Restaurant chain stocks can be a haven for long-term investors during market upheavals. Their cheap meal options, global footprint and earnings stability are some of the strengths that protect them from the extreme volatility that can affect high-flying growth stocks in uncertain times.
Today we look at two global food chains – Starbucks (NASDAQ:) and McDonald's (NYSE:) – to analyze which stocks offer better value as the markets' sell-off deepen amid speculation that the Federal Reserve monetary policy more aggressively to tackle inflation.
Since last fall, there has been a clear trend that the specialty coffee maker, known for drinks such as pumpkin spice lattes and cinnamon roll frappuccinos, is losing interest from investors. The stock, after soaring to a record high in mid-July, has fallen more than 10% in the past six months, underperforming other major restaurant operators. Shares of SBUX closed at $106.03 yesterday.
This weakness comes after a remarkable turnaround during the pandemic, when the Seattle-based company took a major blow to its business as COVID-19 spread worldwide, forcing offices to close and daily customers staying at home.
As sales gradually return to pre-pandemic levels, Starbucks now faces new challenges in the form of rising prices of goods and transportation, as well as wage inflation. Many analysts believe these headwinds will hold and hold back Starbucks' recovery, especially if it has no intention of slowing its investment efforts to gain market share.
As part of its plan to take sales away from competitors, Starbucks aims to earn $2 billion in capital expenditures this year as it expands aggressively, especially in China.
In a recent note, RBC Capital Markets analyst Christopher Carril lowered his outlook for Starbucks stock to 'perform' of 'outperform', saying rising cost pressures will have an impact:
"Continuous investment in its employees is core to SBUX's business strategy and principles, and probably the right decision for the company in the long run. We continue to believe this is the case, but given the magnitude of the cost pressures in FY22, we see potential for ongoing debate about the timing of a return to SBUX's ongoing target of 18-19% operating margin."
In a similar note, Oppenheimer analyst Brian Bittner said:
“Our updated analysis suggests that the EPS forecasts in '22 and '23 do not have upward leverage necessary to drive outperformance. While 2022 is a well-reported "investment year," The Street is already endorsing excessive margin and earnings per share growth in '23."
The maker of Big Macs, Egg McMuffins and French fries is proving to be a much better bet in the ongoing rotation to value stocks and safety. Unlike SBUX, MCD stock rose to an all-time high last week, after seeing returns of around 25% last year. McDonald's stock ended Monday at $264.41.
One of the reasons for this strength is that MCD outperformed most restaurants during the pandemic, thanks in part to its focus on takeout and delivery. In addition, a new chicken sandwich, the company's price hikes and robust loyalty program are boosting sales in the US, where the chain has more than 13,000 locations.
The company's comparable store sales increased 12.7% in the period ending September 30, beating analyst estimates by nearly 10%.
In a recent note, Piper Sandler upgraded MCD from neutral to overweight, saying the company is in a better position to address the challenges of the current inflationary environment.
The note read:
"While the cost pressures and operational challenges facing the wider industry are real, we believe McDonald's is in a unique position to leverage its size, scale, operational capabilities and continued investments to gain market share." to acquire, as it capitalizes on the high consumer trends that are highlighted.”
In the note, quoted by CNBC.com, Piper Sandler said it recently surveyed consumers and found a strong desire to return to restaurants, with preferences pointing to a strong year for McDonald's.
Added the note:
“Our research indicates a sustained and near-peak consumer preference for contacts with restaurants via the drive-thru channel. Based on cuisine, the results indicate a steady and ongoing demand for hamburger and chicken kitchens.”
These positive sentiments are also reflected in an Investing.com survey of 37 analysts, 27 of whom rated MCD as "outperform".
Analyst consensus estimates polled by Investing.com.
The stock's 12-month average price target is $274.55, up nearly 4%.
MCD is doing much better in the current flight to safety than Starbucks.
Investor preference for the fast food giant shows that its stock will be less affected by macro events in the coming months as the market struggles with a more aggressive Fed, and restaurant operators continue to contend with higher inflation, staff shortages and supply/imbalance in the question.