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What are we looking for?

When COVID hit, a number of consumer cyclical stocks experienced large declines. Restaurants were in this group, with stock prices dropping up to 75 per cent from their prepandemic highs as coronavirus restrictions limited eateries to offering takeout only. With these establishments beginning to reopen for dining, a number of restaurant stock prices have recovered significantly since the lows of last year. With that backdrop, are there firms in this industry still presenting investment opportunities?

The screen

We used StockCalc’s screener to select the 10 largest restaurant companies on the Toronto Stock Exchange and TSX Venture Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

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  • Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.

If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30, which offers a 30-day free trial and special pricing for the second month).

What we found

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from our models and analyst target data.

This industry includes companies that own, operate and/or franchise full- or quick-service restaurants. Four of the companies listed are royalty trusts, which flow all of their taxable income to unitholders. Trusts either own the debt and equity of the underlying business or receive royalty revenue from it.

What is interesting is most of the companies in the accompanying table are showing as fully to slightly overvalued by our models, implying the market has already looked past the opening to these companies returning to a more “normal” business environment – and has priced them accordingly.

Let’s look at a couple of these companies:

MTY Food Group Inc. is an interesting company to examine here as it has gone full circle, from $65 a share pre-COVID to less than $15 on March 18, 2020, and is back up over $65 again. The majority of its revenue comes from Canada and it is ubiquitous in malls across the country with brands such as Manchu Wok, Muffin Plus and Van Houtte. According to a recent study by Deloitte, mall traffic had been declining year-over-year even before the pandemic hit but the study suggests the reopening may actually breathe new life into malls as we look to get out of our homes more. Our models and the analyst target support the current price for MTY.

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The stock price of A&W Revenue Royalties Income Fund has also come full circle, from $37 a share pre-COVID to less than $18 on March 18, 2020, and is back up over $37. A&W pays a 3.7-per-cent distribution (which was suspended for three months during 2020). Our models are showing a range of valuations for A&W with a higher reliance on the ABV calculation, which leads us to a weighted valuation of $36.29, or 3.5 per cent below its current price.

All of our models show SIR Royalty Income Fund, which had the largest 12-month price increase of all names listed, as currently overvalued. The fund receives its royalties from privately owned SIR Corp., whose banners include Jack Astor’s and Scaddabush. (SIR Royalty said recently it plans to resume its monthly distributions effective July 30.)

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select Canadian-listed restaurant stocks 

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val ($)Diff (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)Div. Yld. (%)1Y Rtn. (%)
Restaurant Brands Int'lQSR-T25,417.582.8076.12-8.1109.5532.7771.55112.523.211.9
MTY Food Group Inc.MTY-T1,678.267.9268.931.555.87105.8370.5767.00n/a139.9
Recipe Unlimited Corp.RECP-T1,202.321.3320.31-4.88.2212.4017.3624.25n/a119.7
A&W Revenue RoyaltiesAW-UN-T548.737.6036.29-3.521.4325.1339.59n/a3.736.6
Pizza Pizza RoyaltyPZA-T363.811.3010.86-3.99.378.909.3812.505.640.8
Boston Pizza RoyaltiesBPF-UN-T304.814.1414.502.53.0615.0317.6814.504.6112.0
Keg Royalties Income Fd.KEG-UN-T167.014.7113.95-5.2-10.687.9521.87n/a3.566.8
SIR Royalty Income FundSRV-UN-T82.09.897.74-21.7-6.991.176.54n/an/a241.0
Freshii Inc.FRII-T67.62.132.161.2-0.043.102.762.56n/a49.0
Sportscene Group Inc.SPS-A-X34.44.003.32-17.11.431.503.320.00n/a23.1

Source: StockCalc

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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