McDonald's A Better Stock Than Yum Brands? Probably

| About: McDonald's Corporation (MCD)

This article will compare two of the fast food heavyweights, the quintessential and familiar McDonald's (NYSE:MCD) and competitor Yum! Brands (NYSE:YUM), owner of KFC, Taco Bell, and Pizza Hut. In each sector that we hold stocks in, we prefer to own only the best stock, however we naturally acknowledge that both have been, and will continue to be, great investments. Over the last five years MCD and YUM have exhibited very similar performances with YUM slightly outperforming MCD with a 74% vs. 65% return respectively. On the ten year time scale, not including dividends, MCD has the slight edge, returning 423% vs. YUM's 394%. As of today, MCD pays 3.14% and YUM 1.94%.

MCD vs. YUM 5 year returns

All financial data has been taken from MSN Money and Google Finance.

When the gross profit margin of both companies are compared, the first thing that is noted is that over the last five years MCD has hovered around 40% vs. YUM's 28%, a clear edge to MCD. However, as the below chart indicates, YUM has managed to increase its gross profit year-over-year at a more consistent rate than MCD. Especially notable is from 2011-2012, MCD only increased its gross profit by 1.2 % compared to YUM's 8.5%. The increase of the gross profit margins of both companies do not have any distinct trend, however over the last five years, YUM has increased their gross profit margins at an overall higher rate than MCD.

MCD and YUM gross profit margins

Now, when we are looking at the selling, general, and administrative expenses, MCD has a clear edge over YUM. In 2008 MCD spent 27% of gross profit on SGA expenses, declining to 23% in 2012. Compare this to YUM, which spent 51% of gross profit on SGA expenses, declining to 43% in 2012.

When the after tax profit of the both companies is compared, the profit as a percentage of total revenue for MCD is almost twice as high as YUM. For MCD, the profit as a percentage of total revenue has been around 20 % with little deviation over the past five years, whereas YUM has ranged between 10% and 12% over the same time frame. This is a clear edge to MCD, however rather disturbingly in 2011 to 2012, the year-over-year increase in net earnings decreased by almost 1% after almost double digit gains both previous years. Compare this to YUM, which from 2011 to 2012 increased net earnings by 21% and 14% and 8% the previous two years. Determination of which company has the competitive edge in this case is tough, however we would give the edge to MCD due to the increased margin of safety resulting from the 20% profit as a percentage of total revenue, however we will be keeping a close eye on the net earnings of MCD over the coming quarters.

As we shift our discussion to the debt of the two companies, YUM has increased its assets to liabilities ratio from 0.98 to 1.31 over the past 5 years, compared to MCD which has decreased its from 1.89 to 1.76 over the same time period. Interestingly, simultaneous to this YUM has decreased their long term debt, where as MCD has increased theirs. As of 2012 it would take MCD 2.5 years to pay off all long term debt using annual net earnings, compared to YUM which would take only 1.8 years.

Finally, when we compare the retained earnings of the two companies, both have been consistent at increasing them over the past five years, MCD has an annual increase by 7 to 8 percent, whereas YUM has decreased theirs from an astounding 229 % from 2008-2009 to 72, 20, and 11 % in the following years.

It is a tough decision to decide which is better between MCD and YUM, however what has won us over to MCD's side is the larger 20% margin of MCD vs. the 10% for YUM. Other investors will have to make their own decisions when weighting which factors are most important to achieve their financial goals, but for us we prefer MCD.

Disclosure: I am long MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.