Burger King: Having it Their Way

Burger King (BKC) is midway through a revitalizing transition and appears to have strong momentum. After falling miserably behind competitors in the late 1990’s the company was taken private and given new management and a new growth strategy. The stock was launched in early 2006 and quickly saw its shares fall from the initial trading range. But after hitting a low in August, the stock began a run that more than doubled the value of the company. Since the beginning of this year, the stock has pulled back on concerns of a weakening consumer and in conjunction with broad markdowns in equity indices. The intrinsic value, however, appears to be building and will likely drive the stock higher in future months.

While largely considered an American phenomenon, the burger industry has expanded to cover a large geographic compilation of countries. While Burger King’s largest rival McDonalds (MCD) has roughly 16,000 locations outside the US, BKC has built its international store count to 4,000. This leaves ample room to continue to expand simply by mimicking its competitor without running out of new potential locations.

At the same time, Burger King has been successful on the home front in making its restaurants more attractive to customers. An initiative to remodel a number of aging stores has been very successful in re-invigorating sales levels at each store and so the company is planning to leverage this success on a growing number of other eligible locations. Corporate strategists have also mandated new store hours requiring all franchised stores to stay open later into the night. The addition of a breakfast menu has added revenue during times that locations had previously sat idle. The new initiatives have produced impressive increases in top line revenues.

As revenues increase from International expansion and rising same store sales domestically, management is also hard at work to address cost issues and thus allow more of the incremental sales dollars fall to the bottom line. A new broiler model has been adopted and will be in all stores by 2010. The appliance consumes significantly less power, thus cutting down on one of the larger fixed costs associated with each store. The added leverage has the company looking for long term revenue growth of 6-7%, EBITDA growth of 10-12% and net income growth of roughly 20%. This is an ambitious growth plan but could add significantly to shareholder value.

Speaking of shareholders, it should be noted that private equity firms still own 44% of the total outstanding shares. Bearish traders often point to the overhang as investors likely have some reservations about the possibility of these shares being dumped on the market. Furthermore, the company was loaded down with debt when it was brought back to market and has only recently gotten the debt to a level where it is much more manageable. Interest expense is a significant cost, but it appears now that interest expense is becoming smaller as a percentage of revenue, the company is looking for other ways to spend its robust free cash flow. While debt repayment will still be a top priority, management is also exploring ways to use that cash in additional capacities. The board has authorized $100m for share repurchases, and a good bit of capital will be spent on the remodeling of older stores. Both uses of cash should add to the value for existing shareholders.

While timing in this market remains the key, Burger King likely deserves a spot on the roster as a solid potential long position. The cash flow is strong and while high-end restaurants are seeing sales drop off, consumers are likely trading down to lower priced fast food chains. The company has some pricing power in its pocket that it has decided not to use at this time until the consumer picture becomes a bit more clear. Management has made skillful decisions to turn the company from a floundering mess into a chain to contend with. I have confidence that there will be some good trading opportunities in Burger King this year and will keep my sights on the pattern it is developing.

Comments

[markdauvid]

three cheers for burger king they are coming out with new burger products. i would like to see them come out with a cheddar whopper and a swiss cheese whopper. i suggested using those cheeses to big mac but they told me they dont accept customer suggestions but they would save it electronically. maybe bk will try them. i hope so.

[Zachary Scheidt]

sounds good to me!

[vicky]

three cheers to burger king indeed, still profiting off the slavery and exploitation of tomato pickers in florida.

more like PROFITEER KING, or EXPLOITATION KING.

ciw-online.org sfalliance.org


POWER TO THE PEOPLE
HOLD CORPORATE SCUM ACCOUNTABLE FOR HUMAN RIGHTS ABUSES

[jose nadien]

down with the king, up with a fair food nation,

the demands are simple, burger king profits, we work at their restaurants and in the fields to provide the goods for them,

burger king has an opportunity to make a difference and to exercise corporate responsibility,

one penny more, a code of ethics, worker participation


enough of this corporate outrage, power to the people


long live the coalition of immokalee workers

[Sharon L.]

Shame on you, Burger King, for refusing to work with the Coalition of Immokalee Workers. Shame on you, John Chidsey, for perpetrating the lie that farmworkers are not working in sweatshop conditions. I read that Florida was called ground zero for modern day slavery but the US Dept of Labor -- the "King" surely cannot argue with the facts!

see ciw-online.org for the real story

[Paula C. - OH]

I wanted to comment on BK's commerical I just watched tonight.......SICKOS!!!!! How disgusting, a tongue "hard-on"! I have kids and I change the channel when it comes on. My 10 yr. old just had the "talk" @ school and commented on it. Pretty sad when a parent has to explain what is going on with the man's tongue! Burger King needs to remember that kids watch commericals. I don't even want to take them out to eat @ Burger King anymore in fear of having to explain again!