Investors have good reasons to go shopping in the fast-food industry right now. This niche tends to perform well even as consumers become more price-conscious and pull back on overall spending. And companies like McDonald's (MCD -0.42%) and Chipotle (CMG 6.33%) can still post strong earnings growth when the inevitable economic rebound occurs.
Both restaurant giants recently reported fresh earnings results that showed solid sales momentum even as inflation pinched many shoppers' budgets. Against that backdrop, let's see which stock is more attractive today.
Growth wins
McDonald's easily wins the growth matchup. The burger titan said in late January that comparable-store sales jumped 12% globally in the fourth-quarter selling period. That result represented an impressive acceleration from the prior quarter's 10% jump. It also roughly doubled Chipotle's Q4 growth rate of 6%, which marked a slowdown from the prior quarter.
The fast-food companies are competing for consumers' attention in core areas like product quality and convenience. But McDonald's drive-thru platform is hard to challenge. Booming results there helped the chain post 5% higher traffic in the full 2022 fiscal year. "Our...strategy is driving growth and building brand strength," CEO Chris Kempczinski said in an SEC filing.
Expansion opportunities
Chipotle still managed a strong 14% sales increase for 2022 thanks to a big assist from its growing store base. In contrast with McDonald's, the burrito chain sees room to add many more locations over the next several years.
2022 marked its highest in terms of store launches, with 236 new locations. Most of these featured drive-thru offerings. Executives believe they can more than double their restaurant count over time to reach at least 7,000 locations. McDonald's more mature sales footprint means it has to rely more on boosting spending at existing restaurants.
Profits and value
Both companies are efficient and have pricing power, two factors that are especially valuable in today's inflationary environment. Chipotle raised operating profit margin to 13% of sales in 2022 from 11% a year earlier. McDonald's highly franchised model delivers an industry-leading 44% profit margin, too.
MCD Operating Margin (TTM) data by YCharts
Investors might think they are getting a better deal with Chipotle stock today. Shares are priced at about 6 times annual sales compared to McDonald's ratio of 8.6. Chipotle is not only cheaper on an absolute basis, but its current valuation is also a bigger discount compared to the recent past. McDonald's, on the other hand, is close to its pandemic peak valuation of around 9 times sales.
Still, the burger titan offers a few benefits that Chipotle can't match. These include an established global sales base, better comps, and higher profitability. McDonald's also pays a substantial dividend, which in 2022 was raised 10%. The company has been steadily increasing that payout for nearly 50 years.
Overall, these factors suggest that McDonald's is worth the premium valuation that Wall Street has assigned to the stock. While both companies are likely to generate solid returns for investors, McDonald's provides the better mix of growth, income, and financial fortitude.
