Would You Choose Restaurant Brands’ Stock Over McDonald’s?

McDonald’s stock (NYSE: MCD) has grown 20% in the last couple of years (since Jan 2018), but Restaurant Brands’ Stock (NYSE: QSR) has grown by only 10%. But it is hard to believe why McDonald’s stock is up more Restaurant Brands’ stock – especially since Restaurant Brands’ revenue growth for the 2017-2019 period stood at 22.4%, while McDonald’s revenue fell by 7.6%. Wouldn’t Restaurant Brands be the better bet in the long run? Not quite. McDonald’s continues to be the stronger investments, as we highlight in our dashboard Restaurant Brands vs. McDonald’s: Does the price movement makes sense.

No doubt, the key parameter that differentiates the 2 companies, and will continue to do so over the coming years, is the margin. McDonald’s profit margins (net income as a percentage of sales) are higher at 28.6% versus 19.8% for Restaurant Brands. Further, McDonald’s margins have risen from 22.8% in 2017 to 28.6% in 2019, while Restaurant Brands’ margin fell from 27% in 2017 to 19.8% in 2019. We believe McDonald’s margin will continue to witness strong growth – a view that is reinforced by the fact that McDonald’s P/E is higher at 23.2x (based on its current market price and FY’19 EPS), while Restaurant Brands is 22.1x.

How Do The Core Businesses For McDonald’s And Restaurant Brands Compare?

Let’s look at the core business prospects a bit more closely. McDonald’s started out as a burger place, which widened and turned itself into a global chain that provides a locally-relevant menu, including breakfast options. McDonald’s revenues have fallen over the years due to its re-franchising initiative. Re-franchising led to an overall improvement in margins and thus earnings. The company has been affected by the coronavirus outbreak, as most restaurants – especially in the US – are working on take-out-only mode. However, the company does benefit to an extent from its geographical diversification with 38,695 restaurants across 119 countries at the end of 2019. 

Restaurant Brands is a combination of Tim Hortons®, Burger King®, and Popeyes® brands, which have a total of 27,086 restaurants across 100 countries as of year-end 2019. All the three brands have their individual identity and are managed independently. While Restaurant Brands’ revenues have seen an increase of 22.4% between 2017 and 2019, the margins fell from 27% to 19.8% primarily due to the higher effective tax rate as well as the costs associated with managing and marketing 3 separate brands – giving McDonald’s a clear advantage. 

To conclude, we believe McDonald’s is likely to continue to outperform Restaurant Brands. There may be an even bigger opportunity when you compare Microsoft to Amazon.

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