Sometimes the offspring fares better than the parent. It's been almost 15 years since McDonald's (MCD 0.38%) spun off Chipotle Mexican Grill (CMG 0.17%), a move that catapulted the burrito-wrapping chain into cult status among investors as well as fans of fast-casual dining.
McDonald's has done well since cutting Chipotle loose. It's nearly a dividend-adjusted 10-bagger since the day that Chipotle went public at $22 in late January of 2005. Chipotle has done considerably better: It's a 57-bagger as of Monday's close. Even if we go by the initial pop in Chipotle stock (closing at $44 on its first day of trading), it's a game-changing 28-bagger for investors who have ridden the ups and downs.
Both stocks are class acts in an otherwise fickle restaurant industry. Let's size up each quick-service specialist to see which one your portfolio should take a bite out of next.
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Let's roll
There aren't too many chains generating positive same-store sales these days, and it's easy to see why Chipotle is in rare company with the 8% increase in comps that it posted for the third quarter. We're not comparing a concept to where it was earlier in the pandemic when everyone was scrambling to stay alive; we're stacking a chain against last summer's performance. Put another way, Chipotle is holding up better in the new normal than it was a year ago when the COVID-19 crisis wasn't fathomable.
Chipotle is on a roll. Revenue rose 14% in the third quarter on the strength of positive comps and modest unit expansion. The headline here is that digital sales have more than tripled over the past year, as folks order meals online for takeout but also through third-party delivery apps. It was a period of record revenue, but reported and even adjusted earnings are still well short of its peak 2015 profitability. Chipotle is still in great shape. It's thriving in the new normal, and it will fare even better once things get back to normal. The shake-out that would eliminate a few potential rivals only sweetens the pot.
McDonald's is another survivor of the pandemic. Global comps declined 2.2% for the quarter, but don't let Chipotle's strong unit-level production sway you into thinking that what Mickey D's did wasn't spectacular. Comps clocking in a mere 220 basis points below where the world's largest burger chain was operating a year earlier is great. More importantly, that's a worldwide figure -- U.S. comps were actually positive for the quarter.
Succeeding on another front where Chipotle stumbled, McDonald's actually grew its earnings in the third quarter when pitted against the prior year's performance. It also boosted its dividend last month, something it has now done for 44 consecutive years. The company is a Dividend Aristocrat, and Chipotle isn't going to be shelling out quarterly distributions anytime soon.
There aren't too many restaurant stocks that have nearly completed their turnarounds in this very challenging year. Chipotle and McDonald's are at the head of the class, but neither stock is cheap. McDonald's is trading at 26 times next year's projected earnings, and Chipotle's multiple is approaching 60. The burrito maker is worthy of a premium given its superior growth rate, but you can't sleep on Mickey D's since it has also excelled at pulling the right digital levers.
Given the market volatility, I'm going to give McDonald's the nod here. Both stocks should beat the market, but McDonald's will hold up better if the market slides in the year ahead. If you like McDonald's now, you're going to like it "supersized" in your portfolio.
