, McDonald’s trades at a premium to Restaurant Brands. However, given that the stock is trading near the lower end of its typical valuation range and has posted long-term price gains, a long-term bullish view seems appropriate.
McDonald’s average P/E range since October 2019 is 28.4x, but that includes many ups and downs around the pandemic. More recently, the fast food giant appears to have bottomed out at a P/E of around 21 in early July, and its range since the August 2021 drop has been from 21x to around 35x.
Additionally, McDonald’s appears to be a safe investment during an economic downturn, with shares up 39% over the past five years and 269% over the past decade. Consumers typically gravitate toward lower-priced restaurants when their wallets are tight, and McDonald’s certainly fits the bill.
The chain’s new $5 menu has generated a lot of buzz, and management said in a memo to franchisees that the new menu is starting to reverse the trend. It reported a “noticeable” increase in restaurant traffic and said the $5 menu is starting to draw customers from competing chains.
McDonald’s reported a “progressive increase” of nearly 3% in customers during the promotion. In fact, management said more customers tried the offer than they expected.
While this is a short-term solution to the problem, the consumer confidence index fell to 100.4 in June from 101.3 in May as Americans grew increasingly concerned about their short-term prospects. It is worth noting that the $5 promotion began in late June.
In addition, the index of expectations for income, activity and the labor market fell from 74.9 in May to 73 in June. Any index below 80 suggests a recession.
So it looks like McDonald’s is ready to weather the storm of another economic downturn, and the current drop in its stock price and valuation looks like a dip buying opportunity.
What is the price target for MCD stock?
McDonald’s has a Moderate Buy consensus rating based on 19 Buy, 8 Hold, and 0 Sell reviews over the past three months. At $302.13, the average price target for McDonald’s stock implies an upside potential of 11.77%.
International Restaurant Brands
With a P/E of around 17.4x, Restaurant Brands International shares tend to be less volatile than McDonald’s. They have also been trading at the bottom of their range since August 2021, so a neutral view seems appropriate.
During this period, Restaurant Brands shares have generally traded between 17.4x and around 23.8x, with the exception of a spike to around 30x in January. Some investors may want to consider a bullish position on the stock, as there is significant upside potential here. However, another consideration is that the company’s long-term share price gains are much lower than those of McDonald’s.
Restaurant Brands shares are up just 13% over the past five years and 149% over the past ten years, so the stock’s upside potential relative to McDonald’s may be less over the long term.
Moreover, if McDonald’s $5 menu continues to steal customers from Restaurant Brands’ chains, it could be detrimental in the short term. Restaurant Brands subsidiary Burger King, meanwhile, was one of the first to offer a $5 menu this summer.
However, its same-store sales in the U.S. remained roughly flat in the summer quarter, suggesting consumers are seeing more value in McDonald’s $5 menu.
What is the price target for QSR stock?
Restaurant Brands International has a Moderate Buy consensus rating based on 11 Buy, 5 Hold, and 1 Sell ratings over the past three months. At $86.16, the average price target for Restaurant Brands stock implies an upside potential of 21.94%.
Conclusion: Bullish on MCD, Neutral on QSR
While both McDonald’s and Restaurant Brands International have shown signs of stability during tough economic times, McDonald’s simply appears to be the better player in the fast food sector. The stock’s upside potential is greater based on the stock’s trading range alone, and it has gained more over the long term than Restaurant Brands stock.
Disclosure
