McDonald’s vs Restaurant Brands, Which Is The Better Buy For The Fast-Food Rebound

Fast-Food Is Rebounding Fast

Restaurant stocks, specifically fast-food restaurant stocks and/or those with a drive-through or delivery presence, have been doing well in the post-pandemic world. The data shows a bottom was hit in March and sales have only been accelerating since. Based on the data and a recent business update from Restaurant Brands International (NYSE: QSR) the consensus targets for the year are way off and due for a positive reset. With that in mind, the entire industry is on the verge of melting up which begs the question, which is the better buy?

In this match-up, we have the leading contenders in the burger wars by size and sales volume. In the one corner is McDonald’s (NYSE: MCD), the world’s largest burger vendor and largest fast-food chain globally. In the other corner, a distant 7th on the list of world’s largest fast-food chains and a more-distant 2nd largest burger joint by sales is Restaurant Brands International, the parent company of Burger King, Tim Horton’s and Popeye’s. The one is a prince of dividend payers, the other a fast-growing brand with a secret weapon.

Could The Winner Of The Burger Wars Be A Chicken Sandwich?

You might think McDonald’s has a vastly superior outlook for growth this year because of one factor, it is a pure-play on burgers with deeper market penetration. The fact is McDonald’s is expected to post a revenue contraction near -12.6% while Restaurant Brands’ decline will be closer to -11%. Looking forward, both are expected to see a substantial rebound but neither stands out as a clear winner. McDonald’s consensus for revenue growth is near 15% in 2021 while Restaurant Brands will be closer to 13%.

The difference with Restaurant Brands International is that it’s a three-pronged play on fast-food. The BK segment saw a deep decline due to the pandemic but is now turning out flat-comps in the YTD comparisons and on track to deliver growth this year. Rounding out Restaurant Brand’s portfolio is Tim Horton’s, a mostly breakfast-oriented chain centered in Canada, and Popeye’s.

Popeye’s is Restaurant Brand Int’s secret weapon. The nationwide chain of fried-chicken restaurants got a game-changing boost from last year’s “chicken wars”. The chicken war put Popeye’s firmly in the eye of national chicken lovers and has since seen an acceleration of growth that is yet unchecked. To put this statement into perspective here is the low-down, Popeye’s has sustained growth in the high 20% range in 2020.

The negative in this picture is Tim Horton’s. Tim Horton’s is still showing negative comps although the business has been improving consistently on a week-over-week basis since bottoming. Assuming that Tim Horton’s, now about 90% open, can even approach flat comps from the current -15% growth in Popeye’s will easily offset the difference. Add in an expectation for positive comps at BK in the nowish time-frame and the stage is set for Restaurant Brands to exceed its consensus target and outperform McDonald’s during the rebound.

There Is A Dividend And The Value To Consider

As always, the best investments (in my opinion) come with a dividend. In this case, there is MCD, a prince of dividend payers with 43 years of consecutive distribution increases, and QSR, a stock with only an iffy history of growth. In McDonald’s favor are much-better payout ratios but that may not matter if Restaurant Brands outperforms consensus as I think it will. In QSR’s favor are the yield and value. The yield with QSR is about 3.8%, about 100 basis points better than McDonald’s, with a potential for multiple expansion to sweeten the deal.

McDonald’s is trading at 32X this year’s and 23X times next year’s consensus EPS while Restaurant Brands trades closer to 26.5X and 20X its EPS. This factor suggest that shares of QSR are a better value, undervalued, ready for a multiple expansion or a combination of all three. Regardless, QSR appears to be the better buy for growth, yield, and value.

The Technical Outlook: More Gains Possible With Restaurant Brands

Using the simplest of targets, the pre-pandemic high, Restaurant Brands has a better reward profile. A move up from today’s price levels to the pre-pandemic high set in February is worth about 24% for QSR and only 18% for MCD. In that light, and considering both charts look like price action is trending higher, QSR is still the better buy. The risk is that QSR has a resistance point to get past at the $60 level but, when that happens, the potential for this stock to surpass its pre-pandemic high emerges. (But that’s true for McDonald’s too, both stocks have their appeal, McDonald’s may be the better choice for those with lower risk tolerance.)