Restaurant Brands (QSR) is making itself into a quick service powerhouse by completing large acquisitions. The 2017 acquisition of Popeye’s has taken QSR to the next level in terms of size and investors were rewarded as a result. But since the stock topped out in October, it has been tough sledding for QSR. The Q4 report was very well received and the stock looks fairly cheap relative to its growth potential, but is it cheap enough here?
Lots of resistance overhead
One note I’ll make on the chart is that since the downtrend began in October, QSR has had a difficult time rallying past the 50DMA. That’s a problem because the 50DMA is still very negatively sloped, and until QSR can clear it, the trend is down. The 200DMA is also flattening out and barring a rally fairly soon, that will likely become resistance as well. The bulls have their work cut out for them because the stock is already in a downtrend and it hasn’t been able to break out just yet, so that is certainly something worth watching going forward as the 50DMA in particular has been so predictable in terms of resistance.
Growth numbers remain strong
Total revenue was up just over 10% for the full year as some fairly weak comp sales numbers were offset by unit count growth. Comps came in at -10 bps for Tim Hortons, +3.1% for Burger King and -1.5% for Popeye’s. Burger King has been hot for a while and that strength is continuing due to its nearly constant menu innovation, which is doing its job in terms of driving traffic. Popeye’s had comp sales issues as a standalone public company and it appears QSR has been unable to mend those problems just yet. Tim Hortons has also had a difficult time with traffic lately. These results certainly aren’t disastrous by any means, but they aren’t all that great, either, because it means QSR has to rely on unit growth to grow the top line.
Unit growth was 2.9% at TH, 6.5% at BK and 6.1% at PK. Those are some reasonably large numbers and they certainly look better than the comp numbers we just looked at. This is mostly what drove QSR’s revenue higher in 2017 and that will likely be the case in 2018 as well. Analysts have revenue growth decelerating to 8% for 2018 which seems reasonable given the struggles with comps that TH and PK have had, but accounting for continued unit growth as well. I’d really prefer it if QSR had some sort of meaningful comp sales growth, but that isn’t something I’m willing to bet on given the track record of TH and PK of late.
Perhaps more importantly, adjusted EBITDA – which is QSR’s preferred measure of margin – rose by more than 8% in dollar terms in 2017. QSR cited higher revenue and prudent spending management in leveraging down SG&A costs to boost EBITDA, and indeed, that is the entire point of becoming a conglomerate of brands. I suspect we’ll see some additional leverage on spending in 2018, but the gains won’t be enormous as the PK acquisition is fully integrated at this point; the low-hanging fruit has been picked. In addition, QSR’s adjusted EBITDA is already 47% of revenue at this point, so one wonders just how high it can go. Other franchise-heavy fast food businesses have certainly crested 50% in terms of EBITDA, so I’m not suggesting QSR’s margin growth has ended, but when the numbers are this big, growth can be challenging to come by. In addition, most of the cost savings from integrating PK have been realized, leaving incremental growth from here a bit more challenging.
Analysts are very bullish
Analysts are expecting 34% EPS growth this year, and as I mentioned, only about 8% of that is going to come from revenue growth. That implies that QSR’s margins will have to rise significantly in order to meet that level of growth. QSR’s share count has actually risen YoY so that certainly isn’t helping, and it means margins have to do a bunch of work to keep QSR’s EPS growth on track. Tax reform will certainly help for this year, but the key for QSR going forward is what margins look like; if margin growth accelerates, the stock will shoot higher. If it doesn’t, we may see QSR miss estimates.
As wishy-washy as I sound on QSR here, I actually think the stock is cheap. Its longer-term EPS growth rate is in the high teens, meaning that at its current multiple of 21, its PEG is just over 1. That is cheap for a company with so much unit growth ahead of it and a favorable margin profile that is still expanding. I don’t know if QSR can do 34% EPS growth this year, but I’m not counting it out, either. In addition, I’m not sure it matters if QSR hits that number because the stock isn’t pricing it in. Having a PEG of just over 1 makes QSR qualify for the growth-at-a-reasonable-price tag for me and for that reason, I think it is a buy after earnings.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in QSR over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.