Chipotle Vs. McDonald’s Stock: Which is the Better Buy?

Chipotle Mexican Grill, Inc. (CMG) and McDonald’s Corporation (MCD) are two of the best-known and most successful restaurant chains in the world.

They are also very popular on Seeking Alpha with over 350,000 subscribers between them.

MCD is a much larger chain with 40,000 restaurants worldwide. CMG, on the other hand, has nearly 3,000 in the United States.

Chipotle was founded in 1993 by Steve Ells in Denver while McDonald’s was founded by Ray Krock in 1961 when he bought out the original McDonald’s brothers.

Although they are both in the restaurant business, they generally appeal to different demographics, but still compete for the same public catering budgets.

Even market analysts cannot decide which one is better because the ratings are virtually identical.

No investment advantage for CMG or MCD that I can see based on analyst ratings. Because the market seems to be split on which stock is more investable at this point, I’ll try to break down the metrics between the two pillars to determine a favorite.

Comparison of CMG and MCD financial measures

Both Chipotle and MCD have had their share of problems over the past few years.

In the case of McDonald’s, this has led to two CEO changes in the past 7 years, accompanied by a significant drop in revenue. For Chipotle, three food poisoning outbreaks since 2015 have set back its growth plans and severely damaged its reputation.

But here’s what the metrics look like now.

Looking at the table above, we can see that McDonald’s (yellow) has a much higher gross margin (line 4) than CMG. One of the reasons for this is the MCD franchise model that indeed has 100% margins. On the other hand, CMG the restaurants are all company owned.

But Chipotle has no debt and therefore a much lower debt to EBITDA ratio.

Besides, the PE ratio of MCD is 1/3 of CMG and MCD the price at FCF (Free Cash Flow) is 1/2 of that of CMG. McDonald’s also pays a dividend and not CMG.

So why are the PE and FCF ratios so different? The reason is CMG’s rapid revenue growth rate over the past 10 years compared to McDonald’s.

Note CMG has grown revenue an average of 13% per year since 2013, compared to McDonald’s -2% per year. However, it is easy to see Chipotle food poisoning outbreaks in 2015, 2018 and 2020 and how that affected revenue.

On the other hand, McDonald’s has seen a decline in revenue almost every year since 2013, except for a sharp increase in 2021, which resulted in a negative average of 2% over this period.

So both chains had their issues, but Chipotle still managed to grow their revenue significantly, while MCD’s revenue has been declining since 2013.

Why is Chipotle’s stock higher than McDonald’s?

As you can see from the financial metrics table above, McDonald’s is a much larger company with an MV (Market Value) over 4 times the size of CMG, $166 billion to $37 billion.

But CMG’s price is higher, from $1,308 to $225, simply because there are far fewer shares outstanding, 28 million for CMG and 743 million for MCD.

Seeking Alpha has a stock price article “The 11 Most Expensive Stocks” which shows that CMG is the 7th highest.

Number 1 is of course the famous Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) at $432,902.00 per share.

Personally, I don’t understand why CMG and other companies don’t split their shares at a level that makes it more affordable for small investors to buy the ubiquitous 100 shares without mortgaging their homes. In CMG’s case, these investors would often be their own customers, giving them another reason to buy their tacos.

Are Chipotle and McDonald’s stocks good long-term investments?

If you look at the 10-year price of the two stocks, you can see that CMG had the better performance, but not by much. The current CMG fading (blue line) is likely the result of recent food poisoning news, just like in 2015.

When you add MCD’s dividends over the same period, there really isn’t much difference.

And if we compare the two with the generic S&P 500 represented by SPY (purple line), they look like three pigs in one shot – not enough difference over 10 years to make an investment decision based on long-term results.

So the answer to whether MCD or CMG are good long-term investments is yes, but so is the S&P 500 and it’s much less volatile.

Are CMG or MCD stocks a better buy?

As we can see from this analysis, CMG appears to be the more dynamic of the two stocks. But it looks like he can’t help but step on himself as the third report of food poisoning grabs headlines.

When do investors say “never again” when it comes to CMG?

As for MCD, its iconic brand should generate value over time.

According to this Top 10 Brands chart, MCD’s market value is almost entirely covered by brand value alone.

And of course, MCD’s ever-increasing dividend makes it a “Dividend Aristocrat”, meaning a stock that has increased its dividend every year for at least 25 years.

Based on the evidence presented, I rate McDonald’s as a buy and CMG as a sell.