McDonald's Vs. Yum!: Which Is The Better Restaurant Stock?

The restaurant industry has been lacking zing over the past few quarters. Negative comps resulting from sluggish traffic, along with rising costs, continue to take the shine out of restaurant stocks.

Nevertheless, some of the big names like McDonald's Corp. (NYSE:MCD) , Yum! Brands, Inc. (NYSE:YUM) , Domino's Pizza, Inc. (NYSE:DPZ) and Darden Restaurants, Inc. (NYSE:DRI) have done well on the back of strong fundamentals and innovative offerings.

In fact, McDonald's and Yum! Brands are two companies that have adopted a de-risking strategy, dropping their ownership of restaurants through refranchising. This reduces capital requirements, boosts earnings per share growth and makes them less vulnerable to food inflation.

In addition, growing free cash flow allows both the companies to make investments for increasing brand recognition and shareholder returns.

With both carrying a Zacks Rank #3 (Hold), let’s find out which company is placed better with respect to some key parameters.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Share Price Movement

Year to date, McDonald's has had a more impressive run on the bourse with a return of 41.2% while Yum! Brands has gained 30.3% in the last year. Notably, both have outperformed the industry that has rallied 14.4% in the same time frame.

Projected Earnings Growth

Arguably nothing is more important than earnings growth as surging profit levels is what most investors are after. Earnings growth is definitely necessary and it along with stock price gains is often an indication of a company’s strong prospects.

Both McDonald's and Yum! brands have their own initiatives in place to boost earnings. While McDonald's is keen on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings, Yum! Brands is working on a strategic transformation plan to drive growth at KFC, Pizza Hut and Taco Bell brands. It is also shifting toward a single point-of-sale system in the United States.

Yum! Brands is expected to see higher earnings growth than McDonald's in 2018. Its EPS is projected to grow 13.1% while that of McDonald's is expected to increase 6.8%. So, Yum! Brands has an edge over McDonald's in this respect.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.

Both McDonald's and Yum! Brands have outperformed the industry year to date, which has a net margin TTM of 15.8%. However, McDonald's has a lead since its TTM net margin is higher at 22.4%, compared with Yum! Brands 16.1.

Valuation

The EV/EBITDA ratio offers a clear picture of a company’s valuation and its earnings potential. Typically, the lower the EV/EBITDA ratio, the more appealing it is. This signals that a stock is undervalued.

Both McDonald's and Yum! Brands are overvalued relative to their broader industry that has an EV/EBIDA value of 13.8. However, McDonald's holds the edge here with a lower EV/EBITDA value of 16.1, compared to Yum! Brands’ 19.8.

Earnings History, ESP and Estimates

Both McDonald's and Yum! Brands have delivered positive earnings surprises in each of the prior four quarters. While McDonald's has an average earnings surprise of 5.2%, Yum! stands out with an average earnings surprise of 7.8%.

However, McDonald's Earnings ESPof +0.54% lends it an edge over Yum! Brands, which has an Earnings ESP of -7.04%.

While the Zacks Consensus Estimate for McDonald's full year has increased 0.15% over the last 30 days, it has remained unchanged in case of Yum! Brands over the same time frame.

To Conclude

Our comparative analysis reveals that McDonald's has an edge over Yum! Brands in terms of share price movement, net margin, EV/EBITA ratio, Earnings ESP and estimate revisions. Yum! Brands, on the other hand, is better poised than McDonald's in terms of projected EPS and boasts a solid earnings surprise track record.

So, with a lead in most of the evaluated metrics, McDonald's, appears to take precedence at the moment.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>