McDonald's vs. Starbucks: Which Is the Better Buy?
By: Although one restaurant analyst has a “buy” rating on both McDonald’s and Starbucks, he thinks the coffee chain’s stock is the better buy, citing its potential for greater earnings growth.
In assessing the companies, which have both recently traded at all-time highs, Matthew DiFrisco, a Lazard Capital Markets managing director and senior analyst, told CNBC he is focused on opportunities for sales growth and on the commodities front.
Starbucks , which is on his firm’s “Fresh Ideas” list of stocks, has many channels that it is beginning to enter, including consumer products, K-cups, and grocery stores, he said.
Meanwhile, “commodities are beginning to work for Starbucks, and commodities remain a headwind — certainly beef prices primarily — for McDonald’s ,” DiFrisco said.
“We’re looking ahead, and their earnings certainly look like they’ll be maintaining a pace of over 20 percent for the next couple of years,” said DiFrisco about Starbucks. “There’s even upside to that as they recoup maybe 40 cents worth of earnings power that they lost due to the commodity headwinds the last two years. So I do think that the opportunity is there for greater (earnings per share) growth, and it’s justified in the multiple.”
Starbucks made some tough decisions early in the recession , such as closing nearly 9 percent of its stores, he said.
In the wake of those difficult decisions, “the brand and the portfolio have come out roaring,” DiFrisco said, “and they’ve done some attractive entrances into some new channels, such as K-cups, and such as looking at their own alternative to instant coffee, as well, in their Via product.”
Starbucks’ price-to-earnings ratio is about 29, while McDonald’s price-to-earnings ratio is about 19, he said.
DiFrisco added that while McDonald’s earnings have not moved very much, they are stable.
“I think they’ve used their balance sheet to their advantage, and that’s helped them fundamentally outperform,” he said about McDonald's. “Its valuation is probably getting closer to hitting a ceiling, I’d say, than Starbucks.”
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Disclosures:
Lazard Capital Markets makes a market in Starbucks and McDonald’s securities.
