If you like investing in cash-rich businesses that own valuable global brands, you've got some compelling reasons to take another look at PepsiCo (PEP 0.30%) and McDonald's (MCD 0.51%). Both stocks have dramatically underperformed the market rally in the past year despite generally strong operating trends.
But which one looks like the stronger investment today? Let's take a closer look.
Image source: Getty Images.
Pepsi has a better record
PepsiCo is the clear winner in the growth matchup. The snack food and beverage giant gained market share in 2020 across both of its main portfolio segments. Consumers bulked up on its packaged brands like Quaker Foods even as Pepsi gained ground against Coca-Cola (KO +0.27%) in the soda segment. These wins allowed the company to post steady sales growth last year as compared to the blockbuster 2019 outing.
McDonald's, meanwhile, notched improving sales in the second half of 2020 but still endured one of its worst performances in modern times. Global sales fell 8% for the full year as people stayed closer to home.
Operating income took an even bigger hit thanks to new COVID-19-related expenses, higher labor costs, and competitive pressure in the home delivery niche. Peers like Domino's and Chipotle Mexican Grill fared much better by logging growth for the year. Yet Mickey D's did outperform rival Starbucks during the pandemic.
McDonald's is more profitable
The fast-food giant has a much stronger earnings profile, with operating margin landing at 38% of sales compared to Pepsi's 14%. Its franchisee selling model is among the most efficient on the stock market, after all, while Pepsi has to shoulder huge expenses around distribution and manufacturing.
PEP Operating Margin (TTM) data by YCharts. TTM = trailing 12-months.
These challenges are a key reason why CEO Ramon Laguarta and his team are predicting a second straight year of modest profitability declines in 2021. McDonald's, in contrast, is expecting operating margin to bounce right back to its industry-leading mid-40% range this year.
The outlook
The picture is cloudier when it comes to comparing growth outlooks. McDonald's should enjoy a strong sales rebound this year versus last year's pandemic-pressured results. But it's anyone's guess how well the fast-food giant can compete in an environment that's tilting toward home delivery, and away from breakfast food, for the foreseeable future.
Pepsi's short-term future is clearer, with annual gains likely to stick around the 5% rate the company has achieved in each of the last two years. Management is shifting the business toward a growth-centered profile, which will support robust market share gains at the expense of earnings in 2021.
Wall Street isn't thrilled with that profit outlook, which helps explain why the stock hasn't participated in the rally in the S&P 500 since COVID-19 struck just over a year ago. Investors should see that gap as an opportunity to buy a great business at a discount, though, especially now that its dividend payout is yielding about 3% compared to McDonald's 2%.
It would still be a mistake to bet against the fast-food giant, which may see a head-turning rebound in late 2021 as consumer spending patterns snap back toward normal. But PepsiCo looks like the more compelling buy as we exit the first quarter of the year.
