Is Restaurant Brands Stock A Buy At $49?
After a 16% decline over the last six months, at the current price of around $49 per share, we believe Restaurant Brands International Inc. stock (NYSE: QSR), one of the largest fast-food restaurant chains in the world, including Burger King, Tim Hortons, Popeyes, and, since late 2021, also Firehouse Subs – could see gains. QSR stock has declined from around $58 to $49 in the last six months, outperforming the broader indices, with the S&P falling about 19% over the same period. QSR’s stock declines can be attributed to investors’ concern about rising costs and their effects on the company’s bottom line. Restaurant Brands stock trades at a lower price-to-earnings ratio of 18x – compared to a P/E ratio of 20x for Yum! Brands (NYSE: YUM) and Starbucks (NASDAQ: SBUX), and 25x for McDonald’s (NYSE: MCD). This valuation looks like a reasonable value given the company’s solid mid-to-long-term growth prospects.
QSR’s Q1 revenues grew 15% y-o-y to $1.45 billion, fueled by strong same-store sales growth from Burger King’s overseas restaurants. In the first quarter, same-store sales at Burger King spiked 20% internationally, but they were flat in its home market as the chain tries to revive demand. Worldwide, Burger King saw its same-store sales climb 10% in the quarter, while Tim Hortons (a coffee chain based out of Canada) comp sales grew 8%, and Popeyes (a fried chicken chain) comp sales saw a fall of 3% in Q1. In terms of unit growth, the value grew 3% for Burger King, 7% for Tim Hortons, and 8% for Popeyes. Q1 was the first full quarter that Restaurant Brands’ acquisition of Firehouse Subs (a sandwich chain) was included in its revenue. Firehouse chain saw same-store sales growth of 4.2% in the quarter. It should be noted that only locations that have been open at least 13 months are included in its same-store sales metrics. On the bottom line, the company’s earnings were flat y-o-y at 59 cents in the first quarter. And, its adjusted EBITDA grew 10% y-o-y to $530 million over the same period.
In the fiercely competitive restaurant industry, how does Restaurant Brands stand out?
- Restaurant Brands’ revenue has grown by 6.5% over the last five years, in comparison to its rival McDonald’s which saw its revenues decline by 4.8%. Furthermore, Restaurant Brands’ earnings per share have been increasing at a more rapid pace than McDonald’s, increasing by 85% cumulatively compared to 77% for McDonald’s.
- Tim Horton’s, Popeyes, and the recently acquired Firehouse Subs are far less penetrated across international markets than McDonald’s or Burger King. That means more room to open new restaurants and a longer runway for revenue growth.
- It has taken Time Hortons longer to get back on track after the Covid pandemic than other Restaurant Brands’ restaurants because of its home market’s limitations. A year ago, its worldwide same-store sales shrank by 2.3%. However, Tim Hortons brand is back in the saddle with growing sales, comps, and expansion plans in populous countries such as China and India.
- The revenue stream of QSR is directly influenced by the system sales it generates across its brands, which can be increased by growing restaurant sales or by adding as many restaurants as possible. In Q1, the company’s net restaurant growth grew 4.4% year-over-year – despite significant cost inflation.
- There are fewer than 150 company-operated restaurants at last count, or just 0.5 percent of the total estate, which is nearly all franchised. Typically franchisees contribute an upfront fee at the beginning and at the end of their agreements to the parent company. The cut of gross weekly sales can range anywhere from 3% to 6% depending on the brand and jurisdiction. As a result, Restaurant Brands doesn’t have to worry about the day-to-day costs of running a restaurant.
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We have updated our model following the Q1 release. We forecast QSR’s Revenues to be $6.3 billion for the fiscal year 2022, up 10% y-o-y. Looking at the bottom line, we now forecast EPS to come in at $2.98. Given the changes to our revenues and earnings forecast, we have revised our QSR’s Valuation to $53 per share, based on $2.98 expected EPS and a 17.7x P/E multiple for the fiscal year 2022 – almost 10% higher than the current market price. That said, the company’s stock appears cheap at the current price.
The fast-food giant’s next few quarters might show high volatility given the current macroeconomic situation. Going forward, if the present inflationary pressures continue to persist, it is likely that the broader markets may see lower levels in the near term. And, a further dip in QSR stock can be used as a buying opportunity for better gains in the long run.
Here you’ll find our previous coverage of QSR stock where you can track our view over time.
While QSR stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Restaurant Brands’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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