2023-05-04 09:26:48 ET
Summary
- We continue to be bullish on the market in 2023.
- The consumer continues to be strong.
- We love a good turnaround play.
- This company just pulled off a coup in bringing in a proven turnaround expert.
After reporting earnings on Tuesday, it appears that the turnaround that we have been expecting for Restaurant Brands International ( QSR ) is now well underway. The Toronto, Ontario-based company checked in with a 10% year-over-year increase in sales and a 17% increase in earnings.
Their earnings per share of $0.75 beat by $0.11 and their sales of $1.59 per share beat by $30M. Global comparable sales came in at 10% when the Street was expecting 6.27%.
The company franchises and operates 30,000 restaurants under the Burger King, Tim Hortons, Popeye’s, and Firehouse Subs names.
I love a good potential turnaround story. This has been one of the investment themes that has been good to me during my 24 years as a professional money manager.
Restaurant Brands is now one of our biggest holdings at our firm. It is also now in 3 out of the 5 stock portfolios that I feature in my premium subscription service, Best Stocks Now. I usually own about 20 equally weighted stocks in each of these curated portfolios.
Before I get into our thesis on Restaurant Brands, I want to comment on our current macro-outlook for the market. This current earnings season has been one of the best ones that I have seen in recent years. When we began last week, the estimate for Q1 2023 S&P 500 earnings was $50.76 per share.
By the end of the week, that number went clear up to $52.02 per share! That is one of the biggest moves that I have seen in years. This week is also going very well so far.
This current earnings season is only one-half in the books. We still have 250 companies that have yet to report. If we extrapolate out how the first half went, we could possibly come in with $55 in earnings vs. the $50.76 that was expected when we began last week. This could be the best quarter in recent years for earnings beats.
I also like the fact that the big earnings beats are coming from companies from all walks of life: Chipotle (CMG), Microsoft (MSFT), Churchill Downs (CHDN), Meta Platforms (META), Alphabet (GOOG) (GOOGL), Boeing (BA), etc. I have always said that in the stock market, it is earnings, earnings, earnings! We are getting them!
Now for one of our current top ideas in the market:
I love good management. I especially like a change for the better in management, and I especially like when a proven turnaround expert comes on board. Here is a good example of a stock that we own that just brought in such a turnaround expert.
As I mentioned earlier, Restaurant Brands International is a $21.5B market cap company that is headquartered in Toronto, Ontario, Canada. They franchise and operate 30,000 restaurants under the Burger King, Tim Hortons, Popeyes, and Firehouse Subs brands name. If any restaurant chain needs a turnaround, it is these four restaurants.
When was the last time that you ate at any one of these franchises? How was your experience? Was the food good? What were the premises like? Was the line at Burger King anything like the line at In & Out Burger? Was the line at Popeyes anything like the line at Chik-fil-A?
The sad truth is that I have not been to any of these restaurants recently because they are so bad.
I remember when Domino's Pizza ( DPZ ) was in the same kind of pickle. They consistently ranked in last place in the delivery pizza wars. Their food was bad, their reputation was bad, and their delivery was bad. Enter a new CEO, Patrick Doyle stage left.
Patrick Doyle was with Domino's from March 2010 to June 2018. During that time, the stock went from about $11.00 per share to $269.00 per share. That is a lot of pepperonis! That works out to a 2,345% overall gain. An investment of $10,000 when Doyle came on board would have turned into $2.69 million by the time he left. Doyle also turned Dominos into a digital powerhouse during his tenure.
Here is what a chart of Domino’s looks like while Doyle was at the helm.
Restaurant Brands International recently hired Doyle as its new CEO back in November of 2022. He replaced the two existing CEOs that were previously running the ship. The stock has been public since 2015 and has turned in some decent performance over the years, but the potential is much greater than the results have been.
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The average annual earnings growth rate has been just 4% per year over the last five years, they deliver a mediocre product, and they are way behind with their digital technology. The stock got crushed during COVID-19 and got clear down to just $25.00 per share in March of 2020.
It has made a decent comeback since, but imagine what a complete makeover could do for this franchise. The stock currently has a PE ratio of 21.46X and a Price to Sales ratio of 3.33. Both of these numbers are about average for the sector.
QSR Performance (www.BestStocksNowApp.com)
The stock has picked up some momentum lately with the Doyle news and currently sports a momentum grade of A-. Its returns over the last 1, 3, and 5 years have handily beat the S&P 500, but we think the numbers can be a lot better over the next 1, 3, and 5 years. Remember, it has racked up these returns with just an average of 4% annual earnings growth over the last five years. We are forecasting low double-digit growth over the next five years. This could make a big difference in the valuation and performance of the shares if Patrick Doyle can get this company back on track.
At today’s numbers, the stock does not look like a very good value, but there is a lot of room for improvement. A lot better numbers were already present in the company’s recent earnings release earlier this week. We expect this trend to continue for quite some time.
At a current price of around $72 per share, an expected annual 5-year earnings growth rate of 6.03%, and earnings estimates in the low $3.00 per share range, our current valuation shows just 54.3% upside potential over the next 3-5 years. These numbers still for the most part reflect the previous management, however.
We are projecting an 11% annual average earnings growth rate over the next five years and slightly improved margins with a better product at all four of the company's franchises.
This gets us to a 3-5 year target price of around $130 per share or just over 80% upside potential during this time. We feel that we are using very conservative estimates that could be easily exceeded.
We continue to be bullish on the market now that the Fed is out of the way and this current earnings season is going so well. We have a 12-month target price of 4,500-4,600 for the S&P 500 and a STRONG BUY rating on Restaurant Brands International.
For further details see:
Restaurant Brands International: Our Current Favorite Turnaround Play