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Better Buy: McDonald's Corp. vs. Yum! Brands

By Daniel Sparks – Apr 8, 2016 at 7:37AM

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With both stocks crushing the market's return this year, investors might have their eyes on these two fast-food operators. But which stock offers more value?

Both McDonald's (MCD -0.89%) and Yum! Brands (YUM -1.35%) have significantly outperformed the overall market his year.

MCD Chart

MCD data by YCharts

In light of the two stocks' outperformance, the two companies might be attracting more attention from investors than usual. But of the two stocks, which -- if any -- is a better buy?

To get a better look at both of these fast-food operators, let's compare them head to head.

Metric

McDonald's

Yum! Brands

Market capitalization

$115.5 billion

$33.2 billion

Price-to-earnings

27

28

Price-to-free cash flow

24

28

Trailing-12-month revenue growth (YOY)

(7.4%)

(1.3%)

Trailing-12-month EPS growth (YOY)

(0.3%)

26.5%

5-year EPS CAGR

0.9%

4.1%

Growth
Yum! Brands stands out as the clear winner when it comes to growth.

While both company's reported declining revenue during the past twelve months, Yum! Brands' decline was much more moderate than McDonald's. Yum! Brands revenue is down 1.3% and McDonald's is down 7.4%.

Further, Yum! Brands' recent EPS growth handily trumps McDonald's. Yum! Brands' EPS increased 26.5% in the trailing 12-month period, while McDonald's declined 0.3%. And Yum! Brands averaged annualized EPS growth of 4.1% during the past five years, while McDonald's averaged 0.9% during the same period.

Valuation
Neither McDonald's or Yum! Brands look like a bargain by any means, with both of their top line growth coming to a halt recently, their high price-to-earnings and price-to-free cash flow ratios might keep many investors looking for deeper bargains away.

These two company's sport premium valuations due to their business' durability. McDonald's powerful brand, along with its real estate empire of coveted properties for many of its restaurants, won't be disappearing; indeed, the company has the capital and managerial prowess to even evolve with food trends if it needs to. Similarly, Yum! Brands' KFC, Pizza Hut, and Taco Bell are here to stay, too.

Image source: Yum! Brands.

Which stock offers investors more value? While Yum! Brands' trades at a higher price-to-earnings and price-to-free cash flow ratio than McDonald's -- at 28 compared to McDonald's ratios of 27 and 24, respectively -- the smaller company's recent growth easily trumps McDonald's, suggesting the company may have a better runway ahead of it than McDonald's over the long-term.

Yum! Brands, therefore, looks like the better buy when comparing it with McDonald's.

But despite these two companies' staying power, and Yum! Brands comparatively better investment prospects, neither stock jumps out as a clear buy at these prices. Investors might want to keep these two companies on their watchlists, waiting for a pullback before considering buying shares. At the same time, neither stock is grossly overvalued by any means, so just because neither are a clear buy, they also don't have the characteristics of businesses investors would want to sell. However, if investors needed to liquidate some of their portfolio, and they had to choose between the two, McDonald's looks like the stock that should go first.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$243.76 (-0.89%) $-2.19
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$109.16 (-1.35%) $-1.49

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

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