Fast foods are popular due to their relative convenience. Despite economic volatilities, they have become a top choice for the majority of the American population. Given their increased demand and defensive nature, let’s explore why fast-food stocks McDonald's Corporation (MCD) and Chipotle Mexican Grill, Inc. (CMG) could be solid watchlist additions this year.
Robust job hiring and resilient spending despite high prices have raised the odds of progressive interest rate hikes by the Federal Reserve, resulting in experts anticipating a recession in the upcoming months.
Fast foods, often touted as “recession-proof,” have become important for price-conscious diners amid soaring grocery and restaurant prices. On average, Americans spend more than $1,200 on fast food annually, $100 monthly, $13.15 weekly, or $3.39 daily. Additionally, an average American household reportedly spends 10% of its daily income, up to roughly $110 billion annually.
Moreover, due to its focus on speed, affordability, and convenience, the global fast-food market is expected to grow above a CAGR of 4.6%. It is anticipated to reach over $998 billion by 2028.
Since the fast food sector fares better than the rest of the industry during economic uncertainty and downturns, fast food stocks tend to be great defensive pickups amid recessionary concerns. Therefore, quality fast-food stocks MCD and CMG could be added to your watchlist for 2023.
McDonald's Corporation (MCD)
MCD operates and franchises its restaurants in the United States and internationally. The company’s segments include the United States (U.S.); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).
MCD’s President and Chief Executive Officer, Chris Kempczinski, said, “While we expect short-term inflationary pressures to continue in 2023, we remain highly confident in Accelerating the Arches, which now includes a greater emphasis on new restaurant openings. The recently announced Accelerating the Organization initiative will complement this strategy to enable the McDonald’s System to be faster, more innovative, and more efficient.”
On February 2, MCD declared a quarterly dividend of $1.52 per share of common stock, payable to the shareholders on March 15, 2023. This reflects the shareholder return ability of the company.
MCD’s trailing 12-month gross profit margin of 56.97% is 61.4% higher than the 35.30% industry average. Its trailing-12-month EBITDA margin of 52.69% is 367.3% higher than the 11.28% industry average.
MCD’s revenues from franchised restaurants increased 7.5% year-over-year to $3.65 billion in the fourth quarter that ended December 31, 2022. Its operating income grew 7.7% from the prior-year period to $2.58 billion. Moreover, the company’s net income and earnings per share increased 16.1% and 18.8% year-over-year to $1.90 billion and $2.59, respectively.
Street expects MCD’s EPS to grow 4.4% year-over-year to $2.66 in the fiscal second quarter ending June 2023. Also, its revenue for the same quarter is expected to increase by 6.5% year-over-year to $6.09 billion. It surpassed EPS estimates in each of the four trailing quarters.
Over the past year, the stock has gained 6.1%, closing the last trading session at $264.78. Moreover, the stock has gained 3% over the past six months.
MCD’s POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MCD has an A grade for Quality and a B for Stability and Sentiment. Within the B-rated Restaurants industry, it is ranked #10 out of 45 stocks.
In addition to the POWR Ratings stated above, we have also rated MCD for Growth, Value, and Momentum. Click here to get all MCD ratings.
Chipotle Mexican Grill, Inc. (CMG)
CMG owns and runs Chipotle Mexican Grill locations, providing a diverse menu of burritos, burrito bowls, quesadillas, tacos, and salads. As of December 31, 2022, CMG had nearly 3,200 restaurants in the United States, Canada, the United Kingdom, France, and Germany. It is the only restaurant company of its size that owns and operates all its restaurants.
On February 27, 2023, CMG announced the introduction of the new Fajita Quesadilla on March 2, 2023, as a digital-only menu item on the Chipotle app and Chipotle.com. For the first time, guests would be able to get their favorite Chipotle Quesadillas with Monterey Jack cheese, their protein of choice, and fresh fajita veggies via Chipotle's digital ordering channels. This might boost the company’s revenues.
On February 15, CMG announced its new restaurant opening called Farmesa at Third Street Promenade in Santa Monica, California.
Nate Lawton, Vice President of New Ventures at Chipotle, said, “Launching Farmesa in the Kitchen United Mix food hall in Santa Monica and partnering with third-party partners for pickup or delivery will allow us to reach a large number of consumers, learn quickly, and evolve our concept and menu so that we can deliver on our goals before expanding.”
CMG’s trailing 12-month net income margin of 10.41% is 117.1% higher than the 4.78% industry average. Its trailing-12-month ROCE of 38.54% is 224.6% higher than the 11.88% industry average.
For the fiscal fourth quarter (ended December 31, 2022), CMG’s total revenue increased 11.2% year-over-year to $2.18 billion, and its income from operations grew 87.2% from the year-ago value to $296.33 million. Also, the company’s adjusted net income grew 45.5% year-over-year to $231.39 million, while its adjusted earnings per share came in at $8.29, up 48.6% year-over-year.
The consensus revenue estimate of $2.33 billion for the fiscal first quarter ending March 2023 reflects a growth of 15.5% from the prior-year quarter. Likewise, the consensus EPS estimate of $8.87 for the same quarter indicates a 55.6% year-over-year improvement. Furthermore, CMG surpassed its consensus EPS in all three of the four trailing quarters.
The stock gained 1.22% intraday to close the last trading session at $1,494.75.
CMG’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
CMG also has a B grade for Quality and Growth. Within the same industry, it ranks #14.
Beyond what we’ve stated above, we have also given CMG’s ratings for Stability, Sentiment, Value, and Momentum. Get all CMG ratings here.
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MCD shares were unchanged in premarket trading Tuesday. Year-to-date, MCD has gained 0.47%, versus a 4.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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