Scenarios That Might Impact QSR’s Valuation
Restaurant Brands International Inc (NYSE:QSR), the parent company of two iconic brands, Burger King and Tim Hortons, has been riding on positive comparable sales from both the brands in the last two quarters, which drove the company’s stock price nearly 30% in the first calendar quarter, and is currently trading at $38. The company’s prime focus is increasing its market share in the fast-food industry, with aggressive international expansion being the top priority. However, there are some factors that can impact the company’s stock price significantly, such as slow international growth for both the brands and improved market share in the breakfast category. Both these scenarios might, one way or the other, affect the company’s financial growth prospects and valuation at present.
We have a $42 price estimate for Restaurant Brands International, which is roughly 10% above the current market price.
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Let us discuss these scenarios in detail.
Restaurant Brands International delivered a fairly impressive performance in the first quarter, both in terms of the financial performance, as well as restaurant development. In Q1 2015, the company opened net 68 stores, out of which 53 were Tim Hortons stores and 15 were Burger King restaurants, resulting in a 5% international growth on a trailing twelve month basis. [1] With Burger King stores spread across 100 countries, the brand is trying to target high growth markets, such as India, South Africa, Russia, and France. Burger King announced that it will open 350-400 restaurants in France in the coming few years. Moreover, Tim Hortons brand is also trying to expand into international markets, including the U.S., where the brand owns 892 restaurants in nearly 18 states, and plans to expand further into core and profitable markets, and thereby improving the top-line growth in the segment. There are 59 Tim Hortons store locations in the Middle East and the company is missing out on several major markets around the globe, and hence, the company plans to accelerate the expansion in high growth markets in the coming years.
There are currently 14,320 Burger King franchised restaurants and 4,658 Tim Hortons franchised restaurants around the world. Trefis estimates the number of Burger King franchised restaurants to increase at a fast pace and reach 19,600 franchised restaurants by the end of our forecast period. On the other hand, we forecast a gradual increase in the number of Tim Hortons franchised restaurants, with an estimate of 8,100 franchised restaurants by 2021.
If, for some reason, the company’s plan of international growth does not pan out well, and the number of Burger King franchised restaurants reach just 17,500 and Tim Hortons franchised restaurants reach just 6,500 by the end of our forecast period (2021), we might see a 20% downside to the Trefis price estimate for the company.
The merger with Tim Hortons, a well known fast-food brand in Canada, provides the company with additional resources to shrink the gap, if not outpace the industry leaders, in terms of market share. Tim Hortons’ hold and momentum in the coffee and other baked food products market and Burger King’s brand appeal and popularity in the fast-food industry is a perfect combination for a company to attract some customer attention. Tim Hortons’ innovative menu items, well-established coffee and food offerings, and dominance in Canada, might help Burger King in off-setting the damage done to its revenue growth by the competitive activity. The increase in customer traffic should translate to better revenue growth in the coming years.
In 2014, the average revenue per Burger King restaurant was $1.435 million for company-operated restaurants and $0.07 million for franchised restaurants. On the other hand, the average revenue per Tim Hortons restaurant was $14 million for company-operated restaurants, whereas it was $0.04 million per restaurant for franchised restaurants in 2014. Below is a table showing the Trefis estimates for average revenues per restaurant for each segment.
Divisions Average Revenue per restaurant (2014) Average Revenue per restaurant (2021 current estimate) Burger King Company-operated restaurants $1.435 million $1.62 million Burger King franchised restaurants $0.07 million $0.082 million Tim Hortons Company-operated restaurants $14 million $16.72 million Tim Hortons franchised restaurants $0.021 million $0.042 million However, if both the brands introduce new innovative menu items and expand its coffee portfolio more aggressively, there might be a much faster growth in the average revenues per restaurant in all the segments. Let us take the scenario mentioned in the table below.
Divisions Average revenue per restaurant (current estimate for 2021) Average revenue per restaurant (for 2021 in case of improved performance) Burger King Company-operated restaurants $1.62 million $1.80 million Burger King franchised restaurants $0.082 million $0.088 million Tim Hortons Company-operated restaurants $16.72 million $17.9 million Tim Hortons franchised restaurants $0.042 million $0.051 million Taking all the above new estimates, there might be a 16% upside to the current Trefis price estimate for the company.
Below is the chart showing the company’s revenue growth in case of these two scenarios:
Apart from these major trends and scenarios, there are many other headwinds that the restaurant industry might have to face, including commodity inflation. However, being an almost 100% franchised company, commodity inflation will not have a major effect on the company’s financial performance.
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