The restaurant industry is expanding rapidly due to technology integration, growing eating-out trends, changing customer preferences, availability of diverse cuisines, and increasing disposable incomes. The industry’s growth is expected to be driven by off-premise traffic, which includes takeout, drive-thru, and home deliveries.

Furthermore, the industry aims to drive growth by offering personalized and curated experiences, experiential dining, and sustainable and healthier options. The top restaurant stocks, McDonald’s Corporation (MCD) and Starbucks Corporation (SBUX), reported their recent earnings. In the first quarter, MCD’s EPS missed Wall Street estimates by 1%, but its revenue came marginally above Street estimates.

MCD missed quarterly profit estimates for the first time in two years due to budget-conscious consumers and the Middle East conflict impacting international sales. The company also highlighted the growing rivalry in the fast-food industry as another factor leading to lower-than-expected earnings.

Meanwhile, SBUX failed to surpass the consensus EPS and revenue estimates by 15.2% and 6.5% in the second quarter, respectively. The company’s second-quarter earnings were below expectations due to reduced customer visits and orders, resulting in lower revenue, earnings, and store sales growth. CEO Laxman Narasimhan called it “a highly challenged environment.”

According to the National Restaurant Association’s 2024 State of the Restaurant Industry report, restaurant revenues are expected to exceed $1.1 trillion this year, setting a new record for the industry.

The industry will employ more than 15.7 million people in the United States by the end of 2024. The global fast-casual restaurant market size is estimated to expand at a CAGR of 8.3% to $293.80 million by 2030.

Given this backdrop, let’s compare two Restaurants stocks, McDonald’s Corporation (MCD) and Starbucks Corporation (SBUX), to understand why waiting for an opportune entry point in both stocks could be wise.

The Case for McDonald’s Corporation Stock

McDonald’s Corporation (MCD) operates and franchises restaurants under the McDonald’s brand internationally. The company offers food and beverages, like hamburgers, fries, sundaes, soft drinks, coffee, other beverages, and a full or limited breakfast. It owns and operates through conventional franchises, developmental licenses, or affiliate structures.

MCD’s stock has gained 5% over the past six months to close the last trading session at $273.04. However, the stock has declined 7.7% over the past year.

MCD’s revenue grew at a CAGR of 9.9% over the past three years. Also, its net income grew at a CAGR of 21.4% over the past three years.

In terms of forward EV/Sales, MCD is trading at 9.25x, 686.5% higher than the industry average of 1.18x. Likewise, its forward EV/EBIT is trading at 19.85x, 46.9% higher than the 13.52x industry average. Also, its forward Price/Sales is trading at 7.42x, 772.1% higher than the 0.85x industry average.

In terms of the trailing-12-month net income margin, MCD’s 33.22% is 636.7% higher than the 4.51% industry average. Likewise, its 53.67% trailing-12-month EBITDA margin is 386.2% higher than the industry average of 11.04%. Additionally, its 45.91% trailing-12-month EBIT margin is 502.5% higher than the industry average of 7.62%.

MCD’s revenues for the first quarter that ended March 31, 2024, increased 4.6% year-over-year to $6.17 billion. Its operating income rose 8.1% from the year-ago value to $2.74 billion. The company’s non-GAAP net income and non-GAAP EPS came in at $1.96 billion and $2.70, up 1.1% and 2.7% from the prior year’s quarter, respectively.

Street expects MCD’s revenue for the quarter ending June 30, 2024, to increase 2.5% year-over-year to $6.66 billion. The company’s EPS for the same quarter is expected to decline 1.3% year-over-year to $3.13. Moreover, the company surpassed consensus EPS estimates in three of the trailing four quarters.

MCD’s stock is trading below its 100-day and 200-day moving averages of $280.91 and $286.67, respectively.

MCD’s POWR Ratings reflect this mixed outlook. It has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a C grade for Growth, Momentum, and Sentiment. Within the Restaurants industry, it is ranked #9 out of 42 stocks. To see the additional grades of MCD for Value, Stability, and Quality, click here.

The Case for Starbucks Corporation Stock

Starbucks Corporation (SBUX) operates as a global roaster, marketer, and retailer of coffee. It operates in North America, International, and Channel Development segments. The company’s stores provide coffee and tea beverages, roasted whole beans and ground coffees, single-serve products, ready-to-drink beverages, and other food products.

SBUX’s stock has declined 5% over the past six months and 22.6% over the past year to close the last trading session at $88.49.

SBUX’s revenue grew at a CAGR of 16.6% over the past three years. On the other hand, its total assets shrank marginally during the same period.

In terms of forward non-GAAP P/E, SBUX is trading at 24.82x, 66% higher than the industry average of 14.95x. Likewise, its forward EV/EBIT is trading at 20.89x, 54.5% higher than the 13.52x industry average. Also, its forward EV/EBITDA is trading at 15.14x, 62.1% higher than the 9.34x industry average.

In terms of the trailing-12-month Return on Total Assets, SBUX’s 14.71% is 248.9% higher than the 4.22% industry average. Likewise, its 23.13% trailing-12-month Return on Total Capital is 283.7% higher than the 6.03% industry average. Additionally, its 11.70% trailing-12-month net income margin is 159.6% higher than the 4.51% industry average.

For the fiscal second quarter that ended March 31, 2024, SBUX’s total net revenues decreased 1.8% year-over-year to $8.56 billion. In addition, net earnings attributable to Starbucks and non-GAAP EPS were $772.40 million and $0.68, declining 15% and 8.1% year-over-year, respectively.

However, the company’s current liabilities came in at $7.53 billion as of March 31, 2024, compared to $9.35 billion as of October 1, 2023.

Analysts expect SBUX’s EPS for the quarter ending June 30, 2024, to decrease 5.3% year-over-year to $0.95. Its revenue for the same quarter is expected to increase 0.5% year-over-year to $9.22 billion.

SBUX’s stock is trading below its 100-day and 200-day moving averages of $95.10 and $92.40, respectively.

SBUX’s POWR Ratings reflect its uncertain prospects. It has an overall rating of C, which translates to a Neutral in our proprietary rating system.

It has a C grade for Growth, Value, Momentum, and Sentiment. Within the same industry, it is ranked #17. Beyond what we stated above, we also have given SBUX grades for Stability and Quality. Get all the SBUX ratings here.

McDonald’s (MCD) or Starbucks (SBUX) – Which Will Be the Better Earnings Momentum Buy?

The restaurant industry is rapidly changing, with new trends emerging according to shifting consumer preferences and demands. Restaurants are exploring new ways to incorporate technology into their operations as it plays an increasingly important part in the dining experience.

Both MCD and SBUX stand to benefit from the restaurant industry’s tailwinds. However, the companies faced several challenges that led to earnings miss for both in the last reported quarter. Therefore, given their mixed fundamentals and analyst estimates, it could be wise to wait for better entry points in both stocks.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Restaurants industry here.

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MCD shares were trading at $271.83 per share on Wednesday morning, down $1.21 (-0.44%). Year-to-date, MCD has declined -7.80%, versus a 5.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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