Starbucks Corporation (NASDAQ:SBUX) and McDonald’s Corporation (NYSE:MCD) are two behemoths in the restaurant and beverage industry. Both are ubiquitous—there aren’t too many places left in the world where someone wouldn’t recognize the company behind the green twin-tailed mermaid or the golden arches. But over the last five years, SBUX stock has been kicking MCD stock’s butt.
In the last five years, Starbucks stock has gone up 223%, compared to just 64% for McDonald’s stock during that same time. But past performance isn’t an indicator of future performance.
So let’s ask the question: which of these two stocks has more potential upside?
To answer that, let’s compare some metrics and see who the winner is.
For this measure, we will use same-store sales growth, which is a common metric used in the food and beverage industry. The metric compares revenue earned by a restaurant’s established outlets over a certain period. This allows us to factor out growth that came from the opening of new stores.
In the latest quarter, same-store sales growth for Starbucks and McDonald’s were eight percent and five percent, respectively.
Over the next five years, Starbucks is expected to grow earnings at an average annual rate of 17.60%, while McDonald’s is expected to grow earnings at a 9.02% annual rate.
Potential Growth Catalysts
Forecasted growth, especially over five years, is very hard to predict. Anything can change for a company in that timeframe that could cause the company’s stock to under- or over-perform.
Let’s see what each company has got going on today that can potentially exceed analysts’ forecasts five years from now…
Starbucks’ mobile app has proven to be hugely successful with customers. Customers who used the Starbucks app to pay for their coffee accounted for 21% of all U.S. transactions in the first quarter of 2016, with that number rising to 22% in December (Starbucks’ Q1 is October to December). (Source: “Mobile means more bucks for Starbucks,” Mobile Strategies 360, January 26, 2016.) The company added that they were seeing further acceleration in January.
Starbucks is now taking its app one step further. The company recently rolled out its “Mobile Order & Pay” system. Using the latest version of the Starbucks app, customers can now order their coffee before they get to the store, meaning the skip the line.
In the latest quarter (the service was launched in September), Starbucks’ president and COO, Kevin Johnson, said that the company is now processing more than six million Mobile Order & Pay transactions per month and there were about one million U.S. customers who used the service in December. “We have just scratched the surface,” Johnson said. (Source: “Starbucks mobile order-ahead program reaches 6M orders per month,” GeekWire, January 21, 2016.)
McDonald’s rolled out its all-day breakfast menu in the U.S. last quarter. Earnings for the quarter were a major victory, as the all-day breakfast menu helped power the company to an increase in global same-store sales of five percent over the previous year. U.S. same-store sales saw even better numbers, growing 5.7% in the same period. (Source: “McDonald’s Reports Fourth Quarter And Full Year 2015 Results,” McDonald’s Corporation, January 25, 2016.) It’s the second quarter in a row that McDonald’s has posted same-store sales increases.
McDonald’s is also following in Starbucks’ footsteps by getting into the customer rewards game. The company is building a loyalty program into its new smartphone app that could be in place late this year or early next year. (Source: “McDonald’s building loyalty program,” Nation’s Restaurant News, March 9, 2016.)
If you’re a dividend investor then you may weigh more importance on this metric. SBUX stock pays a dividend of $0.96 per share; at its current price, the stock has a yield of 1.36%. MCD stock pays a dividend of $3.56 per share for a dividend yield of 2.90%.
We also want to determine how cheap the stocks are by comparing their earnings to their share prices. Both stocks are reasonably priced. Starbucks trades at 31.57 times its forward earnings, while McDonald’s trades at a cheaper 23.00 times its forward earnings.
The Winner Is…
Starbucks and McDonald’s can be great picks for any investor’s portfolio. Starbucks’ growth prospects seem brighter than those of McDonald’s at the moment, but McDonald’s is the cheaper stock of the two.
For investors looking for growth, Starbucks may be the better choice, but if anyone is looking for the cheaper stock, go with McDonald’s—it has a nice dividend, too.