Burgers Over Coffee: Why McDonald’s Stock Looks More Attractive Than Starbucks?

by Trefis Team
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McDonald’s stock (NYSE: MCD) has grown only 19% since the end of 2019, but Starbucks’ stock (NASDAQ:SBUX) has grown by 36%. This, despite the fact that McDonald’s has better profit margins and geographical reach than Starbucks. We believe that the stock price movement does not make sense and McDonald’s is a strong investment currently. Our dashboard McDonald’s vs. Starbucks: Does The Stock Price Movement Make Sense? has the underlying numbers.

Starbucks’ revenues have grown by 18% over FY 2017 to FY 2019 (FY ends in September) compared to an 8% fall in McDonald’s revenue. The fall in McDonald’s revenue was primarily due to the re-franchising initiative by the company which has improved its earnings. McDonald’s profit margin (net income as a percentage of revenue) has constantly increased from 23% in 2017 to nearly 29% in 2019, while Starbucks has slightly improved to about 14%. (The increment in margin seen in 2018 was due to one-time gain resulting from acquisition of a joint venture).  This continuous improvement in earnings makes McDonald’s a strong investment.

How Do The Core Businesses For McDonald’s And Starbucks Compare?

Let’s look at the core business prospects a bit more closely. McDonald’s started out as a burger place, which widened and turned itself into a global chain that provides a locally-relevant menu, including breakfast options. McDonald’s revenues have fallen over the years due to its re-franchising initiative. Re-franchising led to an overall improvement in margins and thus earnings. The company has been affected by the coronavirus outbreak, as most restaurants – especially in the US – worked on take-out-only mode for a large period of Q2 2020. However, the company does benefit to an extent from its geographical diversification with 39K restaurants across 119 countries at the end of Q1 2020. 

Starbucks sells a variety of coffee and tea products under the flagship Starbucks Coffee brand. The company has seen a good improvement in its revenues over the past few years while its profit margins have remained steady. It has been affected by the coronavirus outbreak, as most restaurants – especially in the US – were confined to take-out-only mode for a large period of Q2 2020. Starbucks also benefits from its geographical diversification with more than 32K restaurants across 82 markets at the end of Q2 2020 (ended March 2020).

While McDonald’s seems to be a better bet compared to Starbucks if you are looking for outsized outperformance? Here is a short list of 4 companies that beat the s&p 500, every single year, year after year, for the last 10 years.

For greater insight in to the Food & Beverages space, check how Dunkin’ Brands and Starbucks are placed to weather a Covid-19 recession.

 

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