Restaurants: Buy the Dip?

A deep look at top restaurant companies like McDonald's and Starbucks

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Jun 21, 2018
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Despite recent price drops, restaurant companies like McDonald’s Corp. (MCD, Financial), Starbucks Corp. (SBUX, Financial) and Yum Brands Inc. (YUM, Financial) still have profit margins that outperform the industry median.

Starbucks tumbles further on management’s “strategic priorities” announcement

Seattle-based Starbucks closed at $50.45 on Thursday, down 3.40% from its previous close following Wednesday’s 9% nosedive on CEO Kevin Johnson’s announcement that the company will close 150 “underperforming company-owned stores” during fiscal 2019, approximately three times greater than the historical annual average of 50.

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Other restaurant companies closed lower on Thursday:

  • McDonald’s closed at $160.16, down 1.48%
  • Yum Brands closed at $79.82, down 1.29%

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Company still has good profit margins relative to industry

Despite the lower prices, Starbucks still has a profitability rank of 7 as the company’s margins and returns outperform over 90% of global competitors. GuruFocus lists five positive investing signs for the coffee retailer, including expanding operating margins, consistent revenue growth and a dividend yield near a 10-year high of 2.29%.

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Table 1 lists various valuation and quality metrics for top restaurant companies according to the industry overview pages.

Company Price-sales ratio Gross margin Net margin Operating margin ROA
McDonald's Corp. (MCD, Financial) 5.82 48.10% 24.02% 38.04% 16.22%
Starbucks Corp. (SBUX, Financial) 3.09 59.00% 18.71% 16.65% 27.72%
Yum Brands Inc. (YUM, Financial) 4.77 54.84% 25.60% 28.96% 28.33%
Yum China Holdings Inc. (YUMC, Financial) 2.72 79.45% 10.35% 64.70% 17.18%
Darden Restaurants Inc. (DRI, Financial) 1.69 30.39% 6.92% 8.96% 10.41%
Chipotle Mexican Grill Inc. (CMG, Financial) 2.9 17.36% 4.16% 6.69% 9.17%
Restaurants industry median 1.1 23.59% 3.12% 6.57% 4.69%

Table 1

According to Table 1, McDonald’s and Starbucks have gross margins that imply durable competitive advantages, a key criterion of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio)’s investing strategy. The Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) co-managers also look for strong operating margin growth and high predictability of earnings.

Premium members can view the list of Buffett-Munger companies and other key value screeners, including the historical low price-sales and low price-book screeners.

Disclosure: No positions.