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MCD or DPZ: Which Stock is Better Placed at the Moment?

·6 min read

The restaurant industry is gradually getting back on track aided by pent-up demand for dine-in experience and robust off-premise sales. The industry operators are benefiting from rollout of vaccines and reopening of economy. Notably, people are finally starting to feel safer to venture out and spend money that they've been saving over the past year. To this end, companies are resorting to hiring and retention of team members to support high volumes.

Given that the industry players are witnessing solid sales on the back of its off-premise offerings, majority of the restaurant operators have initiated the testing of ghost or virtual kitchens. Notably, the idea of providing off-premise offerings along with an connected curbside service has been receiving a positive customer feedback. As dining room traffic increases, off-premise business is likely to be robust.

Meanwhile, restaurant operators are continuously coming up with new ideas to keep their businesses afloat. This includes expansion of seating capacity at both indoor dining rooms and outdoor seating, installation of breathable panels and roll-out of subscription paid services.

In line with the industry’s growth, leading restaurant companies — McDonald's Corporation MCD and Domino's Pizza, Inc. DPZ — are trying out different strategies to generate profits. With both the companies carrying a Zacks Rank #3 (Hold), let’s analyze and find out which is poised better on the basis of different parameters.

Price Performance and Valuation

Shares of McDonald's have gained 26.4% in the past year, while the same for Domino's have appreciated 21.9%.

On the basis of the forward 12-month P/E ratio, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 28.2X compared with the S&P 500’s 21.7X. McDonald's has an edge with a lower forward 12-month P/E ratio of 26.07X compared with Domino's figure of 33.36X.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Estimated Earnings & Revenues

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels indicate strong prospects (and stock price gains).

For the current year, McDonald's earnings per share is expected to increase 41.8% year over year. Notably, sales for the current year are expected to improve 16.7% year over year. Meanwhile, Domino's current-year earnings per share is likely to rise 6.4% year over year. The company’s sales are likely to improver 4.6% year over year. Thus, this round goes to McDonald's.

Fundamentals

McDonald’s is the world’s largest chain of fast-food restaurants with presence in more than 100 countries. During the coronavirus pandemic, the company has been focusing on drive-thru, delivery & take-away. Prior to the coronavirus crisis, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now accounts for approximately 90% of sales. The company has more than 25,000 drive-thrus globally. Moreover, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option. To provide enhanced experience and convenience to customers, it is increasingly focusing on delivery. It provides delivery from more than 30,000 restaurants in above 75 countries, compared to nearly 3,000 restaurants over the past four years.

The company believes that there is a huge opportunity to grow all its brands globally by expanding presence in existing markets and entering new ones. Despite the pandemic, McDonald’s opened about 500 restaurants in across the market in 2020. In 2021, it is planning to open more than 1,300 restaurants globally. In 2021, the company anticipates systemwide sales growth, in constant currencies, in the low double digits. In China, the company opened 150 new restaurants in first-quarter 2021 and is on track to open 500 restaurants in the country this year.

After reporting dismal comps in the trailing four quarters due to the coronavirus pandemic, the company reported robust comps in first-quarter 2021. In the quarter, global comps advanced 7.5% against a decline of 3.4% in the prior-year quarter. Moreover, during the first quarter, comps at the United States, international operated markets and international developmental licensed segment rose 13.6%, 0.6% and 6.4%, respectively. The company recorded high average daily sales volumes in first-quarter 2021. The U.K., Canada and Japan reported robust comps.

Meanwhile, the pizza category is the fast-growing segment in the U.S. quick-service restaurant industry and Domino’s is one of the largest pizza chains globally. In the United States, the company is the market leader in the delivery segment. Domestically, first-quarter fiscal 2021 marked the 40th consecutive quarter of positive same-store sales. During the fiscal first-quarter 2021, U.S. comps benefited from increase in ticket and order growth.

Domino’s continues to impress investors with robust margin growth. In first-quarter fiscal 2021, the company’s operating margin expanded 60 basis points (bps) year over year to 39.6%. Operating margin expansion was primarily driven by an increase in revenues in its U.S. franchise business. Moreover, the company-owned store margin as a percent of revenues rose owing to robust sales leverage.

Meanwhile, the company’s international growth continues to be strong and diversified across markets, courtesy of exceptional unit level economics. Notably, first-quarter fiscal 2021 marked the 109th consecutive quarter of positive same-store sales in its international business. Improvement in comps can be attributed to ticket growth. The company inaugurated 175 (36 net U.S. stores and 139 net new international stores) global net store openings during first-quarter fiscal 2021.

Our Take

Fundamentals of both the companies are solid. However, McDonald’s is ahead of Domino’s in terms of earnings growth, valuation and share price performance.

Key Picks

Some better-ranked stocks worth considering in the same space include Dine Brands Global, Inc. DIN and Texas Roadhouse, Inc. TXRH. Dine Brands and Texas Roadhouse sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dine Brands’ 2021 earnings are expected to soar 269.3%.

Texas Roadhouse has a three-five year earnings per share growth rate of 10%.

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