McDonald’s Corporation (MCD), Red Robin Gourmet Burgers, Inc. (RRGB): The Burger Wars – Who’s Winning

McDonald’s Corporation (NYSE:MCD), the world’s largest fast food chain, is fighting on several fronts from casual dining restaurant chains and private burger up-and-comers to its usual rivals in the burger biz as the line blurs between the quick serve and fast casual concepts.

A battle for market share

McDonald’s just reported Q1 earnings on April 19. Analyst Michael Kelter of Goldman Sachs mentioned the elephant in the room: “So, your restaurant level margins now appear to be on pace for their third straight year of declines in all three divisions; in the U.S, in Europe, and in Asia.” In answer to Kelter’s question how they plan to change that, CFO Peter Benson stated they were willing to sacrifice a little margin to win what he called, “a battle for market share.”

They may just need an elephant gun to slay that declining margin rogue elephant and keep poachers away from their burger turf. Q1 earnings weren’t much to write home about with global comps and consolidated revenue and operating income all down 1%. Diluted EPS was up 2% to $1.26. The stock itself is barely up 5% over the last year.

The company did announce the debut of their egg white omelet on April 22 and the snack wraps featuring steak and chicken as well as the Fish McBites. As CEO Don Thompson said, it’s the new menu items and the larger sandwiches that are key.

Although the value menu disappointed, McDonald’s Corporation (NYSE:MCD) itself is still quite a value. Its yield is at 3.10% and the P/E is at 18.53. The PEG reflects the slowing growth nonetheless at 2.02. Operating margins are still much high (even if declining) at McDonald’s Corporation (NYSE:MCD). Don’t forget McDonald’s is also a Dividend Aristocrat, having raised the dividend for more than 25 consecutive years.

Throwing down the gauntlet

A company that has thrown down the gauntlet, if not outright slapping McDonald’s Corporation (NYSE:MCD) in the face, is Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) , which has a downsized concept of its 468 sit down restaurants, Burger Works, a food court or airport size fast food counter. The 5,000 square-foot-plus casual dining restaurants are still their mainstay but with beer and wine available and most of the signature Red Robin menu these could really gain traction as the company rolls them out to airports, stadiums, malls, college campuses, etc. nationwide.  They’ve rolled out four in Colorado and one at the Ohio State University campus. Shades of Buffalo Wild Wings (NASDAQ:BWLD)’ strategy!

The prices compare favorably with the more expensive McDonald’s burgers. McDonald’s features the Cheddar Onion Burger on its dollar menu but comparing that to a Burger Works make your own burger is like comparing the cheapest taco on the Taco Bell menu to a Chipotle Mexican Grill, Inc. (NYSE:CMG) hand made burrito with all the fixings. And it seems people are beginning to spend a little more to get better quality if the consistently rising revenues from Panera Bread Co (NASDAQ:PNRA) are any indication.

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) reports earnings on May 13.

Red Robin’s P/E is a pricier (like its burgers) 23.20 but the PEG is lower at 1.44. The forward P/E also comes down to 17.77. Naturally, Red Robin has more direct rivals like Applebee’s and privately owned gourmet burger joints. Analysts expect 13.50% EPS growth next year and 13.77% five year EPS growth for Red Robin. The stock is up 29.27% over the last year.