Better Buy: McDonald’s Corporation vs. Burger King (RBI)

If this battle were just about which burger joint is more well-known worldwide, McDonald's (MCD -0.42%) would be a runaway winner. The company's Golden Arches are one of the most recognizable logos on earth. But today's better buy match-up is about much more than that. It's about which is the better stock to buy today.

Image source: Getty Images.

Technically speaking, Burger King isn't its own publicly traded entity. Instead, it is part of Restaurant Brands International (QSR -0.75%), which includes Canadian coffee joint Tim Horton's as well. We'll refer to the combined entity as RBI.

When we take all of this and add it together, which company's stock comes out as the more desirable to own? There's no way to answer that question with 100% certainty. However, there are three basic lenses through which we can view the companies to get a better idea for what we're buying.

Sustainable competitive advantages

The restaurant industry is cutthroat. There's nothing that one restaurant offers up that -- hypothetically speaking -- another couldn't. That's why the power of brands and scale are so important: They represent essentially the only two differentiators that keep customers coming back for more -- while holding the competition at bay.

McDonald's is strong in both regards. It has just under 37,000 locations globally. Forbes ranked it as having the most valuable brand in the restaurant industry, and the ninth most valuable overall, worth over $40 billion. 

Neither Tim Hortons nor Burger King made Forbes' list. The former has 4,600 locations worldwide, while the latter clocks in with just under 16,000.

While I'm going to give the nod to McDonald's, here, based both on its scale and its brand power, it is worth pointing out that over the past three years, RBI has more than held its own when it comes to same-store sales, an important indicator of where a company is headed.

Same-Store Sales Growth
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Some fresh thinking helped McDonald's rebound last year, but if this overall trend continues for the next few years, the answer to this question may very well be different.

Winner = McDonald's

Financial fortitude

Folks who invest in fast-food stalwarts like this often do so for the company's dividend. The days of heady growth are long over, and shareholders like to see extra cash being returned to them.

Still, there's something to be said for keeping a boring old pile of cash around. That's because every company, at one point or another, is going to experience difficult financial times. If a company enters such times with lots of cash and little debt, it can actually emerge stronger, relative to its peers.

But those that are debt-heavy are in the unenviable position of ceding long-term market share just to keep themselves afloat. Keeping in mind that McDonald's is valued at almost four-and-a-half times the size of RBI, here's how the two stack up.

Data source: SEC filings, Yahoo! Finance. Net income and free cash flow presented on trailing-12-month basis.

Here, we have a pretty clear winner. Relative to their sizes, net income and free cash flow are at least comparable between the two. But RBI has a much more favorable cash-to-debt ratio, which would give it more flexibility in tough times than McDonald's.

Winner = RBI

Valuation

Finally, we have the murky science of valuation. While there's no single metric that can tell you if a stock is cheap or expensive, there are a number of data points we can consult. Here are five I like to use.

Data source: Yahoo! Finance, E*Trade. P/E calculated using non-GAAP earnings when possible.

Now things get really confusing. As you go down the line, the advantage see-saws between the two companies.

In the end, my vote goes to RBI. First, I consider free cash flow to be a better measuring stick than earnings, where numbers can be massaged with accounting rules. On that basis, RBI trades at a 35% discount. When we factor in growth (PEG ratio), RBI trades at a 38% discount to McDonald's.

And while McDonald's has a bigger dividend yield right now, RBI has actually raised its payout every quarter since going public in 2014. Based on the low payout ratio, that's a practice that looks destined to continue for the foreseeable future.

Winner = RBI 

My winner is...

There you have it: While McDonald's clearly has a stronger brand, RBI has a more solid balance sheet and is trading for a more favorable valuation. Throw in the fact that both Tim Horton's and Burger King have shown solid same-store growth, and I think this is the better pick of the two.