The ongoing debate of burgers versus burritos may remain unsettled when it comes to deciding what's for dinner, but the stock market has spoken loud and clear.
McDonald's (MCD) is enjoying a 2.2% climb in recent trading following its impressive earnings report. Meanwhile, Chipotle Mexican Grill (CMG) took a hit with its quarterly results, causing its shares to plummet by 9%. This makes Chipotle the worst performer in the S&P 500 and sets it on track for its worst day since the beginning of the pandemic.
At first glance, the reason for this discrepancy seems obvious. McDonald's surpassed expectations with strong results in both its top and bottom lines, while Chipotle fell short with slightly lower revenue and same-store sales that missed consensus estimates.
One key factor is McDonald's solid performance in its international business during the quarter. On the other hand, Chipotle, with its limited presence abroad, was unable to capitalize on strong demand from tourists. Additionally, inflationary pressures seemed to have a greater impact on Chipotle compared to McDonald's.
Another aspect worth noting is the difference in flexibility between the two companies. Chipotle had an excellent first quarter, and its shares have surged over 37% this year. This outperforms the S&P 500 and even surpasses McDonald's, pushing Chipotle's forward price-to-earnings ratio well beyond 40 times.
In contrast, McDonald's displayed more caution during the spring quarter, leading to a more modest increase in stock value. As a result, its shares are currently trading at a forward earnings ratio of less than 25 times.
It is undeniable that Chipotle's quarter has left some bullish investors disappointed. However, despite the setback, there may still be a compelling reason for investors to buy the stock on this temporary dip.
Is Chipotle a Better Investment Than McDonald's?
Over the past five years, Chipotle's shares have seen an incredible growth of more than 300%, outperforming McDonald's (88%) and the S&P 500 (63%). Despite some volatility in its earnings, Chipotle has managed to recover from market concerns and continue its upward trajectory.
One notable factor is Chipotle's valuation, currently at a discount compared to its historical level. While McDonald's stock is trading slightly above its five-year average, Chipotle's valuation is below 42 times. Additionally, analysts expect Chipotle's long-term earnings growth rate to be 27%, significantly higher than McDonald's rate of less than 9%.
Despite recent adjustments in analysts' estimates, Chipotle is still expected to deliver impressive earnings per share growth of over 33%, accompanied by a nearly 14% rise in revenue. This surpasses the growth expectations for McDonald's, which are 8.4% and 10.5% for top- and bottom-line respectively.
One key advantage that Chipotle possesses is its ability to adjust prices to counterbalance rising costs. Menu price increases implemented in October have proven successful in subsequent quarters. It's clear that Chipotle has tapped into a market of value-conscious consumers who prioritize their budgets.
Chipotle caters to slightly higher-income earners who prefer it over more expensive sit-down restaurants, while McDonald's has noticed a strain on spending power among its lower-income customers.
This does not mean that McDonald's is not deserving of enthusiasm for its latest quarter results, nor does it make investing in the company a foolish choice. However, Chipotle needs to demonstrate that its sales and traffic momentum from the second quarter was not just a brief blip. Investors should prepare themselves for some potential challenges.
In conclusion, considering Chipotle as an investment opportunity while it faces some temporary setbacks seems reasonable, just as rational as ordering an extra serving of robot-prepared guacamole.
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