Can Starbucks (SBUX) and McDonald's (MCD) Boost Your Portfolio's Taste by Year-End?

The restaurant industry has been performing well thanks to robust consumer spending, increasing disposable income, and growing dining-out trends despite elevated prices. The industry is poised for solid growth with easing inflation, rapid digitization, evolving consumer preferences, and the surge in online delivery services.

Considering these factors, it could be wise to buy fundamentally strong restaurant stocks, Starbucks Corporation (SBUX) and McDonald’s Corporation (MCD).

Before diving deeper into their fundamentals, let’s discuss what is shaping the industry’s prospects.

The restaurant industry has experienced a surge in demand for online food delivery services over the past few years. The industry is performing well due to significant growth in both dining out and takeout/delivery orders. The global online food delivery services market is projected to reach $159.46 billion in 2027, growing at a CAGR of 2.8%.

The strength of the restaurant industry is evident, with retail food and services reporting total sales of $705.0 billion in October, reflecting a 2.5% year-over-year increase. Additionally, according to the U.S. Census Bureau, total sales from August to October increased by 3.1% compared to the same period a year ago.

The National Restaurant Association (NRA) anticipates ongoing consumer visits to restaurants, projecting that the U.S. restaurant industry will achieve $997 billion in sales in 2023. Notably, according to a report by Fortune Business Insights, the global food service market will likely grow at a CAGR of 10.8%, reaching $5.42 trillion by 2030.

On top of it, digital technology is reshaping the restaurant industry by reducing costs, improving efficiency, and enhancing customer experiences through AI, cloud solutions, self-service options like kiosks, and online delivery. Ongoing partnerships with food delivery aggregators complement this transformation.

Considering these conducive trends, let’s analyze the fundamental aspects of the two Restaurants picks, beginning with the second choice.

Stock #2: Starbucks Corporation (SBUX)

SBUX operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates through three segments: North America; International; and Channel Development.

On November 11, 2023, SBUX announced its Triple Shot Reinvention Strategy, emphasizing elevating the brand, strengthening digital capabilities, and expanding globally. The plan aims to double Starbucks Rewards members, reach 55,000 stores worldwide by 2030, achieve $3 billion in efficiency savings, and revitalize the partner culture.

SBUX’s CEO, Laxman Narasimhan, highlights the company's commitment to long-term growth, brand elevation, and shareholder returns. He states that the strategy builds on the past year’s success and aims to deliver sustainable growth and value to partners, customers, and shareholders.

In terms of the trailing-12-month EBITDA margin, SBUX’s 19.39% is 77.7% higher than the 10.91% industry average. Likewise, its 11.46% trailing-12-month net income margin is 156% higher than the 4.48% industry average. Additionally, its 14.01% trailing-12-month Return on Total Assets is 251.4% higher than the 3.99% industry average.

SBUX’s total net revenues for the fiscal fourth quarter ended October 1, 2023, increased 11.4% year-over-year to $9.37 billion. Its non-GAAP operating income increased 34.1% from the year-ago value to $1.71 billion. The company’s attributable net earnings increased by 38.8% year-over-year to $1.22 billion. In addition, its non-GAAP EPS increased 30.9% year-over-year to $1.06.

For the quarter ending December 31, 2023, SBUX’s EPS and revenue are expected to increase 28.1% and 11.5% year-over-year to $0.96 and $9.72 billion, respectively. It surpassed the consensus EPS estimates in three of the four trailing quarters. Over the past three months, the stock has gained 2% to close the last trading session at $98.15.

SBUX’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a B grade for Stability and Quality. It is ranked #13 out of 45 stocks in the B-rated Restaurants industry. To see SBUX’s Growth, Value, Momentum, and Sentiment ratings, click here.

Stock #1: McDonald’s Corporation (MCD)

MCD operates and franchises its restaurants in the United States and internationally. The company's restaurants offer hamburgers and cheeseburgers, chicken sandwiches and nuggets, fries, salads, shakes, frozen desserts, sundaes, soft serve cones, bakery items, soft drinks, coffee, and beverages and other beverages, as well as breakfast menu.

On December 6, 2023, MCD announced its aim to reach 50,000 restaurants by 2027, grow the number of loyal users to 250 million, and connect globally with Google Cloud for improved operations. The strategy emphasizes marketing core menu items intensifying digital, delivery, drive-thru, and development efforts.

On December 6, 2023, MCD and Google partnered to boost global restaurant tech with Google Cloud and AI. MCD plans faster innovations and better customer experiences, employing edge computing for insights and fewer disruptions. Deploying Google Distributed Cloud to thousands of MCD locations makes it the world's largest food service retailer to leverage these capabilities.

Brian Rice, Executive VP and Global CIO at MCD, foresees substantial digital business growth through the Google Cloud partnership. Leveraging MCD’s scale, the collaboration facilitates swift development, enhancing operations, customer experiences and optimizing tools and models through worldwide data connections.

In terms of the trailing-12-month net income margin, MCD’s 33.31% is 643.8% higher than the 4.48% industry average. Likewise, its 46.02% trailing-12-month EBIT margin is 513.3% higher than the 7.50% industry average. Its 25.68% trailing-12-month levered FCF margin is 399.8% higher than the 5.14% industry average.

MCD’s revenues for the fiscal third quarter that ended September 30, 2023, increased 14% year-over-year to $6.69 billion. Its net income rose 16.9% over the prior-year quarter to $2.32 billion. The company’s operating income for the period increased 16.1% year-over-year to $3.21 billion. Also, the company's net earnings per share came in at $3.17, representing an increase of 18.3% year-over-year.

Analysts expect MCD’s EPS and revenue for the quarter ending December 31, 2023, to increase 8.8% and 8.7% year-over-year to $2.82 and $6.44 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 11.2% to close the last trading session at $291.42.

MCD’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

It is ranked #8 in the same industry. It has an A grade for Sentiment and Quality and a B for Stability. To see MCD’s Growth, Value, and Momentum ratings, click here.

What To Do Next?

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MCD shares fell $0.42 (-0.14%) in premarket trading Wednesday. Year-to-date, MCD has gained 13.09%, versus a 22.70% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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