Morningstar

Burger King Parent's Compelling Investment Story

We wouldn't require much margin of safety before taking a position in this narrow-moat firm.

Securities In This Article
Restaurant Brands International Inc
(QSR)

With narrow-moat

While a more promotional environment in the U.S. and Canada was likely the impetus behind Tim Hortons' posting 0.2% comps (its fourth straight quarter of two-year stacked comp deceleration), we also believe management's explanation of unfavorable weather, western Canada weakness, and a calendar shift for its hockey card promotion has some merit. While these trends will likely weigh on first-quarter results, we expect improvement during the year through a nationwide espresso launch in Canada and rollout of a digital ordering/payment app in the spring. With Burger King also continuing to find good value/premium balance on its menu across its operating markets, we expect both brands to deliver comps in the low-single-digit growth range next year.

We view the recent master franchise joint venture, or MFJV, for Tim Hortons in the Philippines, Great Britain, and Mexico were the most noteworthy development on the new-unit front. This marks a shift to the next phase in Restaurant Brands' post-acquisition strategy for Tim Hortons, which first focused on making the brand more scalable before finding MFJV partners. As such, our model continues to expect gradual improvement in Tim Hortons unit growth, moving from 4% this year to the mid- to high single digits over the next 10 years.

Combining new comp levers and the foundation for unit expansion with continued cost discipline, we remain comfortable with our assumptions calling for 5% annual average top-line growth and longer-term adjusted EBITDA margins growing to the mid-50s over the next 10 years. We plan to raise our $46/CAD 62 fair values by a few dollars because of the time value of money, and while this implies shares are fairly valued, we wouldn't require much margin of safety before taking a position.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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