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Better Buy Now: McDonald's Corporation vs. The Coca-Cola Co

By Jeremy Bowman - Oct 29, 2015 at 7:25AM

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Coke and McDonald's have had a symbiotic relationship for 60 years, and the two companies bear many similarities. Which one is the better pick today?

McDonald's Corporation(MCD 2.46%) and The Coca-Cola Co(KO 2.34%) have a lot in common. The two stocks were some of the best performers in the 20th century, and both companies are among the most prominent American brands and symbols around the world. For many foreigners, the two companies are synonymous with American culture.

More recently, the food and beverage giants have become targets in the obesity crisis, and demand for their trademark products has faded as Americans turn to healthier food choices. 

For investors, both stocks offer similar benefits, as the two stalwart brands deliver strong operating margins and ample cash flow returned to investors in the form of share buybacks and dividends. Currently, McDonald's and Coke both offer dividend yields above 3%, better than the S&P 500. Despite their current challenges, many investors believe the food and beverage giants have sustainable competitive advantages that should continue driving shares higher.

There are also differences between the two, however. Despite their overlapping nature, the restaurant and beverage sectors have separate challenges and competitors, and McDonald's and Coke have adopted different strategies for confronting their changing industries. Let's take a closer at each of these icons to see which one offers the better investment today.

The arches are looking golden again
McDonald's shares surged to a new all-time high following its third quarter earnings report last week. The stock jumped 7% in a single day as the company beat estimates for its top and bottom lines.

Under new CEO Steve Easterbrook, who came aboard in March, Mickey D's has implemented a slew of changes, showing off a more customer-focused, conscientious company. McDonald's has announced plans to ban human antibiotics from its poultry, and its North American stores will serve only eggs from cage-free hens. Earlier this year, it raised the minimum wage at company-owned stores and just this month, introduced all-day breakfast which customers have been clamoring for for years.

On the earnings call, Easterbrook touted the effects of returning to the Egg McMuffin's traditional recipe and introducing the buttermilk crispy chicken sandwich, which he said helped drive positive comparable sales in the U.S.

One positive quarter does not a turnaround make, but there is evidence that McDonald's is finding its footing again after a woeful year. Though the conventional wisdom maintains that fast casual chains like Chipotle Mexican Grill are the major reason for McDonald's challenges, more traditional rivals have been outperforming it as well, and the fast food leader needs to reclaim the value customers it has lost to Burger King and Wendy's. The upcoming rollout of a 2-for-$2 menu should help drive further sales alongside all-day breakfast and the other menu adjustments. While premium offers like the Create Your Taste menu are riskier, McDonald's should find steady growth by leading with its strengths like value and breakfast.

Have a Coke and a smile
Coca-Cola, meanwhile, has chosen a different path than McDonald's. While the Golden Arches is revamping its own offerings to counter the changes in fast food, Coke is looking outside itself for growth. With sales of soda down for 10 consecutive years in the U.S., the world's largest beverage company has had to diversify away from its core brands. It's gone on a shopping spree, picking up labels like Vitamin Water, Odwalla, and Honest Tea, and more recently, it has made high-profile investments in fellow drink-makers Keurig Green Mountain and Monster Beverage. Coke now has 20 billion-dollar brands under its flag. 

Despite headwinds in the U.S. and in countries like Mexico, where a soda tax was implemented in 2013 to combat obesity, Coke is still growing. Volume sales were up 3% last quarter, and adjusted earnings per share grew 8%. 

However, there are glaring weak spots for the company, including Diet Coke which saw sales fall 8%. Diet soda sales as a whole are down a third in the U.S. since their 2009 peak. Organic revenue also fell slightly in the Asia-Pacific region as concentrate sales dipped 2%.

Coke has been making adjustments to drive profitability. The company started selling its sodas in smaller bottles, yielding a higher margin, and it's hard at work on products like Coca-Cola Life, a lower-calorie Coke sweetened with Stevia, as the company believes a low-calorie, natural beverage that tastes like the real Coke could unlock a spike in sales. Bottled water has also been a strong growth driver, but the headwinds against the company remain strong, especially in light of persistent suggestions for a soda tax among U.S. politicians. 

A value meal for investors?
Both Coca-Cola and McDonald's are trading at relatively high price-to-earnings valuations these days, at 25 and 26 times, respectively, which seems to be more of a reflection of their steady cash flow and traditional leadership, rather than future growth opportunities.

Coming off its momentum from last week's earnings report, McDonald's seems better positioned to move higher. The company has made some important changes that should improve quality and drive increased sales, and the new management team will likely bring innovative ideas to the table in the coming months.

Coke, meanwhile, isn't about to collapse anytime soon, but with organic sales up just 3% in its most recent quarter and no new strategies on the horizon to jumpstart sales, the stock is likely to remain flat. If you're looking for a big-name, blue-chip stock that's a solid dividend payer, McDonald's is the better bet.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$252.96 (2.46%) $6.08
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$64.38 (2.34%) $1.47
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,825.33 (1.05%) $39.95
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$19.36 (2.54%) $0.48
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,306.80 (-0.04%) $0.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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