Investors currently hold different expectations for Starbucks (SBUX-2.29%) and McDonald’s (MCD -0.67%) in terms of their earnings prospects. While McDonald’s stock is reaching all-time highs after a period of impressive growth, Starbucks is experiencing solid gains but faces increasing competition as consumer preferences shift towards delivery and drive-thru options. In this article, we will compare these two restaurant giants to determine which one is a better fit for your investment portfolio.
Latest Growth Trends
McDonald’s is currently outperforming Starbucks in terms of growth. Sales in the recent quarter rose by an impressive 13% compared to the previous year, showcasing an acceleration from late 2022. This growth was widespread across all geographic markets and was driven by a balance between price increases and higher customer traffic. McDonald’s attributes its success to improvements in areas such as customer satisfaction and efficient preparation. According to McDonald’s CEO Chris Kempczinski, “Running great restaurants is fundamental to our business momentum.”
On the other hand, Starbucks had a more mixed growth result in the first quarter, with U.S. sales increasing by 11% year over year and international segments growing by 7%. However, these figures still represent solid acceleration compared to the previous quarter and reflect the success of recent initiatives aimed at reconnecting with coffee enthusiasts. CFO Rachel Ruggari attributes this momentum to investments made in stores and partners.
Profitability Comparison
Investors who prioritize profit margins will find McDonald’s stock more appealing. The fast-food giant’s operating profit now exceeds 40% of sales, a record high for the company. While McDonald’s has historically achieved this metric through a higher proportion of franchising, recent gains have resulted from factors such as cost reductions, price increases, and overall growth. Combined with the steady flow of franchise and royalty fees, these successes contribute to McDonald’s status as one of the most profitable companies worldwide.
Although Starbucks does not currently set profit records, it has a good chance of expanding profitability. Management’s strategies include expanding into more rural store locations and emphasizing drive-thru and delivery options. These efforts helped increase profit margins to 15% of sales in the last quarter, up from 12% the previous year. Further accomplishments in these areas could potentially lead to a significant rally in the stock.
Pricing Considerations
For investors seeking a more affordable option, Starbucks stock presents an attractive opportunity. Currently, shares are trading at approximately 3 times sales, a significant decrease from the price-to-sales ratio of 6 observed during the high-growth stages of the pandemic. Conversely, McDonald’s stock is relatively expensive, with a price-to-sales ratio of over 9, near its all-time high.
Although McDonald’s premium valuation is justified by its high and rising profit margin, dominant market position, and resilience in various market conditions, Starbucks possesses similar competitive strengths. Therefore, investors might consider purchasing Starbucks stock at a relative discount compared to the fast-food giant.
Conclusion
When comparing Starbucks and McDonald’s as potential investment options, it is evident that McDonald’s is currently enjoying stronger growth and higher profitability. However, Starbucks presents an opportunity for investors seeking a more affordable stock with the potential for future profitability expansion. Ultimately, the choice between the two stocks depends on individual investment preferences and risk tolerance.
