Looking Beyond The Golden Arches: Drop McDonald’s Stock, Pick This Conglomerate?

If you are a McDonald’s (NYSE:MCD) investor and took advantage of the stock’s roughly 15% rise over the last month, it may be time to look elsewhere. As of this moment, we find Graham Holdings (NYSE:GCH) – a diversified conglomerate with interests in education, media, healthcare, manufacturing, and restaurants – and Laureate Education (NASDAQ:LAUR) – a company that operates a network of licensed campus-based and online universities in Mexico and Peru – as more attractive buys than McDonald’s.

Why? Simply because the valuation and growth numbers tell us so. Graham Holdings and Laureate Education stocks have both seen higher growth in revenue and operating profits than McDonald’s in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than McDonald’s.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than MCD – GHC & LAUR Stocks?

Specifically, to illustrate the opportunity for Graham Holdings, you pay $12.07 per dollar of earnings-before-interest-and taxes (EBIT) for GHC stock versus $17.71 for MCD, and get higher annual growth (12.2% vs 10%), higher quarterly growth (12% vs 4.6%), and better margin trend (up 1.4% vs 0.4%). Overall, you get higher revenue, and operating profit growth from Graham Holdings and Laureate Education, and pay less than MCD stock. See our complete analysis of Better Bets Than MCD Stock

So What’s The Catch?

Now, could McDonald’s buck the trend? Could it grow its revenues and profits faster than Graham Holdings or Laureate Education in the coming quarters? Of course that’s possible. The company could benefit from its aggressive push into the digital and home-delivery niches, high levels of cash in hand, and its ability to perform in challenging economic environments and maintain culturally relevant menus around the world. Moreover, the fast-food giant also launched its new $5 Meal Deal earlier this summer as it looks to win back price-sensitive customers following years of price hikes. Moreover, MCD’s revenues and earnings are quite inflation-resistant. McDonald’s franchises typically don’t own the building and agree to rent their stores from the parent company, giving McDonald’s extra income in addition to franchise fees and other royalties.

The data below shows both Graham Holdings and Laureate Education outperformed McDonald’s recently and over the last year. They might repeat this. Related Ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than McDonald’s, To Get More Revenue And Profit Growth?

While GHC has seen the strongest revenue growth of the three both in the last twelve months and the last quarter, MCD has seen the slowest growth over the period. Moreover, MCD margins have seen less of an expansion versus peers over the last twelve months. However, despite this, MCD stock trades at a higher price-to-operating income ratio of almost 18x, compared to 12x for GHC and 7x for LAUR.

What About Relative Market Returns?

GHC stock has shown a stronger market performance, with returns of  14% over the past 6 months, and 38% over the past 12 months. In comparison, MCD returns for the same periods were weaker at -0.2%, and 4.2%, respectively, although it outperformed marginally over the last 3 months.

How Did These Metrics Look 1 Year Ago – Could MCD’s Combination Of Higher Valuation & Lower Growth Persist?

MCD still had a higher valuation of $19.63 vs $13.87 for GHC but lower annual growth (-1.5% vs 19.27%), lower quarterly growth (4.1% vs 12.77%), although it had a more favorable margin change (2.7% vs 1.6%).  The situation looks quite different now which means that market reward could switch in favor of GHC and LAUR.

Investment Thesis For GHC and LAUR

Graham Holdings operates in a diverse set of sectors, including education, media, healthcare, and manufacturing, and is often viewed as a mini-version of Berkshire Hathaway given its strong balance sheet and professional management teams.  Moreover, the stock has a relatively low valuation, and there remains potential for spinoffs of certain businesses such as the company’s local TV stations to unlock further value. The company is also returning capital to shareholders via increasing dividends and buybacks.

Laureate Education operates in the high-demand markets of Mexico and Peru, where private higher education is increasingly sought after. This gives the company strong room for growth. Moreover, the company’s high market share and high retention levels translate into stable cash flows while its debt levels are also low. The stock also trades at a lower price-to-earnings multiple compared to peers in the education space.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/26/2024
[2] Cumulative total returns since the end of 2016

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