Best Restaurant Stocks to Buy: Starbucks vs. McDonald's vs. Domino's | SBUX vs. MCD vs. DPZ

SUMMARY

Parkev Tatevosian, CFA, analyzes the current investment prospects of Starbucks, McDonald's, and Domino's amid industry headwinds. The discussion centers on business models, financial performance, and valuation to determine the most attractive stock for long-term investors.

MAIN POINTS

• The restaurant industry faces significant headwinds, leading to share price declines and potential opportunities for long-term investors. [0:00]
• Starbucks operates a higher percentage of company-owned locations compared to McDonald's and Domino's, affecting revenue recognition and business control. [2:00]
• McDonald's leads in operating profit margin, while Domino's has the highest return on invested capital due to its asset-light model. [4:01]
• Starbucks trades at the highest forward price-to-earnings ratio, reflecting its growth prospects and recent leadership changes. [5:01]
• Increased competition from food delivery networks challenges Domino's, while McDonald's benefits from expanded delivery reach, making it the preferred stock pick. [7:02]

DETAILED ANALYSIS

The restaurant sector is currently contending with both near-term and medium-term challenges, resulting in notable declines in the share prices of major companies. This environment has created opportunities for long-term investors to consider fundamentally strong businesses that may be undervalued. Among the three companies compared—Starbucks, McDonald's, and Domino's—each operates with a different mix of franchisee and corporate-owned locations.

Starbucks stands out for having the highest proportion of company-owned stores, which allows for greater control over quality and service but requires more capital investment. In contrast, McDonald's and Domino's rely more heavily on franchisees, enabling faster expansion with less direct capital outlay and potentially stronger local management incentives.

Revenue figures can be misleading when comparing these companies due to differences in accounting for system-wide sales. Starbucks reports higher revenue because it owns more of its stores, while McDonald's system-wide sales are much larger but are mostly recognized by franchisees. Despite this, McDonald's remains the largest in terms of total sales generated across its network.

Starbucks has consistently grown by adding new locations and increasing comparable store sales, though it has faced more challenges since the economic reopening compared to its peers. Domino's, which experienced a surge during the pandemic, has seen some normalization in demand.

Financially, McDonald's boasts the highest operating profit margin at 46%, more than double that of Domino's and significantly above Starbucks, whose margin has declined since 2017. This decline at Starbucks is attributed to management struggles with scaling the business. Domino's excels in return on invested capital, reflecting its asset-light, franchise-driven model that generates high profits relative to the capital invested.

When considering valuation, Starbucks is the most expensive based on forward price-to-earnings, likely due to its growth trajectory and the recent hiring of high-profile CEO Brian Niccol. However, McDonald's offers a balance of profitability, stability, and adaptability, especially as food delivery networks have expanded its reach. Domino's faces heightened competition from these same networks, which has eroded its previous delivery advantage.

Based on these factors, McDonald's emerges as the most attractive investment among the three, with Domino's second and Starbucks third.

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