Unless you’ve been living under a rock, you should know by now that Restaurant Brands International (NYSE: QSR) is the name under which Burger King and Tim Horton’s have been consolidated. McDonald’s (NYSE: MCD) needs to take a page out of this playbook. Restaurant Brands’ CEO could offer McDonald’s a few lessons on how to turn around a chain.
While McDonald’s flails away and can’t seem to get out of its own way, Burger King has been soaring. Don’t tell me that a legendary burger chain cannot innovate, because analysts believe the amazing 6.7% comps coming out of Burger King are due to its new “chicken fries.”
Yes, chicken fries. I guess when 100 million of the darn things get sold in just one month, it’s a signal that things are going great … and that stodgy old French fries can be upgraded.
Look at the Comps
How impressive is this? To give you some perspective, most legacy restaurant chains are thrilled if they can manage 3% same-store sales increases. Tim Horton’s comps were up 5.5%, as well.
As Monday’s Restaurant Brands earnings report revealed, last year in the same quarter Tim Horton’s had 2.8% comps and Burger King had a woeful 0.9%.
New products can work.
Meanwhile, revenues across the spectrum were outstanding, with Tim Horton’s revenues up 8.4% and Burger King up 11.6%, from last year’s 6.5% and 5.4% respectively. But let’s be clear that these are in constant currency. The strong dollar actually took Tim Horton revenue down from $1.702 billion to $1.657 billion.
Burger King rose from $4.293 billion to $4.406 billion, or about 3% when factoring in currency effects.
The Role of Franchises
Tim Horton’s has a robust franchise base whose revenues and royalties account for 30% of the company’s revenues. Adjusted EBITDA for Tim’s was $234.3 million. I love the EBITDA number here, as it is up 9% year over year. Its gross margins are about 30%.
This fact is largely overlooked: Burger King is almost exclusively franchised. This removes a lot of risk from the parent because it depends so much on the royalty base. $278 million in revenue translated to $193 million in adjusted EBITDA. As you can see, the margins here are more than 70%.
During the quarter, the parent refinanced some debt, which took its cash balance down from $1 billion to $700 million, thereby reducing debt to $8.9 billion.
That’s a lot of debt, and it saps income by almost $500 million per year. That’s the one bugaboo about the company that I wish wasn’t there. It’s such a huge drag on the bottom line, although arguably necessary because of the turnaround and aggressive continued expansion of both brands.
So, at $43 per share, is Restaurant Brands a buy, sell, or hold? Right now, it’s expensive on just about any metric. If you want to play the P/E ratio game, then the stock is at 40 times fiscal year 2015 earnings, which is insane.
You can argue that its’ really the EV-to-EBITDA ratio that’s more applicable, but at 44, that’s an insane valuation as well. It’s four times higher than virtually every other restaurant chains. The exception is Chipotle Mexican Grill (NYSE: CMG), which trades at 22.
Avoid the risk. Sell for now.
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