Restaurant Brands Stock Down 13% This Year, What’s Next?

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QSR
Restaurant Brands

After a 13% decline since the beginning of this year, at the current price of around $68 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 modest gains in the near term. QSR stock has declined from around $78 to $68 year-t0-date, underperforming the broader indices, with the S&P growing about 12% over the same period. In comparison, QSR’s peer Starbucks’ (NASDAQ: SBUX) stock declined 15% year-to-date to $81. QSR’s stock decline 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 17x – compared to a P/E ratio of 24x for Yum! Brands (NYSE: YUM), 22x for Starbucks and McDonald’s (NYSE: MCD). That said, QSR’s current valuation is also lower than its own five-year average of 24.5x. The company has solid mid-to-long-term growth prospects. Tim Horton’s, Popeyes, and Firehouse Subs are far less penetrated internationally than McDonald’s or Burger King. That means more room to open new restaurants and a longer runway for revenue growth. 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. It should be noted that the company’s Q1 net restaurant growth expanded by 3.9% compared to the previous year (contributing to a total count of 31,113 restaurants globally) – despite cost inflation. [The system-wide sales are different from revenues in that they refer to sales for all franchise restaurants, while revenues include supply chain sales, as well as royalty, property, and advertising revenues from the franchises.]

QSR stock has witnessed gains of 15% from levels of $60 in early January 2021 to around $68 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the increase in QSR stock has been far from consistent. Returns for the stock were -1% in 2021, 7% in 2022, and 21% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that QSR underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could QSR face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

QSR’s Q1 revenues grew 9% y-o-y to $1.74 billion, fueled by 4.6% growth in consolidated comparable sales – notable growth across major segments including 7.5% at Tim Hortons Canada and 6.2% at Popeyes Louisiana Kitchen U.S.  In comparison, QSR’s full-year 2023 revenue grew at 8% y-o-y. In the first quarter, same-store sales at Burger King grew 3.4%, while Tim Hortons (a coffee chain based out of Canada) comp sales grew 6.9%, and Popeyes (a fried chicken chain) comp sales rose 5.7%, and International segment comps grew 4.2% in Q1. On the bottom line, the company’s earnings grew 18% y-o-y to 72 cents in the first quarter. And, its adjusted EBITDA grew 7% y-o-y to $627 million over the same period.

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We forecast QSR’s Revenues to be $8 billion for the fiscal year 2024, up almost 15% y-o-y. Looking at the bottom line, we now forecast EPS to come in at $3.50. Given the changes to our revenues and earnings forecast, we have revised our QSR’s Valuation to $73 per share, based on $3.50 expected EPS and a 20.8x P/E multiple for the fiscal year 2024 – which is 9% higher than the current market price.

Optimistic Five-Year Outlook

QSR released its five-year outlook which is quite positive. The company expects a $60 billion system-wide sales figure in 2028. This represents a compounded annual growth rate (CAGR ) of ~7% from 2023. The company also expects the adjusted operating profit to rise to $2 billion by 2028, a CAGR of 7.8% from 2023. All in all, the company’s outlook seems optimistic for the next five years. This reflects that even if there’s a slow down in  the next year or two, the stock can still perform well.

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.

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 QSR Return -1% -13% 42%
 S&P 500 Return 2% 12% 139%
 Trefis Reinforced Value Portfolio 1% 5% 649%

[1] Returns as of 6/11/2024
[2] Cumulative total returns since the end of 2016

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