Better Buy: McDonald's Corporation vs. Chipotle Mexican Grill, Inc.

By Markets Fool.com

Image source: Getty Images.

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This is an awkward article for me to write. I haven't been to a McDonald's in over five years, and I frequent Chipotle as often as I can (though we don't have one in my small rural town). Furthermore, my family holds shares of the latter, while never touching the former.

But the shares of Chipotle we do own make up a very small percentage of our holdings. I usually let such tiny positions sit unattended for a while. That's why I was surprised to see that when I run these two stocks through my three very basic screens for the better buy today, Chipotle did not come out ahead.

Here's why:

Financial fortitude

As Chipotle is discovering right now, financial fortitude matters a great deal. When times are tough, companies that have cash on hand can weather a downturn. If things go south for an entire industry -- much like what occurred in the Great Recession -- having cash on hand multiplies a company's options: from buying back stock, to outspending rivals, to acquiring competitors.

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The exact opposite is true of debt: It makes a company fragile to the whims of fate. Here's how Chipotle and McDonald's stack up in terms of their financial fortitudes.

Cash

Debt

Net Income

Free Cash Flow

Chipotle

$250 M

$0

$327 M

$241 M

McDonald's

$3,300 M

$23,400 M

$4,800 M

$4,750 M

Data source: Yahoo! Finance. Net income and free cash flow are on a trailing-12-month basis.

Chipotle, obviously, has one huge advantage in this respect: It carries absolutely no long-term debt. That has been key as the company wades its way through the food-borne-illness nightmare that 2016 has become.

But McDonald's is no slouch, either. Even after adjusting net income and free cash flow to match each company's market cap -- McDonald's is valued at over nine times as much as Chipotle -- the Golden Arches still comes out ahead in terms of profitability. A big reason for that is the fact that Chipotle swung dramatically to a loss last quarter.

Taking these factors into consideration, this is essentially a draw.

Winner = Tie

Sustainable competitive advantages

In my time investing, nothing has been a better predictor of investing success than the presence of a sustainable competitive advantage. For both McDonald's and Chipotle -- and, for that matter, any restaurant -- the most important thing is the value of a company's brand.

At any other time in the past decade, I would have made a strong argument that Chipotle had a much stronger advantage than McDonald's. Ever since the movieSuper Size Me came out, Ronald McDonald has come to represent everything that's wrong with fast food: sugary drinks, fatty foods, meat that's raised without a conscience, and the prevalence of type 2 diabetes in America.

Chipotle was the exact opposite. The company sources locally as often as it can. It has been a trailblazer when it comes to humanely raised ingredients. It was one of the first national chains to completely remove genetically modified foods from its offerings.

But things have changed quickly. Just this week, my family and I were at a Fourthof July parade where McDonald's representatives were throwing out bags of... freshly cut apples. Meanwhile, more and more customers can't help but get a sick feeling when they imagine going into a Chipotle. Whether that reaction is fair or not, it's leading to much smaller comps.

In the end, only time will tell if Chipotle's rebranding takes hold and if McDonald's can pivot to a healthier image.

Winner = Tie

Valuation

With the companies in a virtual tie based on the previous two lenses, it's here that McDonald's takes the cake. There are lots of ways to value a company, and here are four of my favorites:

P/E

P/FCF

P/S

PEG Ratio

Chipotle

38

48

2.8

5.6

McDonald's

23

22

4.2

2.1

Data source: Yahoo! Finance, Nasdaq.com, E*Trade.

With the exception of price-to-sales, McDonald's is a better bet on every metric. Even though Chipotle has seen its shares almost get cut in half since late 2015, it is still an expensive stock. With McDonald's, you don't get a screaming deal, but you do get a fair price. And you get a 2.9% dividend yield to boot.

That makes the winner here pretty clear.

Winner = McDonald's

I'll be the first to admit that I need to take a long, hard look at my family's Chipotle holdings. In the meantime, I think investors might benefit from seriously considering McDonald's if they're interested in benefiting from fast-food joints.

The article Better Buy: McDonald's Corporation vs. Chipotle Mexican Grill, Inc. originally appeared on Fool.com.

Brian Stoffel owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends 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.