Rapid technology integration, including the growing use of mobile phones and the internet worldwide, has changed the dynamics of the restaurant and fast food industry. With widespread alternatives like dine-in, take-out, drive-thru, delivery, and fine dining, the restaurant industry is well-positioned to experience significant growth in the foreseeable future.
However, waiting for better entry points in fast food stocks McDonald's Corporation (MCD) and Starbucks Corporation (SBUX) seems prudent.
According to a National Restaurant Association report, restaurant sales levels are expected to reach a record high of $1.1 trillion in 2024, with expectations of positive sales, a surge in delivery, carry-out, drive-thru services, and growing employment.
The U.S. full-service restaurant market is projected to expand to $554.12 billion by 2029, exhibiting a notable CAGR of 11.3% during the forecast period (2024-2029). The rise in tourist arrivals will primarily drive the restaurant market growth, backed by increased out-of-home consumption and consumers’ preference for ethnic cuisines and fine dining restaurants.
After recovering from the pandemic, the restaurant industry is undergoing rapid transformation with the rising prevalence of takeout and delivery apps, trends of incorporating food with entertainment, diners choosing sustainability, and more. Also, technology plays a crucial role in catering to customers and making the process more efficient.
In the U.S., fast food chains prevail over other alternates due to the changing consumer preferences for eating at home, rapid adoption of convenience-driven lifestyles, technological advancements, and the COVID-19 pandemic-induced demand.
The U.S. online food delivery market is expected to reach $68.6 billion by 2032, exhibiting a CAGR of 10%. The convenience of accessing multiple online food delivery platforms, browsing menus, and placing orders are among the key market drivers.
Considering these conducive trends, let’s take a look at the fundamentals of the two Restaurants industry stocks.
Stock #2: Starbucks Corporation (SBUX)
SBUX operates as a global roaster, marketer, and retailer of coffee. It operates in North America; International; and Channel Development segments. The company’s stores provide coffee and tea beverages, roasted whole beans and ground coffees, single-serve products, ready-to-drink beverages, and other food products.
On March 28, 2024, SBUX introduced a new ready-to-drink beverages lineup, which includes Starbucks® Oatmilk Frappuccino® Chilled Coffee Drink, new flavors of Starbucks® Cold Brew and Starbucks® Multi-serve Cold Brew, available in grocery stores in the U.S. This was introduced by North American Coffee Partnership (NACP), creation of SBUX and PepsiCo (PEP).
On March 21, 2024, SBUX’s Board of Directors approved a quarterly cash dividend of $0.57 per share of outstanding common stock. The dividend is payable in cash on May 31, 2024, to shareholders of record on May 17, 2024.
SBUX pays an annual dividend of $2.28, which translates to a yield of 2.49% at the current share price. Its four-year average dividend yield is 1.99%. Moreover, the company’s dividend payouts have increased at a CAGR of 9.8% over the past five years. Starbucks has raised its dividends for 13 consecutive years.
Also, on February 15, SBUX and Bank of America Corporation (BAC) announced a new partnership that would provide millions of Bank of America cardholders and Starbucks Rewards® members in the U.S. with the facility to yield even more benefits by linking accounts.
“We are pleased to partner with Bank of America and offer Starbucks Rewards members even more valuable benefits like Cash Back and more Stars,” stated Ryan Butz, vice president, loyalty strategy and marketing at Starbucks.
SBUX’s trailing-12-month net income margin and EBIT margin of 11.70% and 15.69% are significantly higher than the respective industry averages of 4.72% and 7.61%. However, the stock’s trailing-12-month gross profit margin of 27.87% is 22.5% lower than the industry average of 35.98%.
For the fiscal 2024 first quarter that ended December 31, 2023, SBUX’s total net revenues increased 8.2% year-over-year to $9.42 billion. However, its revenue from the Channel Development segment declined by 6.3% year-over-year to $448 million. Its non-GAAP operating income grew 18% from the year-ago value to $1.48 billion.
In addition, net earnings attributable to Starbucks and non-GAAP EPS were $1.02 billion and $0.90, up 19.8% and 20% year-over-year, respectively.
Analysts expect SBUX’s revenue and EPS for the second quarter (ended March 2024) to increase 5.7% and 10.6% year-over-year to $9.22 billion and $0.82, respectively.
SBUX’s stock has plunged 14.8% over the past year to close the last trading session at $89.30.
SBUX’s mixed prospects are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a C grade for Growth, Value, Momentum, and Sentiment. Within the Restaurants industry, SBUX is ranked #18 out of 42 stocks.
Click here to access additional ratings of SBUX (Quality and Stability).
Stock #1: McDonald's Corporation (MCD)
MCD operates and franchises restaurants under the McDonald’s brand internationally. The company offers food and beverages, like hamburgers, fries, sundaes, soft drinks, coffee, other beverages, and a full or limited breakfast. It owns and operates through conventional franchises, developmental licenses, or affiliate structures.
On March 26, 2024, MCD and Krispy Kreme® announced an expanded national partnership under which Krispy Kreme will deliver fresh doughnuts daily at MCD’s restaurants nationwide. This partnership will allow McDonald’s to unlock new business opportunities in the breakfast category.
On February 8, 2024, MCD’s Board of Directors declared a quarterly cash dividend of $1.67 per share of common stock paid on March 15, 2024, to shareholders of record at the close of business on March 1, 2024.
MCD’s annual dividend is $6.68, which translates to a yield of 2.41% at the current share price. Its four-year average dividend yield is 2.21%. Moreover, the company’s dividend payouts have grown at a CAGR of 7.9% over the past three years. Starbucks has raised its dividends for 22 consecutive years.
Also, on December 19, 2023, MCD and Accenture (ACN) expanded their strategic partnership to execute MCD’s strategy to leverage the latest edge technology and apply generative AI solutions to its restaurants worldwide to improve operations.
Through this partnership, MCD enhanced the digital capabilities of its employees, improved customer and crew experience, and accelerated its technology adoption.
MCD’s trailing-12-month gross profit margin of 57.12% is 58.8% higher than the industry average of 35.98%. But, the stock’s trailing-12-month asset turnover ratio of 0.48x is 52.1% lower than the industry average of 1x.
MCD’s revenues for the fourth quarter that ended December 31, 2023, increased 8.1% year-over-year to $6.41 billion. Its operating income rose 8.5% from the year-ago value to $2.80 billion. The company’s non-GAAP net income and non-GAAP EPS came in at $2.14 billion and $2.95, up 12.7% and 13.9% from the prior year’s quarter, respectively.
Street expects MCD’s revenue for the first quarter (ended March 2024) to increase 4.7% year-over-year to $6.18 billion. Likewise, the company’s EPS for the same quarter is expected to grow 3.9% year-over-year to $2.73. Moreover, the company has surpassed consensus EPS estimates in all of the trailing four quarters.
MCD’s shares have gained 7.8% over the past six months to close the last trading session at $277.74. However, the company’s stock has declined 1.6% over the past year.
MCD’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system.
The stock has a C grade for Momentum, Growth, and Sentiment. Within the Restaurants industry, MCD is ranked #9 of 42 stocks.
In addition to the POWR Ratings we’ve stated above, we also have MCD ratings for Value, Quality, and Stability. Get all MCD ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
MCD shares fell $1.25 (-0.45%) in premarket trading Wednesday. Year-to-date, MCD has declined -6.13%, versus a 9.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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