McDonald's signature Egg McMuffin breakfast sandwich. Image source: McDonald's.
The rivalry between McDonald's (MCD 0.38%) and Burger King stretches back decades, and remains a defining aspect of the fast-food industry. Although Burger King is considerably smaller, its Whopper has long stood as the chief rival to McDonald's signature Big Mac. With similar menus, the two have often been the subject of popular comparison and debate.
But which is the better pick for investors? McDonald's is a stand-alone publicly traded company, which makes the prospect of investing in it fairly straightforward. Burger King is owned by parent company Restaurant Brands International (QSR 5.47%), a Canadian company that derives much of its sales from the coffee chain Tim Hortons.
That makes a direct comparison difficult. Both restaurants occupy a similar space in the industry, and both stocks could be suitable picks for anyone looking to add fast-food exposure to their portfolios.
Larger and more straightforward
McDonald's' business isn't particularly complex: It operates one brand, McDonald's, and employs a traditional franchise model. Most of McDonald's stores are owned by franchisees (over 80%), who pay McDonald's a percentage of their sales, along with minimum rent payments and fees related to their franchise agreements. The rest of McDonald's' stores are corporate-owned.
There are more than 36,000 McDonald's restaurants in more than 100 countries across the globe. At its core, the company's menu centers around burgers and fries, but it also competes with coffee shops and now has significant exposure to breakfast. McDonald's customizes its menu for the different regions in which it competes. Chicken and veggie-based burgers dominate McDonald's Indian menu, for example.
McDonald's' performance largely depends on the success of its restaurants. From the beginning of 2012 until last October, McDonald's' shares were largely unchanged, as the company faced tough competition from rising fast-casual chains. Since then, McDonald's shares have surged more than 30%, as the company has successfully turned its menu around through the implementation of new food offerings, most notably, all-day breakfast.
The recent surge has left McDonald's' stock trading at a slightly elevated valuation -- about 23 times trailing 12-month earnings. McDonald's remains appealing to income-seeking investors, as it pays a healthy dividend, and yields about 2.91% at current levels.
A smart-money favorite
Restaurant Brands International is a bit more complicated. The difference between the two companies might be best summarized through the resumes of their leading executives.
McDonald's' current CEO is Steve Easterbrook, a man who has spent almost his entire career in the restaurant business, working as a manager at McDonald's, and various other restaurant chains in some capacity. In contrast, Restaurant Brands International's CEO is Daniel Schwartz, an executive who served as Burger King's CEO prior to its 2014 merger with Tim Hortons. But most of Schwartz's career was spent working on Wall Street as an analyst, notably for 3G Capital, the Brazilian private-equity firm that owns more than 40% of the company.
Other big-money investors also maintain significant stakes in Restaurant Brands. It's the third-largest holding of Bill Ackman's Pershing Square, and Warren Buffett's Berkshire Hathaway owns just over 8.4 million shares.
At its core, Restaurant Brands, like McDonald's, depends on the success of its stores. But Restaurant Brands does things a little differently, employing an almost fully franchised model. Virtually all Burger King and Tim Hortons restaurants are owned by franchisees.
There are risks to this model. Restaurant Brands has less control over the operations of its restaurants, and less room to experiment -- but faces less risk, and may be able to operate more efficiently. It doesn't have exposure to the labor market, for example, or commodity price fluctuations. It's focused solely on building its brand, finding franchise partners, and taking a cut of their sales.
Restaurant Brands has about 19,400 restaurants in total -- about 15,000 Burger Kings, and 4,400 Tim Hortons. Restaurant Brands stores are spread throughout the globe, but the company has significant exposure to North America -- about three-quarters of all Tim Hortons are located in Canada.
Restaurant Brands remains committed to growth, as management is working to build its international exposure, and strengthen the Tim Hortons brand with American coffee drinkers. Restaurant Brands pays a modest dividend -- it yields about 1.33% -- and trades at a more-aggressive valuation than McDonald's, around 57 times trailing 12-month earnings.
Income or appreciation?
McDonald's appears to be the safer pick of the two, given its more-modest valuation, higher dividend, and recent business turnaround. For investors seeking a steady stream of dividend payments, McDonald's appears to be the better pick.
But Restaurant Brands may offer more upside if the company's relentless expansion pans out. 3G Capital has an excellent track record when it comes to building consumer brands, and Burger King and Tim Hortons have enjoyed steady sales growth during the last year. Still, investors must be comfortable with Restaurant Brands' higher valuation.
