Tag: Restaurant Brands International (QSR)

These 2 Restaurant Stocks Could Be Outperformers

Posted on by Taylor Dart

It’s been a mixed year thus far for the Restaurant industry group, with several quick-service names rallying near all-time highs while casual dining names have struggled to stay in positive territory for the year.

The underperformance of the latter group can be attributed to weaker traffic trends in the casual dining space relative to quick-service.

This is not surprising given that we are seeing a pullback in spending from some consumers and quick-service is a trade-down option relative to casual dining, with consumers able to treat themselves with convenience with pizzas, burgers, and fries without breaking the bank at a casual dining restaurant where average checks are closer to $20.00.

However, while we’ve seen Yum Brands (YUM) and McDonald’s (MCD) continue to make new highs with both up 15% and 25% from their pre-COVID-19 highs, a couple of names remain well below their all-time highs and continue to trade at attractive valuations.

This is despite these two companies having iconic brands similar to McDonald’s, and KFC, Taco Bell, and Pizza Hut (Yum Brands), and despite them having some of the better growth profiles sector-wide.

In this update, we’ll dig into these two companies and highlight why they could be outperformers after a period of underperformance in Dominos Pizza’s (DPZ) case, and years of underperformance in the case of Restaurant Brands International (QSR).

Restaurant Brands International (QSR)

Restaurant Brands International is a $21.2 billion franchisor in the Restaurant industry group with four iconic brands under its umbrella: Burger King, Popeye’s Chicken, Firehouse Subs, and Tim Hortons.

The three latter brands were acquired by Restaurant Brands International over the past decade and they currently make up roughly one-third of its system-wide stores which are spread across over 100 countries.

The largest of its brands is Burger King with ~19,000 restaurants, with Tim Hortons just behind at ~5,600 restaurants, Popeye’s Chicken having ~4,000 restaurants, and Firehouse Subs, the smallest brand, having roughly 1,200 restaurants and operating solely in North America. Continue reading "These 2 Restaurant Stocks Could Be Outperformers" →

Growth At A Reasonable Price

Posted on by Taylor Dart

It’s been a much better year thus far for the major market averages, and several tech names have soared more than 30% off their lows just seven weeks into the year after coming into 2023 at deeply oversold levels.

Although this has been a nice move for those quick enough to establish positions, there are far less attractive setups out there currently, and one must be rigid with their stock selection.

In this update, we’ll look at one semi recession resistant growth story and another company that continues to gobble up market share that are both worth keeping at the top of one’s watchlist if we see a deeper market correction.

Visteon Corporation (VC)

Visteon Corporation (VC) is a $4.6 billion company in the Auto-Truck and Original Equipment industry group and is a global automotive electronics supplier that was spun out from Ford Motor Company (F) in April 2000.

Visteon Corporation differentiates itself from its auto parts peers given that it is the only pure-play supplier of automotive cockpit electronics, the fastest-growth segment within the industry.

For those unfamiliar, the segment is forecasted to grow from $36 billion to $60 billion in 2027, and this incredible growth showed up in Visteon’s most recent Q4 results, with revenue up 35% to $1.06 billion, well above the low double-digit sales growth reported by peers in the same period.

On a full-year basis, Visteon had an incredible year, launching 45 new products (13 in Q4 alone), nailing down $6.0 billion in new contracts, and ending the year with a strong balance sheet, evidenced by $174 million in net cash.

This certainly showed up in its financial results, with record revenue of $3.76 billion (40% growth year-over-year) and 153% annual EPS growth ($5.33 vs. $2.11), a new record for the company.

However, while this is incredible growth relative to FY2020 levels ($2.77) the forward outlook is just as impressive, with annual EPS expected to increase to $9.98 in FY2024, pointing to nearly 90% growth over the next two years. Continue reading "Growth At A Reasonable Price" →

MCD vs QSR: Which Is Healthier For Your Portfolio?

Posted on by Taylor Dart

While the S&P-500 (SPY) and Nasdaq Composite (COMP) are on track for a significant losses this year, the Restaurant Sector has put together a solid performance, on track for just a 9% loss or an 1100 basis point outperformance vs. SPY.

This is despite starting off the year with a much worse performance, with the index briefly down 25% as of May, despite it trailing the S&P-500 and Nasdaq at the time.

The strong recovery in the sector can be attributed to the fact that inflation looks to have peaked, which is a huge benefit to restaurant margins.

Plus, valuations were already at their most attractive levels since March 2020 as of early 2022, with the index starting its bear market six months before the S&P 500 in July 2021.

Finally, while not all restaurant names are considered defensive, quite a few are lower-beta, pay attractive yields, and some benefit from a recessionary environment as they become trade-down beneficiaries.

In this update, we’ll look at two of the largest names in the sector and which looks like the better buy after this violent market-wide correction.

McDonald’s (MCD) and Burger King (QSR) have gone head to head for years from a competition standpoint regarding burger wars.

While McDonald’s has more than twice the number of restaurants globally and started out a decade earlier with Burger King being the copycat, there’s no clear consensus on the better restaurant operator among the two.

From strictly a same-store sales or wallet share standpoint in the United States, McDonald’s has been the undisputed leader, and Burger King has lagged over the past couple of years.

However, with similar prices, similar menus, and Burger King’s appearing to have more iconic fries while McDonald’s wins on burgers, it’s difficult to crown a leader.

That said, there are significant differences when it comes to investing in the brands, especially given that Burger King is just one piece of Restaurant Brands International’s portfolio, which also consists of Popeyes’s Louisiana Chicken, Tim Hortons, and the newly added Firehouse Subs.

In this article, we won’t try to answer the near-impossible question of which is the better burger chain, but we’ll highlight which stock looks healthier for one’s portfolio. Continue reading "MCD vs QSR: Which Is Healthier For Your Portfolio?" →

Which Is The Better Restaurant Stock?

Posted on by Taylor Dart

It's been a volatile year for the restaurant industry group (EATZ), which found itself down over 29% for the year before its recent recovery. This rebound can be attributed to hopes that inflation has peaked combined with short covering, with the small-cap and mid-cap restaurant names having elevated short interest relative to other industry groups.

Following this rally, some investors might be looking for names that haven’t participated in the recovery. However, underperformance is often related to underlying problems with a business, so it's essential to look at industry trends, sales performance, and other key metrics to ensure one isn't buying into a value trap.

In this update, we’ll look at two restaurant brands with above-average short interest and see which is the better stock to own - Restaurant Brands International (QSR) or Red Robin Gourmet (RRGB).

Scale, Business Model & Unit Growth

From a scale standpoint, Restaurant Brands International (“RBI”) and Red Robin differ materially. RBI has more than 29,000 restaurants under four different brands (Burger King, Tim Hortons, Firehouse Subs, Popeyes Chicken), and Red Robin has 525 restaurants under one brand: Red Robin Gourmet Burgers.

Typically, the smaller-scale company would be the more attractive one assuming it was a high-growth concept and a similar business model. However, Red Robin is inferior in both categories.

Not only has Red Robin seen its store count decline by 10% over the past three years while RBI’s store count has increased 15%, but Red Robin operates a casual dining concept, and its brand is nowhere near as iconic as RBI’s top-rated brands in the coffee, burger, and chicken category, which are Tim Hortons, Burger King, and Popeyes, respectively.

Meanwhile, only 20% of Red Robin’s system is franchised vs. 100% for RBI, meaning that Red Robin is much more sensitive to inflationary pressures, seeing a sharp decline in earnings when it's seeing food and labor costs rise. Continue reading "Which Is The Better Restaurant Stock?" →

Two Restaurant Stocks to Buy on Dips

Posted on by Taylor Dart

It’s been a rough year for the restaurant industry, with the index declining over 40% from its highs, and many weaker operators like Red Robin (RRGB) cut in half.

The bear market in these names has been attributed to commodity and wage inflation which has pinched margins, but also due to very difficult year-over-year comps following the surge in traffic from government stimulus and diners anxious to get back to everyday life in Q1/Q2 2021.

Unfortunately, while restaurants should have been out of the woods by Q3 2022 after lapping these insurmountable comps, they’re now contending with a new issue: traffic. This has resulted from shrinking discretionary budgets with consumers hit with rising mortgage payments, rising gas prices, and the cost of groceries continuing to skyrocket.

So, while margins held up relatively due to sales leverage in 2021 and menu price increases, it could prove more challenging to pass on costs this year.

The good news is that while much of the sector has been sold off for a good reason, a few companies are being dragged down with little justification due to the bearish sentiment.

Two companies that meet these criteria are Wingstop (WING) and Restaurant Brands International (QSR), which have found themselves more than 35% from all-time highs. Let’s take a closer look below:

Wingstop (WING)

Wingstop is a mid-cap restaurant company offering classic wings, boneless wings and tenders, and it has enjoyed considerable growth since going public.

The company has seen its store count increase from 998 stores in 2016 to an estimated 1,950 in 2022, translating to an impressive 11.8% compound annual growth rate. This is helped by the company’s phenomenal unit economics (sub-two-year payback), making it an attractive brand for multi-unit franchisees.

So far, the company’s unit growth is not slowing despite its scale, with an estimated 250 stores to be opened in 2023, representing a 13% growth rate.

Although discretionary spending budgets are declining, Wingstop is in a unique position. This is because it has a relatively low average check compared to casual dining restaurants. Besides, while we are seeing commodity inflation in most proteins (beef, seafood, pork), bone-in wing prices are seeing deflation.

So, while other restaurants might be raising prices to protect margins, even if at a slower pace, to ensure they don’t hurt demand, Wingstop could hold prices steady, allowing its value proposition to stand out among its competitors in the quick-service space.

Therefore, Wingstop looks to be an interesting defensive play in the restaurant space, and I would not be surprised to see the stock trade back above $110.00 before year-end.

GDX Chart

Source: YCharts.com, FactSet, Author’s Chart

Looking at the chart above, Wingstop is not cheap, which is why I’m not long the stock yet, given that it trades at more than 48x FY2023 earnings estimates ($1.87). However, the stock does deserve a premium multiple given its double-digit unit growth rates and ability to grow earnings at a rate well above that of its peer group.

Based on what I believe to be a conservative EBITDA multiple of 24 and FY2023 EBITDA estimates of $130 million ($4.33), I see a fair value for the stock of $103.90, pointing to an 11% upside from current levels.

However, given that I prefer to buy at a minimum 20% discount to fair value, I think the name is one to keep a close eye on, but the ideal buy zone is at $83.00 or lower on any dips.

Restaurant Brands International (QSR)

Restaurant Brands International is a large-cap restaurant company with a leading franchised position among its peers, with over 99% of its restaurants franchised.

The company is best known for its brands Popeye’s Chicken, Burger King, and Tim Hortons, but it also recently acquired Firehouse Subs, a rapidly growing, digital-focused sandwich company with over 1,200 restaurants.

This acquisition pushed the company’s total restaurant count to more than 29,000, but it is confident that it can push its total store count above 40,000 by 2027. This would translate to more than 35% growth from current levels, making it more attractive than McDonald’s (MCD), in my view, which is relatively saturated and must rely on same-store sales than global expansion.

The key differentiator for Restaurant Brands is that it could be a trade-down beneficiary. While consumers might cut back in a recession, they are less likely to cut back on things that offer value and convenience. When it comes to a morning coffee/sandwich on the way to work or lunch coffee/snacks like Tim Hortons offers or value meals from Burger King and Popeye’s, I see these as staples more than discretionary items.

In contrast, one might argue that fine dining and casual dining are highly discretionary. Therefore, I do not expect the negative traffic trends that we’re seeing in casual dining to seep into the quick-service space, and if they do, I expect them to be much less pronounced.

I also believe that QSR has a much better chance of mining customers’ data to drive additional visits, given its high proportion of digital sales. Finally, given the lower average check, I see less resistance to menu price increases in quick service vs. casual dining.

Looking at the chart below, we can see that QSR is currently trading at barely 15x FY2023 earnings estimates at a share price of $51.00, which pales in comparison to MCD at ~23x earnings and YUM at ~21x earnings.

In my view, this is completely unjustified, even if QSR’s largest brand (Burger King) is seeing a slower turnaround than planned. Even if we apply a discount and use a more conservative earnings multiple of 19.5x FY2023 earnings, I see a fair value for QSR of $66.10 per share, translating to a 30% upside from current levels.

Combined with a 2.0%+ buyback and a 4.0% dividend yield, the stock is a steal at current levels.

GDX Chart

Source: YCharts.com, FactSet, Author’s Chart

It’s easy to be bearish on the restaurant space given all the headwinds, and there are certainly many names in the casual dining space that it’s best to avoid.

However, I believe names like QSR and WING have been unfairly punished and are now trading at their most attractive valuations in years following this pullback. Therefore, I see QSR as a Buy on any dips below $50.00, and I would view any pullbacks below $83.00 on WING as buying opportunities.

Disclosure: I am long QSR

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.