McDonald’s Corporation (MCD), Starbucks Corporation (SBUX): Should this Stock be on Your Menu?

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McDonald’s Corporation (NYSE:MCD) is an iconic American brand with a long and successful history of serving both customers and shareholders alike. After a bumpy 2012 performance, McDonald’s has returned to solid footing and its stock should be on the menu for any investor hungry for value and yield.

More than just hamburgers

McDonalds (MCD)Over the years McDonald’s Corporation (NYSE:MCD) has expanded from its humble beginnings.  The company has launched a number of successful product initiatives.  Recently the company points investors to the popularity of its McCafe brand of coffees and breakfast items.  McDonald’s has opened 1,500 McCafe locations in its European segment alone.  The chain’s revenue increasingly depends on its much higher-margin coffee, and it plans to continue expanding the McCafe brand to take advantage of consumers who want coffee at reasonable prices.

Drinks like coffee and fruit beverages have been a boon for McDonald’s Corporation (NYSE:MCD), as these products generally provide higher margins than food.  Coffee and fruit-based drinks now account for 10% of the company's revenue, with coffee making up around 4% of revenue, double its percentage from five years ago. In fact, drinks sold though the McCafe brand alone add over $125,000 in annual sales per restaurant.

Starbucks Corporation (NASDAQ:SBUX) needs to take McDonald’s foray into coffee and specialty drinks seriously.  The fast-food chain modeled its drink lineup from Starbucks, which should start to see McDonald’s as a major rival.  In fact, many of McDonald’s coffee offerings look and taste a lot like menu items found at Starbucks.

Starbucks Corporation (NASDAQ:SBUX) is a successful business with a valuable brand, but there’s little doubt that McDonald’s Corporation (NYSE:MCD) is encroaching on its turf and is there to stay.  U.S. consumers are tightening their belts, especially in the current environment of painfully slow recovery in employment and wage growth.  It’s certainly plausible that McDonald’s will make further market share gains by selling $1 coffee, as opposed to the much more richly priced products at Starbucks.

To be fair, Starbucks Corporation (NASDAQ:SBUX) reported record first-quarter results, with global comparable store sales growth of 6% year over year.  Earnings per share grew 14% to a record $0.57 from $0.50 the same period a year ago.  Furthermore, the company has aggressive growth expectations for 2013.  Starbucks plans to open 1,300 new stores globally this year, representing 22% growth versus 2012.

Starbucks Corporation (NASDAQ:SBUX) is very profitable, but trades for 30 times its trailing twelve-month earnings per share.  Clearly, the market has set high expectations for Starbucks going forward.  The company could absolutely meet or exceed these expectations, but investors would be wise to not entirely dismiss the competitive threat posed by McDonald's (and other restaurants) that sell coffee at much cheaper prices.

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