Burger King: Have It Your Way

Jun. 1.09 | About: Burger King (BKC)

Burger King Holdings (NYSE:BKC) May 29, 2009: $16.56
52-week range: $15.85 (May 29, 2009) - $30.95 (Aug. 11, 2008)
Dividend = $0.625 quarterly = 1.51% current yield

Burger King is second to McDonald's (NYSE:MCD) in its category with over $2.5 billion in annual sales. BKC shares touched a new multi-year low intra-day last Friday. The closing quote of $16.56 was still slightly below its May 2006 IPO price of $17/share and well under the secondary offering price of $22 /share in February 2007. Fundamentals have improved even as the share price has gotten cheaper.

Morningstar likes Burger King Holdings. They give BKC their highest, 5-Star ranking and assign a 'Fair Value' of $24 per share.

Here are the post-IPO per share numbers as reported by Value Line:

[FYs end Jun. 30 of the same year] FY 2009 includes Q4 estimates.

If the fourth quarter estimates prove accurate, BKC is trading for only about 12x this FY’s and 10.7x next year’s expectations. Those are the lowest multiples since coming public.

Burger King’s price/book value is now also the lowest ever.

BKC’s current yield of 1.51% isn’t great but it handily beats most of today’s money market and short-term treasury rates.

While nobody is expecting Whopper-like growth in the near term, Zacks sees $1.55 for the fiscal year ending in June 2010. It doesn’t seem a stretch to think BKC shares can rebound a bit by next January.

Here’s my combination play on Burger King for those next 7.5 months:

If BKC shares rise to at least $17.50 or + 5.7% by Jan. 16, 2010:

The $17.50 calls will be exercised.
You will sell your shares for $17,500.
The $17.50 puts will expire worthless- a good thing for you as a seller.
You will have collected $187 in dividends.
You will have no further option obligations.

You will end up with no shares and $17,687 cash for your
original cash outlay of $11,860.

That’s a best-case scenario profit of $5,827 / 11,860 for a cash-on-cash total return of 49%
(achieved on shares that only needed to move up by 5.7% from the trade inception price).

What’s the risk?

Should BKC remain below $17.50 on Jan. 16, 2010:

The $17.50 calls will expire worthless.
The $17.50 puts will be exercised.
You will be forced to buy an additional 1000 BKC shares and
to lay out another $17,500 cash.
You will have collected $187 in dividends.
You will have no further option obligations.

You will end up with 2000 shares of BKC and $187 cash.

What’s the break-even on the whole trade?

On the first 1000 shares it’s the $16.56 purchase price less the $1.70 /share call premium = $14.86 /share.

On the ‘put’ shares it’s the $17.50 strike price less the $3.00 /share put premium = $14.50 /share.

Your break-even is thus $14.68 /share (ignoring dividends).

BKC shares could drop by as much as $1.88 or (-11.3%) without causing a loss on this trade. (Again ignoring dividends).

Burger King shares have not traded as low as that $14.68 break-even price since August of 2006 when sales, cash flow, earnings and book value were all just a fraction of what they are today.

Disclosure: Author is long BKC shares and short BKC options.