Many people analyze a company's prospects in isolation. However, it's useful to compare stocks in the same sector to see which provides a better investment opportunity. To make the determination, you can consider various factors, including a company's prospects and valuation.

Domino's Pizza (DPZ -0.55%) and McDonald's (MCD -0.84%) have become well-recognized companies. But which of these two consumer discretionary stocks deserves your investment over the other one?

Image source: Getty Images.

Domino's Pizza

Domino's Pizza hasn't seen a slowdown due to stressed consumers. The company was founded more than six decades ago and has more than 21,000 locations throughout the world.

And it continues to open new locations in a cost-efficient manner while also minimizing capital expenditures. Domino's primarily franchises its restaurants and collects a portion of the sales. It also sells the franchisees' food, equipment, and supplies.

It's not just the ubiquity that has made it a popular eating destination. Domino's Pizza offers carryout items quickly and at reasonable prices. That's proven to be a good combination with people. It's particularly appealing when people's wallets have become stretched from broad-based inflation.

You can see that in its sales results. While other restaurants have felt the effects of a pinched consumer, Domino's same-store sales (comps) have been increasing. In its fiscal third quarter (ended Sept. 8, 2024), U.S. restaurant comps gained 3% and were up 0.8% internationally.

It's a profitable business, too. Third-quarter operating income, excluding foreign currency exchange effects, was up 5.7%. That might not sound great, but the restaurant industry has been dealing with higher costs for things like food and labor. Management expects at least 8% annual growth from 2026 to 2028.

McDonald's

McDonald's has a large global presence. However, it doesn't own most of its restaurants. Out of the nearly 43,000 locations, about 95% were franchised.

McDonald's became popular worldwide due to its fast service and low prices. However, management got away from its roots and drove away its core, cost-conscious customers at a time when they were dealing with higher prices, including food and rent.

Management tried to rectify the situation by emphasizing value items. But these haven't driven sales growth. In fact, comps have been declining. Fourth-quarter comps dropped 0.4%, and they were down 1.4% in the U.S. Although guest counts were up slightly in domestic restaurants, people spent less as the average check fell.

Profitability has been hurt. The quarterly operating income rose just 3% on a constant-currency basis.

The call

Domino's Pizza has continued to draw customers and drive sales. It's been tough sledding for McDonald's, however. It's trying to win back customers but faces stiff competition.

Domino's stock has gained 9.8% over the last year through Feb. 7. McDonald's shares appreciated just 1.7% during this time.

Domino's trades at a slightly richer valuation. The shares have a price-to-earnings (P/E) ratio of 29 compared to 26 for McDonald's stock. However, Domino's has been performing better than McDonald's and seemingly deserves a higher valuation.

I'd pick Domino's shares right now. That's based on Domino's ability to attract customers and management's ability to execute its Hungry for MORE strategy (more sales, more stores, more profits) through its expanded food offerings, convenience, and value.