Despite differing approaches to the restaurant business, McDonald's (MCD 0.89%) and Chipotle Mexican Grill (CMG 2.51%) are similar in many ways. Both have benefited from high name recognition and the targeting of specific demographics to engender customer loyalty.
Additionally, they have driven considerable shareholder returns, albeit by employing differing strategies. Which restaurant stock better serves investors? Let's take a closer look.
NYSE: MCD
Key Data Points
McDonald's vs. Chipotle
The most shocking difference between these restaurants is how both succeed by pursuing radically different strategies.
If it were not for its franchising fees, one could easily mistake McDonald's for a real estate company rather than a restaurant chain. It is one of many restaurants serving burgers and fries, and customers flock to it for offerings such as Big Macs and Happy Meals.
However, franchises comprise about 95% of McDonald's locations, and the company owns the properties. For that reason, most of its profits come from rent collection and claiming a percentage of sales from the franchises.
In contrast, Chipotle is a restaurant chain in every sense of the word. It owns and operates nearly all of its restaurants. It stood out early in its existence by expanding the fast-casual restaurant concept, a hybrid between fast food and sit-down restaurants.
Additionally, Chipotle led the way in making healthy fast food. The company emphasizes using fresh ingredients only, banning freezers and can openers from its more than 3,300 locations. The fact that Mexican food is one of the more popular food types in the U.S. has probably also contributed to its popularity.
Furthermore, McDonald's is a mature business with operations worldwide. This means it has not expanded the number of restaurants as quickly. It has about 40,000 restaurants in more than 100 countries. That is approximately the same number of locations as last year.
In contrast, Chipotle's more than 3,300 locations are up from around 3,100 at the same time last year. Also, all but about 65 locations are in the U.S., leaving considerable room for expansion.
NYSE: CMG
Key Data Points
How the financials differ
The difference between McDonald's and Chipotle extends to the financials.
As mentioned before, most McDonald's locations are franchises. In the first nine months of 2023, franchises made up around 61% of its $19 billion in revenue, with the small percentage of company-owned restaurants driving the remainder.
The company-owned locations comprised 60% of the expenses for McDonald's. Still, that did not stop its net income of $6.4 billion in the first three quarters of the year from growing 50% compared with the same period in 2022. Such results also confirm the higher level of profitability that its franchise model offers.
Chipotle reported $7.4 billion in revenue for the first nine months of 2023. However, restaurant operations are a lower-margin business than franchising. Consequently, Chipotle kept only $947 million of that revenue in net income, though its profits grew 40% from year-ago levels.
Unlike Chipotle, McDonald's also stands out by offering a dividend, one that has grown every year since the company initiated the payout in 1976. In October, it hiked the payout by 10% to an annual level of $6.68 per share. That amounts to a dividend yield of 2.5%, well above the S&P 500's 1.6% average yield.
Nonetheless, investors seem more optimistic about Chipotle's future. Its total stock returns were significantly higher than those of McDonald's. Indeed, those returns come at a premium, as Chipotle's 49 P/E ratio is well above the 24 earnings multiple for McDonald's. That differential means investors have to decide whether the premium is worth paying.
MCD Total Return Level data by YCharts
McDonald's or Chipotle?
If you are tolerant of risk, Chipotle stock is probably worth the elevated cost given the higher return potential.
Admittedly, the McDonald's franchise model provides higher margins, and its heavier reliance on rent collections and franchise fees makes it a more stable business. When also considering the dividend, risk-averse investors might feel more comfortable with this model.
However, Chipotle has considerably more room for expansion, and its recent financials show its success in capitalizing on that growth. Since it can add around 200 restaurants annually and maintain growth rates, Chipotle is more likely to deliver higher returns despite the valuation premium.
