The Wendy’s Company (NASDAQ:WEN) and McDonald’s Corporation (NYSE:MCD) are the two most active stocks in the Restaurants industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect WEN to grow earnings at a 16.65% annual rate over the next 5 years. Comparatively, MCD is expected to grow at a 10.20% annual rate. All else equal, WEN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. The Wendy’s Company (WEN) has an EBITDA margin of 31.57%, compared to an EBITDA margin of 38.75% for McDonald’s Corporation (MCD). This suggests that MCD underlying business is more profitable. WEN’s ROI is 8.00% while MCD has a ROI of 23.40%. The interpretation is that MCD’s business generates a higher return on investment than WEN’s.
Cash is king when it comes to investing. WEN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.19. Comparatively, MCD’s free cash flow per share was +0.10. On a percent-of-sales basis, WEN’s free cash flow was 3.23% while MCD converted 0.33% of its revenues into cash flow. This means that, for a given level of sales, WEN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. WEN has a current ratio of 1.90 compared to 2.10 for MCD. This means that MCD can more easily cover its most immediate liabilities over the next twelve months.
WEN trades at a forward P/E of 25.25, a P/B of 7.22, and a P/S of 2.72, compared to a forward P/E of 22.94, and a P/S of 5.36 for MCD. WEN is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. WEN is currently priced at a -13.17% to its one-year price target of $16.55. Comparatively, MCD is -6.65% relative to its price target of $171.08. This suggests that WEN is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for WEN and 2.10 for MCD, which implies that analysts are more bullish on the outlook for WEN.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. WEN has a beta of 0.99 and MCD’s beta is 0.69. MCD’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. WEN has a short ratio of 4.71 compared to a short interest of 2.03 for MCD. This implies that the market is currently less bearish on the outlook for MCD.
McDonald’s Corporation (NYSE:MCD) beats The Wendy’s Company (NASDAQ:WEN) on a total of 7 of the 12 factors compared between the two stocks. MCD is growing fastly, generates a higher return on investment and higher liquidity. Finally, MCD has better sentiment signals based on short interest.