Which Stock Is More Mouthwatering? McDonald's vs. Buffalo Wild Wings

By what means does a company a fraction of the size of McDonald's create more value?

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Nov 30, 2015
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In the third quarter, Buffalo Wild Wings (BWLD, Financial) had more than $455.50 million in sales while McDonald's (MCD, Financial) had nearly $6.61 billion in its third quarter. With both of these companies in the same business, which is the better buy?

Contrasting the pair of stocks' economics next to each other shows which company is the most durable. Buffalo Wild Wings, with a $3.05 billion market cap, musters $79.59 per share in sales, although McDonald's, with a $104.89 billion market cap, whips up just $29.88 in sales for every outstanding share. By what means does a company a chunk of the size of McDonald's create more value?

On the cash flow level, Buffalo Wild Wings narrowly outskirts McDonald's with $11.43 per share in cash flow versus $7.33 per share. Nonetheless, McDonald's has Buffalo Wild Wings beat when it comes to current assets per share. McDonald's has $1.56 per share in current assets; Buffalo Wild Wings has a negative net asset value. McDonald's bears an earnings yield of 4.00%; Buffalo Wild Wings only has an earnings yield of 2.9%. Buffalo Wild Wings also slackens in terms of PE ratio at 34.02, in comparison to McDonald's valuation of 24.74 times earnings.

While McDonald's achieves significantly more sales and revenue than Buffalo Wild Wings, McDonald's is also at a detriment in this analysis because of how overpriced its stock is compared to Buffalo Wild Wings. Currently Buffalo Wild Wings has a book value of $34.39 and has a P/B ratio of 4.69; McDonald's has a book value of just $9.05 with a P/B ratio of 12.54. But Buffalo Wild Wings slumps with its 5.21% net profit margin; McDonald's has a net margin of 17.24%.

In 2005 Buffalo Wild Wings had an EPS of 51 cents and is presently earning $3.65 a share, mushrooming at 21.75% compounded annually. McDonald's that year had an EPS of $2.04, while it is now earning $3.49 a share, a 5.52% growth rate compounded annually, which is incomparably lower than Buffalo Wild Wings' growth rate.

Buffalo Wild Wings has a shareholders' equity of $30.11 per share and net earnings of $4.94 per share; McDonald's has shareholders' equity of $14.00 per share and net income of $5.18 per share. From a shareholder's point of view, each share of McDonald's that you own has a coupon attached to it that pays $5.18; Buffalo Wild Wings carries $4.94 in earnings per share. This means that each Buffalo Wild Wings share owned is yielding a 16.4% return on shareholders' equity ($4.94 / $30.11 = 16.4%), of which 100% is withheld by the company. Nevertheless, each share of McDonald's is yielding a 37% return on shareholders' equity ($5.18 / $14 = 37%) and is retaining 83% of its earnings, paying 17% out as a dividend.

On the net income level over the last 10 years, McDonald's has grown its net income 2.24% compounded annually. Buffalo Wild Wings has seen its net income grow 18.67% in the same 10 years. Distinguishing how the two companies are growing their book values, we see Buffalo Wild Wings has seen its book value grow 17.93% compounded annually; McDonald's has seen its book value shrink in the same amount of time.

Debt can also hinder a company or help it prosper. Buffalo Wild Wings has a very low debt level; McDonald's has a strikingly higher debt-to-equity ratio of 2.16. On their balance sheets, McDonald's has $2.58 billion in goodwill while Buffalo Wild Wings has $100 million in goodwill. Buffalo Wild Wings announced a $200 million share buyback initiative six days ago while in 2014 McDonald's announced a $3.2 billion share repurchase program. Does McDonald's size give it the capacity to be so unselfish to its investors?

Buffalo Wild Wings' CEO Sally Smith has been with the company as CEO since 1996. Under Smith the stock price has matured 19.12% compounded annually the past 10 years. McDonald's CEO Steve Easterbrook has been with the company since earlier this year. It's also compelling when you compare the executive compensation at McDonald's versus Buffalo Wild Wings. Smith earned $3,941,774 in 2014; Easterbrook earned almost double, $7.3 million in 2014.

The intrinsic value of both companies is also paramount to inspect. Using Graham's Intrinsic Value formula (with the previous 10 years EPS growth rate), we see that Buffalo Wild Wings has an intrinsic value of $213.58 per share while its shares are currently selling at $160.27, showing the stock is underestimated with a 24.96% margin of safety. Looking at McDonald's intrinsic value using the same formula, we find that its shares are worth just $76.74, showing that its shares are overvalued with no margin of safety.

Comparing the economics of the two companies head to head, we find Buffalo Wild Wings is currently earning a 12.90% return on capital; McDonald's is earning a 23.43% return on its capital. McDonald's also has Buffalo Wild Wings beat in regards to margins, with a gross margin of 39.17% and an operating margin of 30.69%, compared to Buffalo Wild Wings' 22.44% gross margin and 6.33% operating margin.