One is growing more quickly and posting much stronger profit margins.
McDonald's (MCD -1.01%) and Starbucks (SBUX -0.73%) are on different growth paths today. The fast-food companies compete over breakfast beverages and snacks, and both are targeting the drive-thru and delivery channels right now.
But their latest operating updates show how McDonald's is faring better across most of the key metrics that are important to investors. Let's look at whether that success makes the burger giant a clear favorite over the coffee titan.
McDonald's has the traffic
Starbucks' early February earnings announcement showed decelerating sales growth, with comparable-store sales (comps) rising 5%, compared with the prior quarter's 7% increase. McDonald's is expanding sales much more quickly, with comps landing at 12% in the most recent quarter, versus 10% in the prior quarter.
Look a bit deeper and you'll see more separation for the burger chain. McDonald's grew customer traffic by 5% for the full 2022 year, and the number of transactions moved higher in the most recent quarter.
Starbucks, meanwhile, noted a 2% traffic drop in the period that ended in early January. The coffee chain's results were heavily impacted by the China market, which posted a brutal 29% decline in comps.
Cash and profits
McDonald's wins the financial matchup as well. While both companies are being pressured by rising costs, its heavily franchised operating model protected profits.
McDonald's operating income was up 8% in the fourth quarter to $2.6 billion, while Starbucks had a 6% increase. McDonald's profitability remains above 40% of sales, while Starbucks' comparable metric has dropped to around 14% of sales.
McDonald's maintains its edge when it comes to cash flow. Both companies have seen a decline in this core financial metric in recent months. Yet McDonald's has generated over $7 billion of operating cash in the past year compared to Starbucks' $4 billion.
SBUX cash from operations (TTM) data by YCharts. TTM = trailing 12 months.
The better buy
As you might expect, Starbucks stock is valued at a discount compared to its high-performing rival. You can purchase shares for about 4 times annual revenue, while McDonald's trades at over 8 times sales.
The burger giant's valuation hasn't declined much from its pandemic peak, either, suggesting that Wall Street remains highly optimistic about the business.
There are good reasons to expect a rebound for Starbucks as temporary pressures like the disruptions in China start to ease. If inflation keeps slowing, then the company could enjoy profit tailwinds as demand picks up following its recent price increases.
Looking further out, the coffee chain is hoping to do more business through its drive-thru and delivery channels, especially outside of major metropolitan areas. McDonald's wider sales footprint gives it less of a market opportunity here, as it already has a presence across suburban and rural areas.
Still, the burger maker looks like the more attractive stock right now, given its faster growth and market-thumping profitability. McDonald's shares have a higher dividend yield, and shareholders can expect ample cash returns from stock repurchases, too. Starbucks is more focused today on its turnaround, and so management has less room for direct cash returns.
Both restaurant companies are likely to be setting annual sales and earnings records in a few years. But McDonald's is looking like the more-filling option for investors right now.
Demitri Kalogeropoulos has positions in McDonald's and Starbucks. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends the following options: short April 2023 $100 calls on Starbucks. The Motley Fool has a disclosure policy.
