Donuts Over Burgers: Why Dunkin’ Brands Stock Looks More Attractive Than McDonald’s

McDonald’s (NYSE: MCD) stock has declined by close to 12.6% since early February after the WHO declared the Coronavirus a global health emergency, while Dunkin’ Brands (NASDAQ:DNKN) stock has fared worse and lost 21.7% of its value. The lockdown in various parts of the world has had a negative impact on the food and restaurant industry worldwide, as the companies have closed off their restaurants in high-risk areas or are working in takeout-only mode. While the revenues have decreased considerably, the costs have not fallen in the same proportion as the companies have been paying most of their employees even with restaurants closed. However, we believe post coronavirus Dunkin’ Brands’ stock is expected to do better than McDonald’s primarily because it also lost more value due to the significantly larger share of U.S. revenues towards the company’s top line (85% vs. 37% for McDonald’s in 2019).   

Notably, Dunkin’ Brands P/E multiple has already gone to 20.8x (lowest since 2017) from 25.7x at the end of 2019, with the stock falling to $61 for the first time since early 2018.  On the other hand, McDonald’s P/E multiple around 23.4x is only marginally lower than the figure at the end of 2019 as the market expects its globally diversified business to take a smaller hit. But this also makes McDonald’s stock more vulnerable to a sharp decline if it reports worse-than-expected numbers for Q1. And if the virus spread continues to accelerate globally, McDonald’s will be worse off than Dunkin’.

Our conclusion is based on our detailed dashboard analysis, ‘Is McDonald’s Expensive Or Cheap After A -12.6% Move vs. Dunkin’ Brands Group?’ wherein we compare trends in key metrics for the two restaurant companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has McDonald’s Outperformed Dunkin’ Over Recent Weeks?

Dunkin’ Brands’ P/E based on 2019 earnings has declined from over 25.7x in 2019 to 20.8x currently, while McDonald’s multiple has declined from 24.7x to about 23.4x. The steeper decline in DNKN’s multiple can be attributed to the difference in their revenue concentration in the U.S., as highlighted above. However, McDonald’s multiple still appears high, considering that the company’s revenues and margins are also at risk. Notably, DNKN’s P/E is at the lowest level in at least three years and is nearly 10% below the figure at the end of 2018. On the other hand, McDonald’s P/E is around higher than seen at the end of 2018 – indicating that any negative news could result in the figure shrinking 10% to around 20-21x. This leads us to believe that McDonald’s stock could be vulnerable.

Overall, it’s likely that DNKN stock will outperform McDonald’s, which could likely see its P/E multiple shrink further when the ground reality is confirmed during its Q1 results.

But How Long Will Restaurant Business Remain Under Pressure?

• The expected timeline for recovery in global economic conditions hinges on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
• We do believe these trends are likely to reverse in later quarters of 2020. As the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the distressing scenarios that are easily imagined during difficult times.
• Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Dunkin Brands multinational peers, including CMG and SBUX. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe Dunkin’ Brands stock price at levels of $61 provides a buying opportunity for investors willing to be patient. We have also analyzed how far McDonald’s stock could fall due to the coronavirus pandemic.

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