Shares of McDonald's (MCD -0.91%) have outperformed those of Restaurant Brands International (QSR 1.03%) -- parent of Burger King, Tim Horton's, Popeyes, and Firehouse Subs -- in recent years. Just looking at the past year, McDonald's stock has been up 9.8% while Restaurant Brands has been down 14.6% -- and the chart below shows the five-year comparison.
So why is Restaurant Brands the better buy? Because past performance is not always indicative of the future. Successful investing is about understanding where a business is headed and comparing that to the stock's current valuation.
Here are three reasons Restaurant Brands is a better investment than McDonald's today.
1. The Burger King owner has grown faster
Since McDonald's stock has nearly doubled in value over the last five years, you might assume that the business must be performing better than Restaurant Brands. But a review of revenue and earnings growth between the two companies shows the opposite.
Over the last five years, Restaurant Brands' revenue has increased by 6.5% in total compared to a decline of 4.8% for McDonald's. More importantly, Restaurant Brands' earnings per share has slightly outpaced that of McDonald's, growing 85% cumulatively compared to McDonald's earnings growth of 77%.
QSR Revenue (TTM) data by YCharts.
Stocks follow earnings over the long term, so investing in the company that can grow profits faster can lead to significantly better returns. Over the next five years, analysts have slightly more optimistic expectations for Restaurant Brands than McDonald's. The former is expected to grow earnings about a half percentage point faster than Mickey D's at 13.5% per year.
2. Restaurant Brands has greater growth potential
Investors should always take analysts' estimates lightly because they can be off. In the case of Restaurant Brands, there is a good chance that analysts could be underestimating Restaurant Brands' earnings growth relative to McDonald's. The main reason is that the Burger King operator has more room to open new restaurants and, therefore, a longer runway for revenue growth.
McDonald's ended 2021 with 40,031 restaurants globally. It opened 1,500 new restaurants last year, so it's still finding white space out there. But the company's growth strategy hinges on expanding its menu and leveraging its drive-thru and digital ordering capabilities.
Image source: Getty Images.
Restaurant Brands has a much easier path to generating revenue and earnings growth. It ended 2021 with over 29,000 restaurants globally and is targeting 40,000. Moreover, Tim Horton's, Popeyes, and the recently acquired Firehouse Subs are far less penetrated across international markets than McDonald's or Burger King.
On March 15, Restaurant Brands announced an acceleration in the global expansion of Tim Horton's with plans to launch in India this year. The company plans to open as many as 300 Tim Horton's locations across India over the next 10 years. There's also tremendous international growth potential with Firehouse Subs, which has already proven successful across the U.S. and Canada.
3. Superior value and dividend income
Here's the best part. Investors can buy shares of Restaurant Brands' superior growth potential at a cheaper price-to-earnings (P/E) ratio. Whether considering its trailing P/E, forward P/E based on analysts' earnings estimates, or price-to-free cash flow, Restaurant Brands stock offers better value than McDonald's.
QSR PE Ratio data by YCharts.
If you like dividends, Burger King beats McDonald's on that score, too. Restaurant Brands pays a tasty dividend yield of 3.69% compared to a McDonald's yield of 2.16%. Both companies distribute a similar portion of their free cash flow in dividends, so Restaurant Brands' higher yield reinforces the value under its share price.
QSR Dividend Yield data by YCharts.
Comparing these restaurant stocks reveals that Restaurant Brands could be the better investment at current share price levels. Restaurant Brands offers better growth prospects, higher dividend income, and the potential for better shareholder returns with the stock trading at a lower P/E.
