Burger King: Still Second Fiddle

Apr.15.09 | About: Burger King (BKC)

Burger King (BKC) the world’s second largest hamburger chain reported some disappointing earnings guidance prior to the market opening on Wednesday. Shares are off more than 14% in morning trading as it traders and investors digested the announcement, which comes weeks before the restaurateur officially reports fiscal third quarter results. Perhaps most surprising was the fact that traffic to Burger King restaurants is down considerably, which is certainly weighing on shares at the moment. ockham historical valuation BKC

“Also, breaking news from Burger King releasing preliminary third quarter results. Saying 33 to 35 cents a share is what they are going to the estimate had been 33 cents a share for Burger King. Revenue 1% higher than it was this time a year ago. That is a little below forecast and the company talking about its earnings being hurt by lower than expected margins. Interesting. We’ll watch Burger King stock $22.68 at Tuesday’s close, down 16.5% in the trading session. Also McDonald’s is on the wire as Barclays came out with some price target news which was raised at Burger King, but they cut McDonald’s (NYSE:MCD) price target. They see up side to $65 bucks a share. Previous target was $69. Still overweight rating on McDonald’s.” Fox Business Network’s Money for Breakfast 4/15/2009

The market is reacting very negatively to the news out of BKC even as the profit guidance was a little better than expected. However, for Burger King the comparison to McDonald’s (MCD) is unavoidable and in this respect Burger King has not measured up well recently. McDonald’s has generally experienced impressive same store sales gains as the economy has worsened. Furthermore, Burger King’s largest franchisee had reported same store sales up 5% through February of this year. This was factored into analysts expectations for March same store sales growth for Burger King, as a survey by FactSet Estimates shows that expectations were for system wide same store sales to be up 3.4%. However, the results were far less than that with world wide gains of only 1% and in U.S. and Canada only slightly better at 1.6%. More than anything, this is the surprise that is putting pressure on shares Wednesday.

Burger King, at least in March, did not see the growth that analysts were hoping to see and that along with margin compression is leading to a rough trading day. At Ockham, we just initiated coverage on Burger King last week with a Fairly Valued stance. Price-to-sales and price-to cash flow are still comfortably within their historically normal ranges. However, if BKC drops into the mid $18’s, our methodology will begin to look more favorably on the shares.

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