Should You Pick Union Pacific Stock Over McDonald’s?

Given its better prospects, we believe Union Pacific stock (NYSE: UNP) is a better pick than McDonald’s stock (NYSE: MCD). Although these companies are from different sectors, we compare them because they have a similar operating income of around $10 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.

Interestingly, UNP has had a Sharpe Ratio of 0.5 since early 2017, while the figure stood at 0.6 for MCD and 0.6 for the S&P500 index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Looking at stock returns, both UNP and MCD have underperformed vis-à-vis broader markets. While UNP is up 2% this year, MCD is up 3%, and the S&P500 index is up 13%. There is more to the comparison, and in the sections below, we discuss why we believe that UNP will offer better returns over MCD in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Union Pacific vs. McDonald’s: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Union Pacific’s Revenue Growth Is Better 

• Union Pacific’s revenue growth has been better, with a 5.1% average annual growth rate in the last three years, compared to 3.5% for McDonald’s.
• Union Pacific’s revenue growth over the recent years has been driven by a strong recovery in demand after the pandemic-induced lockdowns.
• Furthermore, the company realized substantial pricing gains, passing on the higher costs and higher fuel prices to the customers.
• For perspective, the company’s average revenue per carload grew 17% between 2019 and 2022, while its total carload volume was down 2%.
• For McDonald’s, successful menu and marketing campaigns, clubbed with continued digital and delivery growth, have bolstered its sales in the recent past.
• McDonald’s has also benefited from its customer loyalty program – MyMcDonald’s Rewards – going strong since it relaunched in 2021.
• However, currency headwinds have weighed on the overall top-line expansion of McDonald’s in 2022.
• Looking at the last twelve months, Union Pacific, with 5.7% sales growth, fares better than McDonald’s, which saw its revenue rise by 2.5%.
• Our Union Pacific Revenue Comparison and McDonald’s Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, Union Pacific’s revenue growth over the next three years is expected to be slightly better than McDonald’s, based on Trefis Machine Learning analysis.

2. McDonald’s Is More Profitable And Comes With Lower Financial Risk

• Union Pacific’s operating margin has improved slightly from 39.4% in 2019 to 39.9% in 2022, while McDonald’s operating margin declined from 42.8% to 39.0% over this period, partly due to higher labor inflation.
• Looking at the last twelve-month period, McDonald’s operating margin of 46.5% fares better than 38.5% for Union Pacific.
• McDonald’s operating margin is expected to be weighed down in the near term due to commodity, utility, and labor inflation.
• Our Union Pacific’s Operating Income Comparison and McDonald’s Operating Income Comparison dashboards have more details.
• Looking at financial risk, McDonald’s fares better. Its 18% debt as a percentage of equity is lower than 26% for Union Pacific, while its 3% cash as a percentage of assets is higher than 1% for the latter, implying that McDonald’s has a better debt position and has more cash cushion.

3. The Net of It All

• We see that Union Pacific has shown better revenue growth. On the other hand, McDonald’s is more profitable and has a better financial position. This also explains its higher valuation multiple of 8.2x revenues compared to 5.2x for Union Pacific.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Union Pacific will offer better returns over McDonald’s in the next three years.
• Even if we compare the current valuation multiples to the historical averages, UNP fares better. Union Pacific’s stock is trading at 5.2x revenues, below its last five-year average of 5.8x. In comparison, McDonald’s stock trades at 8.4x revenues, higher than its last five-year average of 7.7x.
• Our Union Pacific (UNP) Valuation Ratios Comparison and McDonald’s (MCD) Valuation Ratios Comparison have more details.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 9% for UNP over this period vs. a -1% expected return for MCD, based on Trefis Machine Learning analysis – Union Pacific vs. McDonald’s – which also provides more details on how we arrive at these numbers.
• While we believe Union Pacific stock is a better pick over McDonald’s, we acknowledge that 9% returns for UNP isn’t great. There are better opportunities over UNP stock. Our Better Bets Than UNP Stock dashboard details S&P500 stocks that can offer better returns in the next three years.

While UNP may outperform MCD in the next three years, it is helpful to see how Union Pacific’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 9/22/2023
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates