I initiated a new position on 3/27/2020 in Restaurant Brands International Inc (QSR) at $40.9365. Restaurant Brands is not within our top 15 largest positions at this time.
I’ve been a big fan of Burger King for a long time now. When I was really young I loved McDonalds, but at some point, I think my early teens I tried Burger King and really liked their chicken nuggets and fries and have been hooked ever since. I now prefer the sandwiches such as the Rodeo burgers, Whopper, and crispy chicken sandwiches along with the fries and mozzarella sticks. When they have the Mac and Cheetos, I usually get those. I feel the food is quite good and at a good price.
Restaurant Brands Strengths/ Weaknesses
I owned shares in Burger King before when they were publicly traded before and was forced to sell when the company agreed to be acquired by 3G Capital. I’ve wanted to own shares again since they IPO’d under Restaurant Brands International but haven’t felt comfortable with the valuation. Therefore, I felt the next best way to get exposure was buying into the largest publicly traded franchisee Carrols, of which I have a significant portion of my portfolio in. This position has decreased significantly with the recent market pullback due to COVID-19 concerns. I am more concerned with Carrols lately due to the level of debt accumulated with their aggressive acquisition of more stores over the last few years, but feel that the delivery and drive thru options should help them persevere through the issues they face. I’m also confident that Restaurant Brands will help them perhaps with reduced royalties and loans if needed, perhaps in exchange of more interest in the company, which could actually benefit Restaurant Brands if it comes to that.
I feel at this time Restaurant Brands is a better valuation and at a better position of strength than Carrols and while I don’t feel necessary to sell any Carrols shares, it would be better to make future investments in Restaurant Brands. The company depends on royalties from franchisees which own the majority of the stores. This allows the company to benefit more when franchisees succeed and not experience as much loss when they fail with a lot less capital investment, a much better position to be in than the individual franchisee in my opinion.
Restaurant Brands also owns Tim Hortons, and Popeyes Louisiana Kitchen and is the third- largest global quick-service restaurant chain, with $34 billion in pro forma system sales expected in 2019 and more than 26,300 units (99% franchised) as of September 2019. Revenue comes largely from franchise royalties and distribution sales to franchisees. Worldwide, there are 18,200 Burger King locations, almost 4,900 Tim Hortons locations, and 3,200 Popeyes locations.
I’m not as familiar with Tim Hortons and Popeyes as I am with Burger King, but have eaten a both, Tim Hortons a few times while visiting Canada and Popeyes when I attended the Carrols stockholder meeting last summer and food is quite good. I wasn’t able to try the Popeyes chicken sandwich since they were out, but tried some chicken strips and they were really good. Tim Hortons has great breakfast options at a good price and the donuts are really good.
Long term threats will continue to be the level of competition, low margins of the business and most importantly labor market tightness. Having spoken with Carrols CEO Dan Accordino in the past, he stated that it’s difficult finding/retaining staff for individual stores.
Reason for Opportunity
The COVID-19 issues are certainly impacting the overall business, since most dining areas are closed and many people are not traveling and/or working there is going to be a drop in traffic even for the drive-thru. However, they are taking the opportunity do more delivery and are offering free delivery options. I’m not sure if that can be profitable, but it’s certainly going to help keep their brands on people’s mind for food options when they are tired of eating home-cooked meal options or need a quick meal. It may even be an opportunity for their brands to stay a part of people’s eating habits when things return back to normal and make their business better than before the virus.
Some franchisees have reported 20-30% drop in sales which I assume should be improving again with the push into free delivery. Of course we won’t know for sure. I wouldn’t be surprised that if they needed to cut their dividend in half due to less royalty revenue and/or needing more cash to help support franchisees. Carrols CEO Dan Accordino recently expressed support for Restaurant Brands stating that they have done a great job in terms of new products (such as the Burger King Impossible Whopper and the Popeyes Chicken Sandwich, marketing (Burger King’s 2 for $6 sandwich promotion) and general support for franchisees. Its encouraging to know that franchisees are happy how Burger King has done since 3G Capital took ownership of the brand.
Restaurant Brands Valuation
The stock price based on past financials look good. I realize that these will change in the short term, but feel comfortable that their sales/earnings will return back to previous numbers or even improve. This does require a certain level of faith and therefore that does make this a more speculative investment. The valuation numbers are as follows:
- Price/Forward Earnings: 9.71
- Earnings Yield: 5.85%
- Forward Dividend Yield: 5.13%
These numbers look really good and I like the 5.13% dividend yield. Again, it’s possible that the dividend could be cut in the short term due to less royalty revenue and/or to provide support to franchisees, but I’m confident they will emerge out of this stronger than ever in the long run.
I started with a relative small position as I believe that the market will continue choppy for a while and may allow me to get more at lower prices in the near term where I will most likely get more depending on what other opportunities appear.