2023-04-16 07:32:16 ET
Summary
- Restaurant Brands International, Inc. maintained an impeccable performance amidst inflation.
- Its decent financial positioning is one of its strongholds.
- Market prospects are still optimistic despite the anticipated mild recession.
- It sustains dividend payouts with enticing yields.
- The stock price remains fairly valued but a bit unexciting.
Inflation has strained the budget of many households and businesses in 2022. And QSRs like Restaurant Brands International, Inc. (QSR) felt its impact. Nevertheless, its solid positioning and efficiency helped it stabilize its revenue growth and margins. Now that inflation has relaxed, the company may enjoy increased flexibility in its pricing strategy. Many individuals may also ease their budgeting despite recessionary fears. Even better, the company is ready for a potential mild recession. It has decent liquidity levels, given its adequate cash reserves. This aspect allows it to sustain its current operating capacity and cover dividend payouts. Likewise, the stock price is consistent with fundamentals with a slight undervaluation.
Company Performance
It's been quite a while since I first covered Restaurant Brands International, Inc. I perfectly understood the negative sentiments regarding its business model and market competition. First, inflation appeared unmanageable, peaking at 9.1%. It has slightly relaxed since then, but it was still double the pre-pandemic average. Despite this, the company managed to stabilize its growth and margins. It secured its position in the market despite being relatively newer than its peers. It continued to capitalize on prudent expansion and investment.
Its operating revenue amounted to 8.47 billion CAD , an 18% year-over-year growth. It was also 14% higher than 2019, showing its sustained rebound. Tim Hortons, its second-largest portfolio, had the highest growth with 9.8%. Burger King came quite close with 8.8%. Various factors contributed to its steady revenue growth. Again, its well-balanced revenue mix worked in favor of the company. Its restaurant sales comprised 43% of the total amount. Franchise fees came close with 41% while advertising had 16%. This well-diversified segment mix worked hand-in-hand with the pricing and marketing strategy of the company. We saw how inflation impacted QSRs, and even giants like McDonald's ( MCD ) saw decreasing sales.
Operating Revenue (MarketWatch)
I perfectly understand the apprehension of many investors about its franchise segment. Since it comprises a substantial portion of revenues franchisors depend on royalty and other fees. Often, these come in percentage of sales, so if sales drop, franchise fees go in the same direction. Yet, we must understand that fee structure may still vary. Note that some franchise systems use a variable percentage of sales. But the thing is, franchise or royalty fees are consistent revenue streams. And QSR brands have already established their reputation. While this aspect may depend on consumer behavior, their popularity secures a solid customer base. For instance, Tim Hortons is a popular coffee shop in the US with 626 locations in nearly 300 cities. While it seems impossible to match coffee giants like Starbucks ( SBUX ) and Dunkin Donuts, its positioning in the US remains solid. Meanwhile, it remains the top coffee shop in Canada, which should not be surprising. We must also consider the continued recovery of large economies, which can increase QSR spending.
Another primary growth driver is its capitalization on prudent expansion and investment. Its store openings continued and reached 29,902 locations versus 28,636. Despite this, the number of stores from 3Q to 4Q decreased, which we can also attribute to inflation. But again, the pricing strategy of the company helped maintain the appeal of its brands. We saw it in the 4Q operating revenue of 2.29 billion CAD, the highest since 4Q 2021. The revenue per restaurant was 76,584 CAD versus 68,096 CAD in 4Q 2021 and 75,080 CAD in 3Q 2022.
Number Of Restaurants (QSR 4Q Earnings Release)
Operating Revenue (MarketWatch)
The digital transformation and the changing labor market landscape also led to an influx of demand. As hybrid and remote work setups remain prevalent, ordering online via restaurant apps or third-party delivery services rose. It was consistent with a study where digital ordering and delivery have grown by 300% since 2014. It was most evident in Millennials, comprising 59% of the total revenue.
Regarding its peers, QSR is still a durable figure in the industry. Its market share in 4Q 2022 was still reasonable at 7.1%. It was lower than in 3Q 2022 at 7.6%. Yet, we can compare all restaurants from my previous coverage. Most restaurants had lower market share like SBUX with 36.7% from 37.2%. MCD also had the same pattern with 25% from 26%. Chipotle ( CMG ) also decreased from 9.8% to 9.2%. Most of the portion of their market share went to Domino's ( DPZ ), increasing from 4.7% to 5.9%. Despite this, QSR continued to outperform the market with its revenue growth versus the 14% market average.
More importantly, QSR remained an efficient company amidst the rising prices. But let's face it, it was challenging for the company to stabilize costs and expenses. Most of these are variable costs, such as inventories and advertising expenses. Fortunately, revenue growth was high enough to partially offset the impact of inflation. The operating margin reached 31% versus 33% in 2021. In 4Q, it had the lowest margin with 29% versus 30% in 4Q 2021.
Operating Margin (MarketWatch)
Operating Margin (MarketWatch)
This year, QSR may face the same headwinds. These may still affect the near-term performance of the company, particularly its margins. But given its market positioning and effective strategies, the company can get through them. There may also be improvements in cost-of-living adjustments, which can increase the demand. We will discuss more of these in the next part.
How Restaurant Brands International, Inc. May Stay Solid This Year
Inflation remains a hindrance to companies like Restaurant Brands International, Inc. But QSR continues to withstand it. It may only have to prepare for a potential mild recession. Even so, inflation continues to stabilize landing at 5%, a 45% decrease from the 2022 peak. While it is still higher than pre-pandemic levels, the current rate is the lowest in almost two years. This sustained decrease may increase the purchasing power of customers.
QSRs are already a staple in the US. Their growth may be sustained as digital transformation and hybrid work adoption continue. In a study, even business owners express their preference for hybrid work, with 80% planning to shift to it. As more people juggle work and household chores, QSRs become more vital. A survey shows that 34% of customers pay at least $50 per order. Meanwhile, 33% are willing to pay higher fees for faster preparation and delivery. A substantial portion of respondents is also geared toward QSR delivery rather than cooking or dining out. With that, QSR sales in the US are expected to reach $370 billion by 2030. It was consistent with the data, showing that QSR spending in 2022 reached $320 billion . It was higher than my estimation of $312 billion in my previous coverage. For the next two years, it may increase by 2% on average.
QSR Spending (Budget Branders And Statista)
What makes QSR a durable company is its solid financial positioning. It has adequate cash levels, which is vital for a capital-intensive company like QSR. Yet, it must be careful with its increasing borrowings. Its Net Debt/EBITDA of 6.2x shows that the company has high financial leverage. On a lighter note, its EBITDA Margin of 34% shows high and stable viability. We confirm it in the Cash Flow Statement since the Cash Flow From Operations can cover CapEx. Meanwhile, its FCF/Sales Ratio of 22% shows that a substantial portion of sales is converted into cash. Indeed, the company continues to stabilize its revenue growth and margins to generate adequate returns. The company shows consistency in viability, liquidity, and sustainability.
Cash And Cash Equivalents And Borrowings (MarketWatch)
Cash Flow From Operations And CapEx (MarketWatch)
Stock Price Assessment
The stock price of Restaurant Brands International, Inc. has been in an uptrend for over a year. But its 2018-2022 pattern was quite unexciting. At $67.50, the stock price is 17% higher than last year's value. Yet, the series of crests and troughs continue to hamper its growth. The consolation is that it remains fairly valued, as shown by the PB Ratio. We can see it using the current BVPS of 13.9 and PB Ratio of 4.84x. With the current BVPS and the average PB Ratio of 4.91x, the target price will be $68.34. The stock price reflects the intrinsic value of the company.
Moreover, QSR is an attractive dividend stock, given its consistent payouts. It also has a yield of 3.26%, way better than its large peers like MCD with 2.1% and SBUX with 1.98%. It is also higher than the S&P 500 average of 1.70%. Indeed, QSR is a potential choice for dividend investors.
With regard to its actual investor returns, QSR remains an enticing stock. We can see it in its EPS and Dividends Per Share to derive Retained Earnings. Its retained earnings have been positive since 2018. As such, dividends have always been well-covered. We can also compare the cumulative retained earnings of $5.90 to the average increment in the stock price. Although the stock price showed a series of ups and downs, the increase was still more prominent. The cumulative stock price increment of $8.4 is 42% higher than the cumulative retained earnings. So for every $1 increase in retained earnings, the stock price rose by $1.44. It is a response to those saying that the stock price does not seem to go anywhere. To assess the stock price better, we will use the DCF Model.
FCFF 2,551,000,000 CAD
Cash 1,590,000,000 CAD
Outstanding Borrowings 4,347,000,000 CAD
Perpetual Growth Rate 4.8%
WACC 9.2%
Common Shares Outstanding 307,142,000
Stock Price $67.52
Derived Value 98.52 CAD or $72.88
The derived value shows that the stock price remains undervalued. There may be an 8% increase in the next 12-18 months. Investors may still consider adding this stock in their portfolio.
Bottomline
Restaurant Brands International, Inc. remains a solid company amidst inflationary headwinds. It may have more promising prospects as macroeconomic indicators continue to improve. But the important thing is the decent liquidity levels that allow QSR to sustain its expansion and withstand headwinds. Also, dividends are still well-covered with high yields. It matches with its decent investor returns, given its retained earnings. Moreover, the stock price still reflects the intrinsic value of the company and shows potential undervaluation. While it appears a bit slow-moving, the upside potential must not be discounted. The recommendation is that Restaurant International Brands, Inc. stock is a buy.
For further details see:
Restaurant Brands: An Undervalued Gem Consistently Downgraded