Burger King Faces FX Headwinds

| About: Burger King (BKC)

Burger King Holdings Inc. (BKC) expects unfavorable foreign exchange rates, primarily related to the Euro and British Pound, to cut earnings for the fourth quarter of 2010 by 1 to 2 cents per share.

For the full year, currency exchange translation is expected to have a neutral to a slightly negative effect on earnings. This contrasts with the prior guidance of a beneficial currency impact on fourth quarter earnings and a slightly positive currency impact for the fiscal year.

Burger King is a global brand with $15 billion in sales, and 12,115 restaurants in 74 countries. Nearly 90% of Burger King’s restaurants are franchised. Presently, the company is on an expansion mode eyeing big countries, such as Japan, Turkey and Russia. More geographic diversification begets more risk of currency translation.

During the third quarter of 2010, Burger
King derived around 26% company-owned revenues from EMEA/APAC. Germany, Europe’s largest economy, was the sole international market contributing 10% or more of Burger King's total revenues. Burger King has 20% company-owned restaurants in Germany.

Basically, with the German economy as well as other European countries reeling under the Eurozone crisis, management anticipates reduction in earnings. To battle it out, Burger King has been looking to refranchise several of its company-owned restaurants in Germany over the next several quarters.

However, we expect this negative impact of the Euro to be partially offset by currency strength in the Latin America segment, as the Mexican Peso (and others) remains above year-ago levels.

Burger King’s closest competitor McDonalds (NYSE:MCD)
derived around 42% company-owned revenues from Europe and more than 70% company-owned sales from outside U.S. during the first quarter of 2010. However, we expect McDonald's to face less volatility from exchange rate since the company has approximately 45% of its debt denominated in foreign currencies to mitigate the impact of such fluctuations.

Burger King lowered its restaurant growth target from the range of 250 to 300 to 230 to 250 due to the closure of 55 restaurants in Israel in May 2010. The shutdown is also going to hurt Burger King’s fourth quarter results due to reduced royalties. However, management commented that closing down the stores in Israel has no relation with the growth plans in Europe and elsewhere in the Middle East.

Its worldwide net restaurant growth rate is one of the highest in the industry. Last year Burger King opened 360 net new restaurants around the world, over 90% were outside of the U.S.

Shares were down 2.3% at $18.67 on Monday on the New York Stock Exchange. We think the stock provides relative safety and moderate growth while being exposed to faster-growing international markets. We currently have a short term Hold recommendation on Burger King.