Would You Choose Restaurant Brands’ Stock Over McDonald’s?

QSR: Restaurant Brands logo
Restaurant Brands

McDonald’s stock (NYSE: MCD) has grown 20% in the last couple of years (since Jan 2018), but Restaurant Brands’ Stock (NYSE: QSR) has grown by only 10%. But it is hard to believe why McDonald’s stock is up more Restaurant Brands’ stock – especially since Restaurant Brands’ revenue growth for the 2017-2019 period stood at 22.4%, while McDonald’s revenue fell by 7.6%. Wouldn’t Restaurant Brands be the better bet in the long run? Not quite. McDonald’s continues to be the stronger investments, as we highlight in our dashboard Restaurant Brands vs. McDonald’s: Does the price movement makes sense.

No doubt, the key parameter that differentiates the 2 companies, and will continue to do so over the coming years, is the margin. McDonald’s profit margins (net income as a percentage of sales) are higher at 28.6% versus 19.8% for Restaurant Brands. Further, McDonald’s margins have risen from 22.8% in 2017 to 28.6% in 2019, while Restaurant Brands’ margin fell from 27% in 2017 to 19.8% in 2019. We believe McDonald’s margin will continue to witness strong growth – a view that is reinforced by the fact that McDonald’s P/E is higher at 23.2x (based on its current market price and FY’19 EPS), while Restaurant Brands is 22.1x.

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How Do The Core Businesses For McDonald’s And Restaurant Brands 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 – are working on take-out-only mode. However, the company does benefit to an extent from its geographical diversification with 38,695 restaurants across 119 countries at the end of 2019. 

Restaurant Brands is a combination of Tim Hortons®, Burger King®, and Popeyes® brands, which have a total of 27,086 restaurants across 100 countries as of year-end 2019. All the three brands have their individual identity and are managed independently. While Restaurant Brands’ revenues have seen an increase of 22.4% between 2017 and 2019, the margins fell from 27% to 19.8% primarily due to the higher effective tax rate as well as the costs associated with managing and marketing 3 separate brands – giving McDonald’s a clear advantage. 

To conclude, we believe McDonald’s is likely to continue to outperform Restaurant Brands. There may be an even bigger opportunity when you compare Microsoft to Amazon.


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