In today's restaurant stock matchup, I've got Restaurant Brands International (NYSE:QSR) facing off against McDonald's (NYSE:MCD).

Restaurant Brands International -- which owns the Tim Hortons, Burger King, and Popeyes chains -- is effectively controlled by the majority ownership of its top two shareholders, 3G Capital and Warren Buffett's Berkshire Hathaway.

Fast-food diners often pit Burger King against McDonald's, but today I'll be pitting the stocks of Burger King's parent company against the stock of the company behind the golden arches.

External view of a McDonald's restaurant.



Since CEO Steve Easterbrook took the reins of McDonald's on March 1, 2015, the stock has climbed more than 50%.  Easterbrook has instilled a new sense of urgency throughout the company to improve the quality of food and service for a new generation of McDonald's customers.





Revenue $22.5 billion $24.6 billion $25.4 billion
Earnings per share $6.55 $5.44 $4.80


All-day breakfast introduced in late 2015 was a big part of giving diners what they want. Behind the scenes, as part of management's long-term growth strategy, McDonald's is transitioning company-owned restaurants, which make up more than 50% of total revenue, to franchised restaurants.

Franchised restaurants have been growing revenue about 5% going back through 2016, which is a better indicator of McDonald's long-term revenue growth once the transition is complete. Over the long term, management is aiming for 95% of revenue to come from franchised restaurants.

As McDonald's transitions its company-owned restaurants to franchised ones, it is saving hundreds of millions on capital expenditures that would otherwise go toward maintenance and opening new company-owned restaurants. The savings will allow the company to increase operating margin from 31.4% to an expected mid-40% margin by 2019. Management is also putting some of the savings into share repurchases, which decrease shares outstanding and, in turn, boosting earnings per share.

Share repurchases and margin expansion will be the main drivers of McDonald's growth over the next few years. Starting in 2019, management expects revenue to grow at a single-digit rate over the long term.

Original Tim Horton's logo with "donuts" written below "Tim Horton".

Original Tim Horton's logo. IMAGE SOURCE: TIMHORTONS.COM.

Restaurant Brands International

Restaurant Brands International was formed a few years ago from the merger of Burger King and Tim Horton's, and since then the stock is up an impressive 85%. Systemwide sales at Tim Horton's and Burger King grew 4.5% and 7.8%, respectively, in 2016, which was the first full year both chains operated under the RBI umbrella. In the first half of 2017, both chains have posted weaker comparable-sales growth, but management isn't concerned about near-term softness, as it remains confident in its long-term growth strategy.

Metric 2017* 2016 2015
Revenue $4.6 billion $4.2 billion $4.0 billion
Earnings per share $1.89 $1.58 $1.09


As with McDonald's, the real story has been RBI's earnings performance. Earnings increased 45% in 2016 after excluding costs associated with acquisitions. So far in 2017, RBI has grown adjusted earnings per share 21%. This is typical of companies operating with the 3G Capital playbook, which is to boost the bottom line by cutting unnecessary costs, and drive long-term revenue growth through better marketing, new menu items, and acquisitions.

Earlier this year RBI acquired Popeyes Louisiana Kitchen, which gives it three strong restaurant brands to continue its quest to dominate the restaurant industry. RBI has a long growth runway ahead with a market opportunity several times its current size, according to management. Going into the year, RBI had systemwide sales of about $24 billion, which is on par with McDonald's. However, each of RBI's restaurant brands has a much smaller footprint than the golden arches. This greater growth opportunity is reflected by analysts' current expectations for RBI to grow earnings 19% annually over the next five years, as opposed to only 10% for McDonald's.

Which is the better buy?

Both companies offer investors good growth potential, but they're going about it in different ways.

McDonald's is working to improve the quality of its food and service, as well as rolling out new digital ordering and delivery. On the surface, this looks like the less risky path to growth compared to RBI's reliance on acquisitions. But with savvy and long-term-focused shareholders in 3G Capital effectively controlling the company, RBI investors seem to be in good hands.

RBI's growth potential comes at a price. The stock's price-to-earnings ratio is 34 times expected 2017 earnings per share. On the other hand, McDonald's stock trades for 24 times expected earnings -- still not cheap, but more appetizing than RBI. McDonald's also offers a better dividend yield at 2.3% compared to RBI's 1.2%.

Comparing both stocks' P/E ratios with analysts' growth expectations, the advantage tilts back to RBI, with a PEG ratio of 1.7 compared to McDonald's 2.3. Throw in two very influential shareholders (3G and Berkshire Hathaway) who have exemplary track records of delivering good returns over time, and RBI looks like the better bet to me.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.