Chipotle Mexican Grill and McDonald's are going in very different directions. Chipotle has been one of the most explosive growth stories in the restaurant industry over the last several years, and the company offers both extraordinary financial performance and exciting growth prospects. McDonald's, meanwhile, faces stagnant or even declining sales, and it's hard to tell what the future might bring for the fast-food giant's investors.
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However, McDonald's is far more attractively valued than Chipotle at this stage, and the stock offers substantial upside potential if management can turn the business around. So which one is a better buy at today's prices?
A tale of two companies
Chipotle's "Food With Integrity" approach to Mexican cuisine is a booming success among customers, and this has made for an extraordinary financial performance over the last decade. The fast-casual chain's sales have grown significantly, from $628 million in 2005 to $4.1 billion in 2014.
There is no slowdown in sight, judging by the latest financial reports. Total revenue for the first quarter of 2015 grew by 20.4%, to $1.1 billion. Comparable restaurant sales jumped 10.4%, and Chipotle opened 49 new restaurants to bring the total store count to 1,831. This kind of growth is quite exceptional in the restaurant business.
Importantly, the company still has significant room for growth: Management believes it can open 3,000 restaurants in the U.S. alone, and Chipotle is barely taking its first steps into international expansion. The way things are going, Chipotle looks remarkably well positioned to sustain impressive performance in the years ahead.
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McDonald's is a very different story. Sales have disappointed over the last several months, as consumers are fleeing Big Macs in favor of healthier alternatives in the fast-casual category. McDonald's has resorted to menu innovation to turn the situation around, but the company seems to be losing touch with its customers, and increased complexities in the kitchen are hurting both service quality and speed.
Global comparable sales declined by 0.6% during April, driven mostly by a 2.3% drop in the U.S. and a 3.8% fall in the APMEA -- Asia-Pacific, Middle East, and Africa -- region. Performance over the first four months of 2015 looked even worse: Global comparable sales were down 1.9%, while U.S. sales dipped by 2.5% and APMEA plunged 7.1%.
Management has announced a new turnaround plan, which includes refranchising 3,500 restaurants by the end of 2018 and delivering $300 million in cost savings by the end of 2017. While it's good to see McDonald's is trying to run a tight ship, it wont be easy for the company to improve sales and cut costs at the same time.
Spicy burrito or a value meal?
The main argument for choosing McDonald's over Chipotle should be based on valuation, particularly from the perspective of dividend investors. McDonald's stock pays a 3.4% dividend yield at current prices, which is particularly attractive from a company with an impressive track record of dividend growth over the long term: McDonald's has raised its payout every year since making its first dividend payment in 1976, accumulating 38 consecutive years of consistent dividend growth. This includes a 5% hike for 2014, announced last September.
When considering both dividends and buybacks, the company's new turnaround plan involves returning between $8 billion and $9 billion to shareholders in 2015 and reaching the top end of its targeted three-year, $18 billion to $20 billion cash return to shareholders by the end of 2016. McDonald's has a market capitalization in the neighborhood of $97.5 billion, so investors will receive nearly 9% of the market value via dividends and buybacks this year.
However, investors should be careful when hunting for bargains in the stock market, as you often get what you pay for. McDonald's has much room for improvement, but there is no hard evidence supporting the belief that the company on track to recovery, so the fundamentals could easily continue deteriorating over time. Until management proves it can change course, staying away from McDonald's looks like the right choice.
Chipotle, on the other hand, is a high-growth company trading at a premium valuation. The organic-burrito maker carries a forward P/E ratio of about 30, a considerable premium versus the average valuation near 18 for companies in the S&P 500 index.
When it comes to Chipotle, a demanding valuation can be a considerable risk if the company hits any bumps down the road and growth rates fall below expectations. However, both sales and cash flow are clearly moving in the right direction, and the long-term growth prospects look strong. As long as the fundamentals remain solid, any short-term retreat in Chipotle stock should be considered a buying opportunity for investors with a long time horizon.
While Chipotle is comparatively more expensive than McDonald's, successful investing is about much more than looking solely at the price tag. Winners tend to keep on winning, and chances are that Chipotle will continue beating McDonald's in the years ahead.
The article Better Buy Now: Chipotle Mexican Grill Inc. or McDonald's Corporation? originally appeared on Fool.com.
Andrs Cardenal owns shares of Apple. The Motley Fool recommends Apple and Chipotle Mexican Grill. The Motley Fool owns shares of Apple and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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