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Better Buy: Sprint vs. McDonald's

By Robert Izquierdo - Mar 24, 2020 at 8:20AM

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The winner between a declining telco and a fast-food stalwart seems obvious, but 2020 introduced new complexities.

Sprint (S) and McDonald's (MCD -0.21%) are storied brands that were headed in different directions last year. Ailing Sprint struggled in 2019, while McDonald's was looking toward technology to help transform its business. 

Enter 2020, and the landscape has somewhat changed. McDonald's has a new CEO after the predecessor was fired. Meanwhile, a federal judge approved Sprint's merger with T-Mobile (TMUS 1.72%) in February, just days after Sprint's moribund stock hit a 52-week low of $4.26 a share. The judge's approval sent shares in the opposite direction to a high of $10.16 a share just three weeks later.

Now, we're in the midst of an unprecedented economic downturn brought on mostly by the COVID-19 pandemic. Let's examine how fortunes may have changed for Sprint and McDonald's in 2020 and see if it can help to determine which stock is the better buy right now.

A yellow notepad sitting on a table with "disaster plan" written at the top and a paper with charts behind it.

Image source: Getty Images.

Sprint today

Without its impending merger, Sprint is not a good investment. The company's fiscal 2019 third-quarter results saw a year-over-year revenue decline to $8.1 billion from 2018's $8.6 billion. Sprint has failed to make a profit in any quarter over the past year. This last quarter saw a net loss of $120 million.

Its cash reserves have dropped nearly in half from the prior year, down to $3.2 billion from $6.2 billion, while current liabilities have grown to $12.5 billion from $10.7 billion the previous year. Its failing financial health was part of the justification for the judge's approval of the merger.

Sprint's one advantage is its radio spectrum rights. Once the merger completes, the combined T-Mobile and Sprint, referred to as the New T-Mobile, will possess frequency assets in three important spectrum bands, giving it a technological advantage over competitors AT&T and Verizon with its 5G rollout.

In terms of the coronavirus impact, Sprint announced that it would remove all data caps and maintain service regardless of ability to pay for the next 60 days, allowing customers to remain in contact with loved ones and continue accessing the internet, particularly important as more people are forced to work from home. Competitors are doing the same, with Verizon going further to say it's accelerating its 5G transition. 

As 5G becomes more prevalent, it helps a combined Sprint and T-Mobile. On March 19, T-Mobile reassured investors that it was financially ready to complete the merger despite the coronavirus situation. The merger could close as early as April.

McDonald's amid COVID-19

The coronavirus impact is far more immediate for McDonald's. Many states, such as California, have banned dining in restaurants, which means McDonald's is only available to consumers via drive-thru and online orders in these markets. The limitations will hurt the company's revenue, and the longer these government coronavirus measures last, the harder it will hit McDonald's. Consequently, the company recently suspended its multibillion-dollar share buyback plan. 

McDonald's had its own challenges before the coronavirus struck. The company's 2019 full-year results, announced on Jan. 29, revealed a negligible year-over-year revenue increase to $21.08 billion from 2018's $21.03 billion. Even so, it's an improvement over 2018's 8% revenue drop and represents a halt to four consecutive years of revenue declines. 

But due to the pandemic, it will be difficult to see revenue growth this year. McDonald's was already struggling in the U.S. against competitors promoting high food quality, such as Starbucks and Chipotle. It's too early to tell if the coronavirus serves as a consumer wake-up call to eat better, which could translate into more declines for McDonald's, or if consumers return to old habits.

Still, the company has many appealing qualities. It is a Dividend Aristocrat, having raised its dividend payout for 43 consecutive years. Its net income was $6 billion, a 2% year-over-year increase, with free cash flow of $5.7 billion for 2019. The company has consistently maintained an excellent stockpile of cash, which it used in recent years to renovate restaurants and introduce technologies such as self-serve kiosks and online ordering.

Despite these investments, McDonald's must evolve its products to return to growth. It will be a recognizable brand for years to come, but the coronavirus will have an effect. How much won't begin to be known until McDonald's releases its next earnings report.

The final verdict

McDonald's faces struggles this year as the company addresses the coronavirus impact. But Motley Fools look at the long term, and in that regard, McDonald's is a company with solid financials.

Sprint's financials paint the opposite picture. Its saving grace is the impending merger with T-Mobile. Post-merger, the new company presents opportunities for growth investors thanks to strong 5G technology. But sans merger, it's not the better buy.

Hence, despite the magnitude of the coronavirus, the long term still favors McDonald's over a stand-alone Sprint.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$244.01 (-0.21%) $0.51
Sprint Corporation Stock Quote
Sprint Corporation
S
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$131.44 (1.72%) $2.22

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