The burger wars are intensifying for consumers, but there are different stakes for investors than simply deciding if the Whopper did in fact beat the Big Mac.
The stakes are high, and with shares of McDonald's (NYSE:MCD) recently hitting new 52-week lows as Burger King Worldwide (NYSE:BKW) trades near all-time highs, it's clear that the two restaurant giants are going in different directions. It's probably a good time to stack them up in a battle to see which of the two leading burger chains is the better investment.
Supersize the setback
McDonald's isn't at its best these days. U.S. comparable-restaurant sales have fallen in 10 of the past 11 months with comps slipping for four consecutive quarters. It doesn't take a carnivore to figure out what's wrong with Mickey D's. The world's largest burger operator is suffering from the proliferation of fast casual and gourmet burger chains that is giving consumers more viable choices.
Adding fry salt to its wounds, McDonald's is suffering from third-party reports knocking everything form the quality of its food to employee unfriendliness to the length of its drive-thru waits. Clearly there's something wrong with McDonald's in particular because it's not as if the rest of its smaller burger-flipper peers are suffering the same trend of patron defections.
Things only got worse in its latest quarter with revenue declining by 5%. Weakness in Asia was a big contributor to the top-line dip after a supplier food safety scare kept customers away. However, stateside comps still took a 3.3% hit during the quarter. McDonald's is a global dud, but the weakness starts at home.
Have it your way
Burger King Worldwide is holding up relatively better. It won't report third-quarter results for a few more days, but it's facing a more favorable trend heading into its next financial update.
Sales rose in Burger King's second quarter with comps rising in all four of its geographical territories. Yes, even in the U.S. where the average McDonald's location is ringing up fewer sales than it did a year earlier we're seeing Burger King inching in the right direction. It has come through with positive comps for three consecutive quarters, contrasting McDonald's negative comparable-restaurant sales during the same three periods.
Burger King credits its success on its strategy of launching fewer, more impactful products. That sounds a lot different than what McDonald's is doing as it continues to broaden its menu, throwing a ton of products into the market to see what sticks.
This battle seems to be leading to Burger King as the clear leader, but that's only limiting the analysis to current trends and momentum. We can't forget that McDonald's is much larger.
Burger King may have a whopping 13,000 locations worldwide, but McDonald's has more than 35,000 eateries. This doesn't mean that McDonald's is merely roughly three times larger. It's actually far bigger than that, and not just because the typical McDonald's location sells more than a BK. Analysts see Burger King ringing up $1.06 billion in sales this year, a far cry from the $27.78 billion that Wall Street pros are modeling for McDonald's.
There's a good reason for the disparity. Burger King's empire consists of franchisee-run locations, but McDonald's is only 80% franchised. That means that it reports the revenue of its company-owned eateries as well as the related costs. This also explains why Burger King has much higher operating and profit margins than McDonald's, even though Mickey D's is no slouch on that front. It's a lot easier to milk more money out of every revenue dollar when you're just collecting royalty and franchise fees.
Turning our attention to payouts, McDonald's is yielding a hearty 3.7%. Burger King's yield clocks in at just 1% despite the franchisee-driven model that would seem to give it more wiggle room to return more money to its shareholders. McDonald's also wins in terms of earnings-based valuation models. McDonald's is trading at 16 times next year's projected profitability, considerably less than Burger King's 2015 multiple of 28.
Burger King is smaller, more expensive on an earnings basis, and shells out a much smaller dividend. However, the market rewards stocks based on performance relative to expectations, and BK gets the upper hand on that front. It has consistently beaten Wall Street's profit targets by 4% or better over the past year. McDonald's, on the other hand, has come up short for three straight quarters. That kind of momentum weighs on Wall Street outlooks with Burger King's profit forecasts inching higher in recent months while the earnings projections for McDonald's go the other way.
That final point may give Burger King the edge in the near term, but it's also hard to dismiss McDonald's over the long haul. It's had a rough year and change, but it had nearly a decade-long streak of positive monthly comps snapped two years ago. History is still on its side, and it has more than enough time to turn things around.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.