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Starbucks vs. McDonald’s: Which Stock to Choose?

Restaurants bore the brunt of the restrictions during the COVID-19 pandemic, as coffee chains and Quick Service Restaurants (QSR) remained closed during the pandemic or had fewer footfalls, due to restrictions.

Just as it seemed that QSRs and and other food franchises seemed to be on their way to financially recovering from the effects of the pandemic, the Delta variant of COVID-19 has again hampered this progress.

Using the TipRanks Stock Comparison tool, let us compare two companies in the restaurant space, coffee giant Starbucks and QSR chain McDonald’s, and see how Wall Street analysts feel about these stocks.

Starbucks Corp. (SBUX)

Starbucks is a coffee retailer and a premier coffee roaster with operations in 83 markets around the world. As of June 27, the company had around 33,200 company-operated and licensed stores, up 3% year-over-year.

The company is expected to announce its fiscal Q4 and FY21 results on October 28.

In fiscal Q3, Starbucks’ revenues jumped 78% year-over-year to $7.5 billion, exceeding the consensus estimate of $7.2 billion. The robust growth in net revenues was primarily driven by a 73% rise in comparable-store sales.

Adjusted earnings came in at $1.01 per share, which compares favorably with last year’s loss of $0.46. Further, it topped the consensus estimate of $0.77.

Kevin Johnson, President and CEO of Starbucks stated, “Given the strength of our diverse portfolio and the elevated Starbucks Experience, as evidenced in our Q3 record results, we are raising our full-year financial outlook and are confident in our ability to continue to execute our ‘Growth at Scale’ agenda to unlock the full potential of the Starbucks brand.”

In FY21, SBUX now expects adjusted EPS to be in the range of $3.20 to $3.25 from the earlier range of $2.90 to $3.00 per share. In terms of revenues, the company has raised its guidance to $29.1 billion to $29.3 billion from the earlier $28.5 billion to $29.3 billion. (See Top Smart Score stocks on TipRanks)

Global comparable sales growth is anticipated to be between 20% and 21%, compared to 18% and 23% earlier.

Yesterday, Deutsche Bank analyst Brian Mullan upgraded the stock from a Hold to a Buy, but reiterated a price target of $127 (14.5% upside) on the stock. The analyst noted that while the company’s business in the U.S. has “incredible momentum,” he also believes that “there should be attractive unit growth in China for some yet to be determined but potentially very long period of time.”

Indeed, the company’s management stated on its Q3 earnings call that SBUX’s total revenue in China has risen 23% in the past two years.

Furthermore, Johnson commented, “In addition to significant new store growth and sequential acceleration of two-year comps in China, we are expanding digital customer relationships and engagement by creating new occasions and experiences that make mobile ordering even more convenient and personalized.”

Another reason for Mullan’s bullish outlook on the stock is that the analyst expects that “SBUX has the ability to return ~14% of its current equity market cap in the form of share repurchases and dividends, over the next three years” and thinks that “this type of long-term growth profile to be fairly compelling and unique within the broader consumer landscape.”

Turning to the rest of the Street, Wall Street analysts are cautiously optimistic about Starbucks, with a Moderate Buy consensus rating, based on 14 Buys and 5 Holds.

The average Starbucks price target of $130.63 implies 17.8% upside potential from current levels.

McDonald’s Corp. (MCD)

McDonald’s operates and franchises McDonald’s restaurants, quick-service restaurants (QSRs) that serve a menu of food and beverages in 119 countries. The QSR giant’s business segments include the U.S. and International Operated Markets (IOM). Currently, 93% of the company’s restaurants are franchised.

The company competes with Starbucks through its McCafé chain.

MCD is expected to announce its Q3 results on October 28.

In Q2, the company posted revenues of $5.89 billion, surpassing analysts’ projections of $5.53 billion. Diluted earnings came in at $2.37 per share, better than the $2.08 a share that analysts expected. Global comparable sales were also up by 40.5%.

For FY21, the company now expects “full year systemwide sales growth in the mid to high teens in constant currencies.” Yet McDonald’s management also cautioned that “there is still some uncertainty as we continue to see pandemic-related stops and starts in markets around the world, especially now with the Delta variant.” (See Analysts’ Top Stocks on TipRanks)

Around a week back, Deutsche Bank analyst Brian Mullan reiterated a Buy and a price target of $265 (7.5% upside) on the stock.

The analyst stated that while investors are expecting same-store sales (SSS) in the U.S. to rise 10%, the Street is anticipating same-store sales to be up by 8.1%.

Giving his reasoning for the Street consensus regarding SSS, Mullan cited a comment from Kevin M. Ozan, CFO and EVP of McDonald’s, at its earnings call. Ozan has said that the company’s margins in the U.S. could “moderate a little bit from where we were in the second quarter.”

The analyst added that if MCD goes on to “report a ~+10% SSS result for the third quarter, the primary implications would be a stable to modestly accelerating U.S. two-year SSS trend, and a likely need for upward revisions for the 4Q21e time period as well.”

Mullan believes that the recovery of the IOM segment is the “key variable to watch here, given the relative operating leverage in the segment.”

Meanwhile, the company’s management indicated on its earnings call that when it comes to Q3, it expects “comps to surpass pre-pandemic levels across all of our big five international markets. The past year has shown us that when markets reopen, customer demand for McDonald’s returns quickly.”

Turning to the rest of the Street, Wall Street analysts are bullish about McDonald’s, with a Strong Buy consensus rating, based on 21 Buys and 3 Holds.

The average McDonald’s price target of $268.39 implies 8.8% upside potential from current levels.

Bottom Line

While analysts are cautiously optimistic about Starbucks, they are bullish about McDonald’s. However, based on the upside potential over the next 12 months, Starbucks seems to be a better Buy.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article​.

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