Investors just received an extra helping of data about the latest operating trends at both Chipotle Mexican Grill (CMG 2.41%) and McDonald's (MCD -0.91%). In late October, the two fast-food companies each reported solid demand for the fiscal quarter that ran through late September. Consumers are frequenting these businesses even as they look to save money in other parts of their budgets.
That's a great sign for shareholders as we head toward a potentially rocky 2024 selling environment. Both restaurant stocks have their positives, but which one is the best choice for investors right now? Let's dive right in.
The sales matchup
There was plenty of positive third-quarter news about growth from both companies to please investors. McDonald's did see a slight slowdown in its expansion pace from the previous quarter, but gains remained strong at 8% in the core U.S. market. Chipotle reported a more modest 5% uptick, yet management was happy to see a healthy mix between rising customer traffic and increased spending.
McDonald's still wins this direct-growth matchup and not only because it is boosting comparable-store sales at a faster rate these days. The chain is competing more with rivals like Chipotle in the drive-through and delivery channels, and its latest results show that it isn't losing market share.
McDonald's has the advantage when it comes to its flexibility in catering to those shifting fast-food spending priorities, too. It can market to shoppers looking for aggressive value and to those who want to splurge on premium items. That positioning reduces the risk that the chain will be caught flat-footed and forced to issue a growth warning.
"The macroeconomic environment is unfolding in line with our expectations for the year," CEO Chris Kempczinski said in a recent press release .
Cash and profits
The picture is more mixed when it comes to finances. Sure, McDonald's boasts a 40%-plus operating profit margin, making it the industry leader on this score. But Chipotle is improving its profitability at an impressive rate even though it is starting from a lower base.
Operating profit landed at 16% of sales in Q3 compared to 15% of sales a year earlier. That spike occurred even as the chain paid more for ingredients like avocado and for wages overall. That success helps explain why most Wall Street pros are looking for the burrito giant's earnings to jump 33% to $43.45 per share this year. McDonald's profits are on track to expand at a more modest 10% for the full 2023 year.
Price and cash
If you favor dividends, then McDonald's will likely fit well into your portfolio. Its dividend has increased steadily for nearly 50 years, or about the same length of time that the Big Mac has been a staple burger on the fast-food menu. The stock pays a meaty 2.6% yield today.
By contrast, Chipotle is laser-focused on reinvesting its cash into new initiatives. So more growth-focused investors might prefer Chipotle, given the chain's expanding profit margins and wider growth opportunity. There's an advantage in being a relatively small player in a massive industry, after all.
And Chipotle is valued at a decent discount compared to earlier in 2023. Yes, at 48 times earnings, the stock isn't especially cheap. But the recent market pullback has reduced that price-to-earnings (P/E) ratio from about 57 back in June. Watch the stock if you're looking for more of a bargain. But investors who buy Chipotle and hold for the long term should still see solid returns from here.
