If you were told two years ago to choose whether McDonald's (MCD +0.38%) or Shake Shack (SHAK +1.09%) would be hitting new all-time highs two summers later, you probably wouldn't bet on the Golden Arches being the victor. McDonald's was mired in a nearly two-year funk of negative domestic comps, and Shake Shack had gone public earlier that year as a market darling.
Reality is a shocker. Shake Shack is now trading pocket change away from an all-time low, and McDonald's is still basking near the all-time highs it set earlier this summer. Is McDonald's the new burger darling? Can Shake Shack bounce back? More importantly, which burger flipper is the better investment now that McDonald's has popped as Shake Shack's valuation gets pared back? The questions are important. Let's see if we can figure things out.
Getting its buns kicked
It's clear that momentum is working for just one of the two chains these days. McDonald's is about to wrap up its 10th consecutive month of stock gains, and it's doing so by posting positive comps and healthy earnings growth. Revenue has been declining, but only because the chain's in the process of handing thousands of its company-owned locations to franchisees.
Shake Shack is at the other end of things. Top-line growth has been explosive -- up 37% in its latest quarter -- but only because it's building out more company-owned burger joints. Comps were actually negative, though adjusted earnings soared 39% to $0.20 a share for the period. The stock took a hit after Shake Shack's latest report as a result of the fast-growing burger chain hosing down its store-level performance guidance. It now sees comps declining between 2% and 3% for the year. Shake Shack was earlier targeting a flat showing.
The turnaround at McDonald's is real. The chain is a beast since Steve Easterbrook stepped up as CEO in early 2015. The refranchising efforts have made it leaner and menu initiatives including All-Day Breakfast and recent food quality upgrades are paying off. It will raise its dividend in a few weeks, stretching its streak of hikes to 41 years in a row.
Shake Shack's prospects for recovery aren't as clear, but it's not because the chain is broken. The "better-burger" chain is still a consumer darling, and there isn't a reason to believe that the rare dip into negative comps these days won't pass come 2018. Shake Shack stock's plummet was one fueled more by its lofty post-IPO valuation than the state of its fundamentals. Even now, the stock's multiples aren't for the squeamish at 59 times this year's projected earnings and 51 times next year's target.
Shake Shack has more upside than McDonald's at this point in each company's life cycle, but there's a lot of risk for the former to get there. McDonald's has become a well-oiled machine at this point, making it the safer bet of the two to be trading higher a year from now. McDonald's gets the nod as the smarter purchase here.
