Fast food restaurant operator Burger King Worldwide (NYSE: BKW) has spent the past few years working through a corporate overhaul that has included a store format redesign, menu changes, and the sale of nearly all of its company-owned stores. The changes, especially the sale of company-owned stores, has turned Burger King Worldwide into a high margin enterprise, which has not surprisingly attracted some big moneyed investors, including billionaire Bill Ackman and his Pershing Square hedge fund. On the downside, Burger King Worldwide is still being challenged by relatively weak sales in its large North American market, anecdotally due to a perception of lower food quality vis-à-vis its fast casual competitors, a trend that has also led to weak sales for McDonald's (NYSE: MCD). So, with mixed crosswinds, is the company a good bet at current prices?
What's the value?
Burger King Worldwide is one of the major players in the global fast food business, operating a footprint of more than 13,000 stores in 97 countries. As previously mentioned, the company has been going through a comprehensive business overhaul that is focused on improving its image and food quality, with the ultimate goal of increasing profitability and shareholder value.
Good news, bad news
The good news for investors is that the overhaul seems to be working, evidenced by an increase in system-wide sales and operating profitability in its latest fiscal year. During the period, Burger King Worldwide benefited from its second straight year of overall comparable store sales growth, up 0.5%, thanks to strong growth in its international operations, as well as from sales momentum in newer products, including Satisfries and the Angry Whopper. More importantly, the higher profitability led to strong operating cash flow, funding further menu development and greater store expansion in international growth areas.
The bad news for investors is that Burger King Worldwide continues to struggle in its battle for customers in the North America market, a segment that accounts for more than half of its total revenues. While the company's comparable store sales growth in North America has turned positive in FY2014, up 0.3%, the absolute level of growth would indicate that acquiring new customers in the fast food burger business is currently an uphill battle.
Of course, Burger King Worldwide isn't alone in its struggle to manufacture sales growth in North America, as McDonald's has had a similar experience lately. Like Burger King Worldwide, McDonald's posted negative comparable store sales growth in its U.S. segment during its latest fiscal year, down 0.2%, a performance that has not improved in FY2014. Worse, the current media frenzy surrounding tainted product supply in the company's China operation will undoubtedly not do much to help McDonald's image and sales growth trajectory.
A better way to go
Burger King Worldwide has certainly upgraded its profitability profile over the past few years, which has led to positive stock price appreciation, including a more than 25% gain in 2014. However, the company seems a bit pricey with a P/E multiple of roughly 36, given that its adjusted operating income has only gained 11.4% in FY2014, much of which seems to have been generated by squeezing cost savings out of corporate overhead. As such, investors might find more favorable returns with a better positioned player in the burger business, like Red Robin Gourmet Burgers (NASDAQ: RRGB).
The company has taken advantage of consumers' anecdotal penchant for a better burger, a trend that has allowed it to generate consistent top-line growth over the past few years, including an 11.1% increase in its latest fiscal quarter. In addition, unlike its fast food competitors, Red Robin has been able to complement its burger sales with a growing assortment of higher-margin sales of alcoholic beverages, which has helped it to maintain an average store profit margin above 20%. The net result for Red Robin has been solid cash flow generation, fueling a further expansion of its franchise around the country, including entry into new markets like Orlando, Florida.
The bottom line
Burger King Worldwide has been a solid profit growth story over the past few years, thanks to its decision to sell off all but a de minimis amount of company-owned stores and its willingness to shake up its menu. That being said, with operating profitability sitting near all-time highs, 68.2% in FY2014, future profit gains for Burger King Worldwide will likely have to come from top-line growth, a source of uncertainty given a difficult operating environment in North America. As such, investors should probably let Burger King Worldwide's stock price cool off a bit prior to contemplating a position.
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