The restaurant industry is one of the substantial components of the hospitality industry, focusing on supplying food services to customers. Restaurants are divided into standalone restaurants, fast food restaurants, chain restaurants, and formal restaurants.

Research and Markets reports that the global quick-service restaurant market is estimated to hit $815.6 billion in the terminal year, growing at a CAGR of 5.1% between 2021 and 2026. The market’s growth should be fueled by the increasing disposable income in highly populated countries such as China and India.

In this article, I’ll analyze and compare two popular restaurant stocks, McDonald’s (MCD) and Starbucks (SBUX), to determine which one is a better buy candidate at the moment. 

Founded in 1940, McDonald’s operates and franchises its well-known hamburger-focused restaurants in the United States and internationally. As of December 31st, 2021, it operated 40,031 restaurants around the world. Based in Seattle, Washington, Starbucks is the world’s largest coffeehouse chain that serves as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates across three business segments: North America, International, and Channel Development.

Year-to-Date (YTD), shares of McDonald’s are down 6.6%, while SBUX stock has plunged 32.1% over the same period.

Recent Developments

On May 3rd, JPMorgan analyst John Ivankoe boosted the firm’s price target on McDonald’s shares from $260 to $275 following its favorable first-quarter results. The analyst noted that MCD stock “offers relative sanctuary” in an “unstable world.” Notably, JPMorgan remains its “Overweight” rating on McDonald’s shares unchanged. 

On May 23rd, Starbucks announced that it had closed its business in Russia. The company declared it would no longer have an operation in Russia, permanently winding down operations in its 130 stores. SBUX added that it would continue to pay its nearly 2,000 employees in Russia for six months, helping them to find new jobs.

Financial Overview & Analysts’ Estimates 

McDonald’s Corporation last reported its financial results on April 28th. In Q1, the company’s total revenue climbed 10.7% year-over-year to $5.67 billion, driven by a 13% YoY increase in revenues from franchised restaurants and a 7% YoY increase in sales by company-operated restaurants. Also, the company was able to beat the Wall Street consensus revenue estimates by $100 million. Besides, the company reported Non-GAAP EPS of $2.28, beating Wall Street’s estimates by $0.11.

It is important to note that the stock’s current annualized dividend rate is $5.52 per share, which translates to a dividend yield of 2.21% as of June 3rd. The company’s payout ratio currently stands at 55.39%. Its dividend payouts have increased at a 7.92% CAGR over the past five years. 

The company’s EPS is expected to grow 2.79% year-over-year to $2.44 in its fiscal second quarter of 2022. However, analysts anticipate MCD’s revenue to remain flat at $5.86 billion in the current quarter.

In Q2, Starbucks’ top line rose 15% on a year-over-year basis to $7.6 billion, standing in line with Wall Street’s revenue estimates. The revenue growth was due to a 14.2% YoY increase in revenues from company-operated stores to $6.28 billion, driven by a 7% increase in the global comparable store sales. Notably, active Starbucks rewards membership was up 17% in the U.S. to 26.7 million members in Q2. Also, the company opened 313 net new stores during the quarter. However, SBUX reported a Non-GAAP EPS of $0.59, missing Wall Street expectations by $0.01.

Starbucks should reward its shareholders with an annual dividend payout of $1.96 per share, leading to a forward yield of 2.57%, which is above the sector’s median threshold of 2.43%. Also, the company has 12 years of dividend growth, increasing its dividends at a 5-year growth rate of 15.11%.

Currently, Wall Street estimates SBUX’s EPS to drop 24.31% year-over-year to $0.76 per share in 3Q22. On the other hand, analysts expect that its FQ3 revenue should increase to $8.14 billion, representing 8.63% year-over-year growth.

Comparing Options Market Sentiment

Looking at the September 16th, 2022, option chain for both MCD and SBUX, let’s determine options market sentiment by comparing the calls/puts ratio. In MCD’s matter, the open calls/open puts ratio at the $250.00 strike price stands at 1.41x, implying a bullish options market sentiment. The open calls/open puts ratio for SBUX at the $80.00 strike price is 2.44x, indicating a relatively stronger bullish options market sentiment.

Conclusion

While both restaurant companies should capitalize on the industry’s growth in the long term, I believe that Starbucks is currently a better investment based on its relatively better financials, higher forward growth rates, and better open calls/puts ratio.

MCD shares were unchanged in premarket trading Friday. Year-to-date, MCD has declined -6.08%, versus a -11.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. More...

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