McDonald’s Corporation (MCD), which is headquartered in Oak Brook, Illinois, and Wingstop Inc. (WING) in Dallas, Tex., are two prominent players in the fast-food restaurant industry. MCD operates and franchises McDonald’s restaurants that serve mainly locally relevant fast food, soft drinks, and other beverages worldwide. As of December 31, 2020, the company operated 39,198 restaurants. WING, together with its subsidiaries, franchises, and operates restaurants under the Wingstop brand name. Its restaurants offer classic wings, boneless wings, and tenders cooked-to-order and hand-sauced-and-tossed in various flavors. As of December 26, 2020, the company had 1,506 franchised restaurants and 32 company-owned restaurants.
Digitalization of operations and contactless delivery services helped fast-food restaurants maintain their sales amid the COVID-19 pandemic. But these restaurants have been witnessing increasing foot traffic lately, owing to the strong vaccination drive, a decline in COVID-19 cases, and the easing of travel restrictions. The global quick-service restaurant market is expected to grow at 5.1% CAGR to $815.60 billion by 2026. So, both MCD and WING are expected to benefit.
But while WING’s shares have lost 6.8% in price over the past month, MCD surged marginally. MCD is a clear winner with 16.1% gains versus WING’s 15.9% returns in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On August 4, 2021, MCD and eBay Inc. (EBAY) announced agreements with Lightsource BP, a leading solar developer, to purchase power from the Ventress Solar project, Louisiana’s largest solar project. The 345-megawatt Solar project will help MCD and EBAY meet their sustainability goals and advance their commitment to climate action while expanding Lightsource bp’s footprint across the Southeast.
On May 25, 2021, WING made a minority investment in the U.K. business, which is operated by its U.K. franchisee, Lemon Pepper Holdings Ltd. (LPH). The company believes this expansion will strengthen the development pipeline in that market and develop expanding market reach in the U.K.
Recent Financial Results
MCD’s total revenues for its fiscal second quarter, ended June 30, 2021, increased 56.5% year-over-year to $5.89 billion. The company’s operating income came in at $2.69 billion, up 180% from the prior-year period. MCD’s net income was $2.22 billion for the quarter, representing a 358.7% rise from the year-ago period. Its non-GAAP EPS increased 259.1% year-over-year to $2.37.
For the fiscal second quarter, ended June 26, 2021, WING’s revenue increased 11.9% year-over-year to $74 million. The company’s operating income came in at $18.90 million, representing a 3.2% decline from the year-ago period. While its adjusted net income increased 13.1% year-over-year to $11.31 million, its adjusted EPS increased 11.8% year-over-year to $0.38. As of June 26, 2021, the company had $43.50 million in cash and cash equivalents.
Past and Expected Financial Performance
MCD’s EPS and net income have grown at CAGRs of 10.5% and 8.1%, respectively, over the past three years. The company’s total assets have grown at a 16.6% CAGR over the past three years.
Analysts expect MCD’s EPS to increase 50.2% year-over-year in the current year and 8.9% next year. Its revenue is expected to grow 19.6% in the current year and 6% next year. The stock’s EPS is expected to grow at a 20.5% rate per annum over the next five years.
In comparison, WING’s EPS and net income have increased at CAGRs of 2.3% and 3%, respectively, over the past three years. The company’s total assets have grown at a 23.6% CAGR over the past three years.
Analysts expect WING’s EPS to grow 93.6% year-over-year in the current year and 29.1% next year. Its revenue is expected to increase 19.2% year-over-year in the current year and 18.2% next year. Analysts expect the stock’s EPS to grow at a 22.6% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, WING is currently trading at 4.93x, which is 160.8% higher than MCD’s 1.89x. In terms of forward EV/Sales, MCD’s 9.89x compares with WING’s 18.45x.
Profitability
MCD’s trailing-12-month revenue is almost 79.9 times higher than WING’s. MCD is also more profitable, with a 50.1% EBITDA margin versus WING’s 26.7%.
Also, MCD’s net income margin and levered free cash flow margin of 31.7% and 27.9%, respectively, compare with WING’s 10.4% and 13.8%.
POWR Ratings
While WING has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, MCD has an overall B grade, equating to Buy. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both MCD and WING have B grades for Momentum, in sync with their impressive price performance. Over the past nine months, MCD has delivered 16.1% price returns, while WING gained 15.9%.
MCD has a B grade for Stability, consistent with its lower volatility than the broader market. The company has a 0.60 beta. However, WING’s C grade for Stability is in sync with its higher volatility. WING has a 1.31 beta.
Of the 48 stocks in the A-rated Restaurants industry, WING is ranked #39, while MCD is ranked #14.
Beyond what we’ve stated above, our POWR Ratings system has also rated MCD and WING for Growth, Value, Quality, and Sentiment. Get all WING ratings here. Also, click here to see the additional POWR Ratings for MCD.
The Winner
Because the fast-food restaurant industry is expected to keep growing, both MCD and WING should benefit. However, we think its relatively lower valuation and higher 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.
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MCD shares were unchanged in after-hours trading Wednesday. Year-to-date, MCD has gained 13.64%, versus a 22.19% 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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