Restaurant Brands International: A Great Business Facing Short-Term Challenges

Summary

• Burger King and Popeye growing at attractive levels. The plan to reignite the growth of Tim Hortons sounds promising.
• Leverage looks high at 4.7x but it is manageable for this type of businesses.
• The refinancing efforts in the last two quarters will save 50 million annually on interest expense.
• Short term negative headwinds due to the coronavirus, growth of Tim Hortons and the competition in the burger space.
• I recommend buying the stock offering a 16% upside to the $78/share target price while offering a 3% dividend yield.

Source: Financial Post

Since our last article on Restaurant Brands International (NYSE:QSR), the stock is up 4%. I think the main drag is Tim Hortons (“TH”). However, during the last earnings call, management detailed a plan to reignite the growth in TH. In this article, I will go over that plan and the performance of Burger King (“BK”) and Popeye (“PLK”). Finally, I will go over the valuation.

Source: TipRanks

Reigniting the growth of Tim Hortons

The system-wide growth of TH shrunk 2.9% in the final quarter of 2019 while BK’s grew 8.4% and PLK’s grew a whopping 42%. This triggered management during the last earnings call to announce a plan to restart growth in TH. Even before the announcement, it was apparent that some changes were coming as the CEO of TH stepped down at the end of 2019.

Some of the changes coming are using better bread, improvement in the coffee brewing process, launching products more in line with the brand, digitalizing the menus in the drive-through, focusing on the loyalty program and preparing to phase 2 of that loyalty program.

Over the next 5 years, QSR will deploy 100 million CAD in digitalizing the drive-through menus. QSR expects that the savings in printing the menus and the labor needed to change the menus in the drive-throughs will offset the cost of the digital menus.

Source: Company 10-Ks

The lack of growth in 4Q19 didn’t impact the financials in 2019. Revenues grew 1.6% and margins improved 60bps to 23.9% even after the impact of the increased price of coffee.

Competition for Burger King and Popeye intensifying

As expected, competition in the space is intensifying. McDonald’s (MCD) released a more affordable chicken sandwich to compete with PLK’s. Also, Yum! Brands (YUM) (KFC, Pizza Hut and Taco

Analyst’s Disclosure: I am/we are long QSR. 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.