Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: McDonald's vs. Bloomin' Brands

By Neil Patel – Jul 1, 2020 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Which restaurant stock deserves a place in your portfolio?

When picking stocks to invest in, it pays to focus on high-quality companies over a time frame long enough to let you ignore the noise. Restaurant stocks are typically tough businesses, but I think investors could benefit and improve their skills by analyzing both McDonald's (MCD -0.87%) and Bloomin' Brands (BLMN -0.77%) and choosing one.

McDonald's has historically been a good business to own, more than doubling in the five-year period ending Feb. 20, just before the coronavirus pandemic began roiling markets. Still, at Tuesday's close, the stock was only 15% off its yearly high set on Feb. 12. After monthly comparable-store sales, or comps, tumbled 39% in April compared to the same period last year, May showed some improvement. 95% of the company's restaurants globally are back open as of June 15, which should boost those comps in coming months.

Bloomin' Brands, which owns casual chains (Outback Steakhouse and Carrabba's Italian Grill) and more upscale eateries (Bonefish Grill and Fleming's Prime Steakhouse & Wine Bar), has had a more dramatic reaction to the pandemic. The market is clearly punishing the cyclical nature of the business, as the stock is 56% off its 52-week high.

Fighting bear and bull made of points of light

Image source: Getty Images.

Please pull up to the window

McDonald's is a stable, mature, and predictable business, as evidenced by its dividend and share buybacks. The fast-food chain reached its target of returning $25 billion to shareholders during the three-year period ending in 2019. This kind of capital return policy characterizes a slower-growing company, as reinvestment opportunities that really push the needle have dried up.

Although revenue in 2019 was 23% lower than five years before, profits are actually up 27%, demonstrating the company's success at cutting costs and becoming more efficient. McDonald's has made a serious push to increase the proportion of franchised restaurants in its system. As of March 31, 95% of locations in the U.S. were franchisee-owned. An approach like this allows McDonald's to leverage its capital-light business model, resulting in higher net income even as sales decline.

Another advantage I believe McDonald's has is how well-positioned it is to bounce back from the coronavirus pandemic. While the work-from-home trend certainly hurts the company's strong breakfast business, the very nature of its quick, cheap, and convenient offerings allows it to succeed in a contactless environment. The company's investments in digital engagement and delivery (as part of its Velocity Growth Plan), coupled with the drive-thru business, are things that Bloomin' Brands just can't compete with.

Right this way

Unlike the fast-food chain, Bloomin' Brands has experienced sales growth. Even though revenue grew at a 3% compound annual rate over the past five years, it came at a significant cost. As of March 29, the company's long-term debt balance was $1.4 billion. For comparison's sake, its market capitalization was about $930 million at Tuesday's close.

The strength McDonald's has in running a capital-light franchise model is Bloomin' Brands' weakness. Bloomin' Brands owns and operates the majority of its restaurants, which requires substantial capital investment and puts the financial risk squarely on the company. At first glance, investors should like the fact that over $1 billion was returned to them over the past five years, but even this raises some questions. I don't support an excessive capital return program when, at the same time, the company takes on so much debt to fund growth.

Additionally, even as Bloomin' Brands' restaurants open up across the country with the easing of restrictions, it's going to take some time to get back to full capacity. The average check size is considerably higher compared to McDonald's, a big impediment as consumers look to save money in recessionary times.

The final verdict

While neither company exhibits extraordinary growth, both McDonald's and Bloomin' Brands offer something for the income-seeking investor. If I had to choose one for the long term, I'd go with the Golden Arches. For McDonald's, a capital-light franchise structure, digital investments, and recession-proof business give it the edge and put it ahead of Bloomin' Brands in my book.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.