Higher Purchase: McDonald’s vs. Chipotle

Regardless of differing approaches to the restaurant enterprise, McDonald’s (MCD -0.44%) and Chipotle Mexican Grill (CMG 0.93%) are comparable in some ways. Each have benefited from excessive title recognition and the concentrating on of particular demographics to engender buyer loyalty.

Moreover, they’ve pushed appreciable shareholder returns, albeit by using differing methods. Which restaurant inventory higher serves buyers? Let’s take a better look.

McDonald’s vs. Chipotle

Essentially the most surprising distinction between these eating places is how each succeed by pursuing radically totally different methods.

If it weren’t for its franchising charges, one may simply mistake McDonald’s for an actual property firm somewhat than a restaurant chain. It’s one among many eating places serving burgers and fries, and prospects flock to it for choices resembling Massive Macs and Comfortable Meals.

Nonetheless, franchises comprise about 95% of McDonald’s areas, and the corporate owns the properties. For that purpose, most of its earnings come from hire assortment and claiming a share of gross sales from the franchises.

In distinction, Chipotle is a restaurant chain in each sense of the phrase. It owns and operates practically all of its eating places. It stood out early in its existence by increasing the fast-casual restaurant idea, a hybrid between quick meals and sit-down eating places.

Moreover, Chipotle led the best way in making wholesome quick meals. The corporate emphasizes utilizing contemporary elements solely, banning freezers and might openers from its greater than 3,300 areas. The truth that Mexican meals is among the extra standard meals sorts within the U.S. has most likely additionally contributed to its recognition.

Moreover, McDonald’s is a mature enterprise with operations worldwide. This implies it has not expanded the variety of eating places as rapidly. It has about 40,000 eating places in additional than 100 nations. That’s roughly the identical variety of areas as final 12 months.

In distinction, Chipotle’s greater than 3,300 areas are up from round 3,100 on the similar time final 12 months. Additionally, all however about 65 areas are within the U.S., leaving appreciable room for growth.

How the financials differ

The distinction between McDonald’s and Chipotle extends to the financials.

As talked about earlier than, most McDonald’s areas are franchises. Within the first 9 months of 2023, franchises made up round 61% of its $19 billion in income, with the small share of company-owned eating places driving the rest.

The corporate-owned areas comprised 60% of the bills for McDonald’s. Nonetheless, that didn’t cease its web revenue of $6.4 billion within the first three quarters of the 12 months from rising 50% in contrast with the identical interval in 2022. Such outcomes additionally affirm the upper degree of profitability that its franchise mannequin presents.

Chipotle reported $7.4 billion in income for the primary 9 months of 2023. Nonetheless, restaurant operations are a lower-margin enterprise than franchising. Consequently, Chipotle stored solely $947 million of that income in web revenue, although its earnings grew 40% from year-ago ranges.

Not like Chipotle, McDonald’s additionally stands out by providing a dividend, one which has grown yearly for the reason that firm initiated the payout in 1976. In October, it hiked the payout by 10% to an annual degree of $6.68 per share. That quantities to a dividend yield of two.5%, effectively above the S&P 500‘s 1.6% common yield.

Nonetheless, buyers appear extra optimistic about Chipotle’s future. Its whole inventory returns have been considerably larger than these of McDonald’s. Certainly, these returns come at a premium, as Chipotle’s 49 P/E ratio is effectively above the 24 earnings a number of for McDonald’s. That differential means buyers need to resolve whether or not the premium is price paying.

MCD Whole Return Stage information by YCharts

McDonald’s or Chipotle?

If you’re tolerant of danger, Chipotle inventory might be definitely worth the elevated price given the upper return potential.

Admittedly, the McDonald’s franchise mannequin supplies larger margins, and its heavier reliance on hire collections and franchise charges makes it a extra secure enterprise. When additionally contemplating the dividend, risk-averse buyers may really feel extra comfy with this mannequin.

Nonetheless, Chipotle has significantly extra room for growth, and its latest financials present its success in capitalizing on that development. Since it could add round 200 eating places yearly and keep development charges, Chipotle is extra prone to ship larger returns regardless of the valuation premium.