The fast-food industry is highly competitive and exposed to jarring demand swings as consumers' tastes change. New rivals pop up every day and are often willing to price aggressively to establish their market share. These factors make it hard for most companies to achieve sustainable earnings growth over time.
Hard, but not impossible.
A few fast-food giants have built the type of business that allows them to cater to shifting demand trends while steadily winning share in this cut-throat industry. Let's look at how McDonald's (MCD -0.42%) and Chipotle Mexican Grill (CMG 6.33%) are leaning on these successes to deliver excellent returns for shareholders right now. These are two fast-food stocks worth considering right now.
1. McDonald's
McDonald's isn't your typical fast-food chain. That fact is obvious from its operating margin, which is closer to a rate that a dominant software company might enjoy. Mickey D's franchise and rental fees allow it to convert over 40% of sales to operating earnings each year, in fact, while most restaurant struggle with single-digit margins.
The chain has to earn those industry-leading margins, though, by continually raising the bar on food quality, customer service, and convenience. "Running great restaurants is fundamental to our business momentum," CEO Chris Kempczinski told investors in late April.
That momentum is impressive in 2023. McDonald's just reported a 13% increase in comparable-store sales, marking accelerating growth trends compared to late last year. Profits jumped 14%, too, with help from selective price increases.
Given that bright outlook on sales and earnings, it makes sense that the stock would be valued at a premium. Yet investors likely won't regret paying a bit more to own this high-performing fast-food business.
2. Chipotle
Chipotle is increasingly competing with McDonald's in the key drive-through space, but there is room for several winners here. The Tex-Mex chain recently announced a near doubling of its profit margin as comps grew 11% through late March.
In a similar way to the industry leader, Chipotle credited a renewed push to excel at fundamentals like customer satisfaction. Management credited, "our focus on getting back to basics," as a key reason why traffic growth was strong this past quarter even as prices increased.
Chipotle still has work to do to reclaim the all-time high margins that the company achieved before its quality control crisis back in 2015. Yet it is also clear that its strategic push into drive-thru and to-go orders is lifting profitability while unlocking new growth avenues.
CMG Operating Margin (TTM) data by YCharts
Quality stocks don't come cheap
Neither stock is especially cheap right now. McDonald's is valued at over 9 times annual sales and Chipotle shares are priced at over 6 times revenue. Domino's is valued at just 2.5 times sales, by comparison.
But McDonald's and Chipotle offer a valuable mix of market share growth and high profit margins that are rooted in steadily rising customer satisfaction. If the fast-food giants can continue raising service levels and food quality, as they have in recent years, then they have a good shot at delivering positive returns for investors even following their stocks' 2023 rally.
