2020 was a challenging year for restaurant chains like McDonald's (NYSE:MCD) and BJ's Restaurants (NASDAQ:BJRI). Both companies closed many of their restaurants as the pandemic spread but subsequently reopened those locations with tighter social-distancing measures.
Investors seem to believe both restaurants will rebound after the pandemic ends: Over the past 12 months, McDonald's stock has risen about 3%, while BJ's stock advanced 15%. But should investors buy either stock right now before the crisis officially ends?
David vs. Goliath
McDonald's is the world's largest fast food chain with a market cap of almost $160 billion. There are currently over 39,000 McDonald's restaurants in more than 100 countries worldwide, and about 93% of those locations are franchised. That business model reduces the company's operating expenses, since it generates most of its revenue from rent, royalties, and other fees, but the reduced direct control McDonald's has over its restaurants can also result in quality-control issues.
BJ's Restaurants is a much smaller casual dining chain with a market cap of less just over $1 billion as of this writing. It only operates 210 restaurants across 29 states, and all of its restaurants are company-owned. The company had been expanding its footprint across the U.S. prior to the pandemic, but it only opened one location so far in fiscal 2020, compared to seven new openings in 2019.
McDonald's growth is stabilizing
McDonald's global comparable-store sales grew 5.9% in fiscal 2019, marking its strongest annual growth in a decade as new strategies -- all-day breakfast, new menu items, renovated stores, a shift to fresh beef, and improved online ordering and delivery options -- paid off. Its total revenue stayed flat, partly due to currency headwinds, as earnings grew 5%.
But in the first nine months of 2020, McDonald's total revenue fell 13% year over year as its earnings tumbled 23%. Global comps dipped 3.4% in the first quarter before plunging 23.9% in the second as the company closed many of its stores worldwide. Results normalized in the third quarter with comps down 2.2%.
The fast food giant reopened most of its stores near the end of the second quarter, and its monthly comps growth accelerated sequentially into the third quarter. It attributed that recovery to a warm reception for its new menu items, including its spicy Chicken McNuggets, new McCafe bakery items, and the returning McRib. The continuation of its "three Ds" (digital, delivery, and drive-thru) strategy also partly offset the loss of in-store diners.
Analysts expect McDonald's revenue and earnings in 2020 to decline 9% and 21%, respectively. But for the new year, they expect revenue and earnings to grow 14% and 34%, respectively, with the end of the pandemic in sight and as the company accelerates its "three D" efforts.
BJ's Restaurants faces a longer road back
BJ's comps rose 1.1% in fiscal 2019, and its total revenue grew 4% as it opened new restaurants. However, earnings fell 6% as margins were squeezed by food cost inflation and higher wages.
In the first nine months of 2020, BJ's revenue plunged 33% year-over-year as comps retreated 15.5% in the first quarter, 57.2% in the second quarter, and 30.2% in the third quarter. The company has reopened most of its restaurants since May, but many of its locations are still operating with limited seating or outdoor-only dining.
BJ's faces a tougher uphill battle than McDonald's in its road to recovery -- for three reasons. First, it offers takeout and delivery options but doesn't provide a drive-thru option like McDonald's and other fast food chains. Second, its food is pricier, which makes it a less appealing option during an economic downturn. Lastly, many diners visit BJ's to drink craft beer and watch sports, but many sports are still running shortened schedules throughout the pandemic.
The company also posted a net loss in the first nine months of the year, and analysts expect its bottom line to stay in the red for 2020 overall, given the setbacks in the latest quarters. However, for 2021, they expect revenue to rebound 30% with a return to profitability. The company still plans to double its number of restaurants to 425 locations long term, but it needs to stabilize its core operations first.
The valuations and verdict
McDonald's currently trades at 25 times forward earnings and seven times sales. It also pays a forward dividend yield of 2.4%. BJ's is tougher to value since its bottom line is currently in the red, but its market capitalization is equal to just a single year's sales. Management suspended the dividend earlier this year.
Value-seeking investors might think BJ's low price-to-sales ratio gives it more upside potential, but McDonald's clearer path toward a recovery makes it a safer investment in this unpredictable market.