McDonald's Corporation (MCD) operates and franchises McDonald’s restaurants worldwide. It mainly serves locally relevant menus of fast-food, soft drinks and beverages. The company operates through three segments—U.S., international operated markets, and international developmental licensed markets. As of December 31, 2020, the company operated 39,198 restaurants.
Domino's Pizza, Inc. (DPZ) operates a network of company-owned and franchise Domino’s Pizza stores internationally. In addition to a wide range of pizza styles and toppings, DPZ serves oven-baked sandwiches, pasta, bread side items, desserts and soft drinks. The company operates through three segments—U.S. stores, international franchise, and supply chain. As of January 3, 2021, it operated approximately 17,600 stores.
Outdoor fast-food joints and restaurants are currently witnessing increasing foot traffic as people re-engage with outdoor activities after more than a year of social distancing. Furthermore, restaurants are rapidly adopting the latest technology, such as contactless ordering and QR menus to enhance efficiency and customer satisfaction. The global quick service restaurant market is expected to grow at a 5.1% CAGR over the next five years to hit $815.60 billion by 2026.
While MCD gained 11.7% over the past three months, DPZ surged 32.6%. In terms of their past year’s performance, MCD is a winner with 17.5% gains versus DPZ’s 16.3% returns. But, which of these stocks is a better pick now? Let’s find out.
Latest Movements
In a Wall Street conference held on June 2, MCD’s CEO disclosed the company’s testing of automated drive-thru ordering using artificial intelligence software at 10 MCD restaurants in Chicago. Achieving approximately 85% order accuracy using the voice-ordering technology, the company hopes it will help offset rising wage demands and worker shortages and improve their customer experience.
On May 20, 2021, MCD’s USA subsidiary announced bold new investments to further reflect its diverse customers, crew members and communities in its marketing. Over the next four years, MCD will increase national investments in diverse-owned partners by up to 10%. MCD will forge new multi-year partnerships with diverse-owned media and production companies and content creators to support its long-term growth and strengthen the broader marketing supply chain. Last, it will form an advisory board of marketing and advertising experts to help dismantle growth barriers for diverse-owned companies.
DPZ opened its first Domino's store in Ghana on April 20, 2021. With Fire Foods Ghana Ltd. as its master franchisee, DPZ hopes to provide excellent customer service and efficient doorstep delivery to the customers in Accra.
On April 12, DPZ and Nuro, the leading self-driving delivery company, announced the launch of autonomous pizza delivery to select customers in Houston using Nuro’s R2 robot. Nuro's R2 is the first completely autonomous, occupantless on-road delivery vehicle with regulatory approval from the U.S. Department of Transportation. Both companies think the initiative will provide a new and different level of experience to its customers.
Recent Financial Results
MCD’s total revenues for its fiscal year 2021 first quarter, ended March 31, increased 8.7% year-over-year to $5.12 billion. The company’s operating income came in at $2.28 billion, which represented a 34.7% improvement year-over-year. While its net income increased 38.9% year-over-year to $1.54 billion, its non-GAAP EPS increased 30.6% from the prior-year period to $1.92.
For its fiscal year 2021 first quarter ended March 28, DPZ’s total revenues increased 12.7% year-over-year to $983.70 million. The company’s income from operations came in at $186.54 million, which represents a 19.7% improvement from the prior-year period. However, its net income decreased 3.2% year-over-year to $117.76 million. Its EPS is reported at $3 for the quarter, down 2.3% from the year-ago period.
Past and Expected Financial Performance
MCD's EPS and total assets grew at CAGRs of 1.3% and 14.9%, respectively, over the past three years. The company’s EBITDA has declined at a 2.1% CAGR over the past year.
Analysts expect MCD’s revenue to increase 46.1% year-over-year in its fiscal year 2021 second quarter (ending June 30, 2021), 16.5% in the current year, ending December 2021, and 6.3% in the next year, ending December 2022. Its EPS is expected to increase 216% year-over-year for the second quarter, 42.6% for the current year and 10.9% next year. Analysts expect the stock’s EPS to grow at a rate of 20.4% per annum over the next five years.
In comparison, DPZ’s EPS and total assets grew at CAGRs of 23.4% and 27.7%, respectively, over the past three years. The company’s EBITDA has declined at a 12% rate over the past year.
Analysts expect DPZ’s revenue to increase 2.3% in its fiscal year 2021 second quarter (ending June 30, 2021), 4.8% in the current year, ending December 2021, and 7.4% in the next year, ending December 2022. However, its EPS is expected to decrease 4.6% year-over-year for the second quarter, but then increase 8.7% for the current year, and 15.3% next year. The stock’s EPS is expected to grow at an 11.2% rate over the next five years.
Profitability
MCD’s trailing-12-month revenue is 4.6 times DPZ’s. MCD is also more profitable with a 51.4% gross profit margin versus DPZ’s 27.6%.
Also, MCD’s EBITDA margin and net income margin of 47.2% and 26.3%, respectively, compare with DPZ’s 18.9% and 11.5%.
Valuation
In terms of non-GAAP forward P/E, DPZ is currently trading at 33.56x, which is 24.9% higher than MCD, which is currently trading at 26.86x. MCD’s 2.17x non-GAAP forward PEG is significantly lower than DPZ’s 2.79x.
Also, in terms of forward EV/EBITDA, DPZ’s 24.15x is 24% higher than MCD’s 19.47x.
Thus, MCD is more affordable here.
POWR Ratings
While DPZ has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, MCD has an overall A grade, which equates to Strong Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both the stocks have an A grade for Quality, which is consistent with their higher-than-industry profit margins. In terms of trailing-12-month EBIT margins, MCD's 38.1% is 423.3% higher than the 7.3% industry average. Also, DPZ's 17.9% trailing-12-month EBIT is 145.5% higher than the 7.3% industry average.
MCD has a B grade for Sentiment, which is in sync with the company’s revenues and earnings growth potential. Analysts expect the company’s EPS to rise 216% in the second quarter of 2021. In comparison, DPZ’s Sentiment Grade of C reflects a bleak outlook, as the company’s EPS is expected to decline 4.6% in the second quarter of 2021.
Of 47 stocks in the A-rated Restaurants industry, DPZ is ranked #30, while MCD is ranked #4.
Beyond what we’ve stated above, our POWR Ratings system has also rated both MCD and DPZ for Growth, Momentum, Value, Stability and Quality. Get all DPZ ratings here. Also, click here to see the additional POWR Ratings for MCD.
The Winner
Fast-food restaurants MCD and DPZ are well-positioned to grow substantially in the upcoming months, in tandem with the economic recovery. However, stable valuations and high profitability make MCD a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Restaurants industry.
MCD shares were unchanged in after-hours trading Tuesday. Year-to-date, MCD has gained 9.69%, versus a 13.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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