Better Buy: Shake Shack Inc. vs. McDonald's

Let's pit the country's largest burger chain against the fast-growing "better burger" darling.

Rick Munarriz
Rick Munarriz
May 23, 2016 at 9:15AM
Consumer Goods

Image source: Shake Shack.

There was a lot of burger flipping going on during the first quarter of 2016. McDonald's (NYSE:MCD) and Shake Shack (NYSE:SHAK) -- the niche leaders in restaurant count and sales per restaurant, respectively -- were buzzing.

Comparable-restaurant sales rose 6.2% at McDonald's during the first three months of the year, the chain's healthiest year-over-year surge in comps in years. Shake Shack comparable-restaurant sales soared 9.9%, and that's after a 13.3% pop through all of 2015. 

The strong gains at the unit level make both concepts big winners in an industry that's merely treading water at this point. Comps for chain restaurants as a whole dipped 0.3%, according to eatery tracker TDn2K's Black Box Intelligence. 

Two sides of the bun

Both eateries are rocking in current popularity, but the stocks and companies aren't close at all. McDonald's hit a new all-time high earlier this month. Shack Shack, on the other hand, has fallen 64% since peaking 12 months ago.

Shake Shack stock may be a market laggard, but it's hard to say that about the company. Revenue skyrocketed 43% in its latest quarter, a potent combination of strong comps and heady expansion. There are just 47 company-owned restaurants, making it easy to move the needle by adding new locations. Its goal is to open 16 new locations this year. Shake Shack's bottom line is doing even better with adjusted earnings more than doubling.

McDonald's is naturally at a different place in its life cycle. Revenue actually dipped in its latest quarter, but that is more a combination of foreign currency fluctuations and some company-owned locations being handed over to franchisees. Unlike Shake Shack which operates primarily as a company-owned concept in the U.S., the vast majority of Micke D's out there are owned by independent franchisee operators.

The one thing that McDonald's and Shake Shack have in common is that earnings are growing faster than sales. Diluted earnings per share rose 46% in McDonald's latest quarter. However, the burger giant is being pitted against depressed results last year. The concept had suffered through two years of negative comps before turning the corner late last year. Net income during the first quarter was actually slightly lower than it was two years earlier. 

Final toppings

Shake Shack gets the upper hand in terms of growth and upside potential in terms of expansion, but McDonald's has a few advantages. For starters, McDonald's has spent more than $20 billion over the past year on share buybacks in dividends. This has resulted in a dramatic reduction in shares outstanding and a reasonable yield of 2.8%. Shake Shack's cash flow is earmarked for expansion. 

McDonald's also naturally carries lower valuation multiples. McDonald's trades at 24 times trailing earnings, with Shake Shack commanding a multiple just north of 100. The markups get relatively kinder if we look to the future. McDonald's trades at 20 times next year's profit target. Shake Shack's multiple stands at 64.

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This makes McDonald's the clear choice for value hounds and yield chasers, but Shake Shack's the one with the more promise for growth investors. Both stocks have the right ingredients to deliver market-thumping growth in the months and years ahead.