On today’s Breakouts report, there are 27 stocks on the positive breakouts list (stocks with positive price momentum), and 46 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is Restaurant Brands International Inc. (QSR-T), a stock that appeared on the negative breakouts list last Monday when stock markets plunged before bouncing back.
The stock remains in a wait-and-see mode until investors see an improvement in operational results from its Tim Hortons brand (i.e. positive comparable sales). The share price has been consolidating, or trading sideways, since March. Year-to-date, the share price is up just 6 per cent, underperforming the broader market.
The stock has 19 buy recommendations out of the 29 analysts who cover the company. The average one-year target price implies the share price has 13 per cent upside potential over the next year. The stock is trading at a reasonable valuation with room for multiple expansion.
A brief outline on RBI is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Restaurant Brands International, or RBI, operates three well-known quick service restaurant banners: Tim Hortons, Burger King and Popeyes. The company has more than 27,000 restaurants in over 100 countries, nearly all of which are franchised. The company has over 18,600 Burger King, 4,900 Tim Hortons and over 3,400 Popeyes locations worldwide.
The company’s total adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) breakdown in the first-quarter 2021 was: 43 per cent stemmed from Tim Hortons, 45 per cent from Burger King, and 12 per cent from the Popeyes brand.
There is seasonality in the company’s business with the first quarter typically the weakest.
The company is dual-listed trading on the Toronto Stock Exchange as well as the New York Stock Exchange under the same ticker, QSR.
Investment thesis
- COVID recovery play. Lockdowns lifted.
- Organic growth. Management anticipates organic, or internal, sales growth will be led by its quality value product offerings, success with its recent product launches such as its dark roast coffee and freshly cracked eggs at Tim Hortons and its Ch’King chicken sandwich at Burger King, product innovation focused on expanding its core menu items instead of introducing promotional but temporary product launches, and growth in its digital platform.
- Rising digital menu adoption. Fosters convenience, personalized selling, promotions, loyalty programs, reward programs – all aimed at driving sales. In the first quarter, roughly 9 per cent of total sales at Burger King came through its digital menu. At Popeyes, 17 per cent of sales stemmed from its digital channels. There is room for digital menu growth. To put this in perspective, last quarter, over 30 per cent of its sales at Tim Hortons Canada was through its digital menu. In March, there were 2 million downloads of its app, fuelled by its Roll Up To Win digital contest that ran between March 8 and April 4.
- Geographic expansion. Management targets having 40,000 restaurants worldwide within six to eight years, up from its current 27,000 plus restaurants.
- Stock’s valuation is in-line with historical averages. Room for multiple expansion as the discount compared to its peers has recently widened.
- Potential key catalyst: 1) seeing operational improvement at Tim Hortons.
- Key risk to be aware of: 1) labour challenges (i.e. turnover, shortage of staff, higher wages).
Quarterly earnings.
Before the market opened on April 30, the company reported its first-quarter financial results.
Adjusted EBITDA was US$480-million, exceeding the consensus estimate of US$456-million, and up 8 per cent year-over-year. Adjusted earnings per share came in at 55 US cents, topping the Street’s forecast of 50 US cents, and up 15 per cent year-over-year.
Same-store sales declined 2.3 per cent at Tim Hortons, rose 0.7 per cent at Burger King, and increased 1.5 per cent at Popeyes. In Canada, same-store sales at Tim Hortons declined 3.3 per cent with stay-at-home orders negatively impacting results.
Nearly half of the company’s Tim Hortons restaurants are located in Ontario, a province that only recently emerged from a lengthy lockdown. At quarter-end, net leverage stood at 6 times.
The share price advanced 1.4 per cent that day, closing at US$84.41. The share price has not moved materially higher, closing at US$82.80 on July 23.
On the earnings call, chief financial officer Matt Dunnigan remarked on the company’s high debt levels, “While net leverage may seem high relative to other industries, we are very comfortable with our position for a number of reasons. First, our liquidity position is solid. Between our $1.6 billion of cash on hand and our undrawn revolver, we have about $2.6 billion available. We also have no upcoming maturities until 2024, and approximately 80 per cent of our capital structure is fixed at attractive rates as a result of the refinancing work we’ve done over the last few years. And most importantly, as José [chief executive officer José Cil] mentioned earlier, our business model as a franchisor is very efficient, and our high conversion of earnings to cash flow provides plenty of capacity to cover our debt service obligations multiple times over.”
The company will be releasing its second-quarter financial results before the market opens on July 30 and hosting a conference call that morning at 8:30 a.m. (ET).
Dividend policy
The company has been steadily increasing its dividend. RBI pays its shareholders a quarterly dividend 53 US cents per share or US$2.12 per share yearly, equating to a current annualized yield of 3.2 per cent.
Analysts’ recommendations
The stock is covered by 29 analysts, of which 19 analysts have buy recommendations, nine analysts have neutral recommendations, and one analyst (Goldman Sachs’ Jared Garber) has a “sell” recommendation.
Revised recommendations
Since the beginning of June, the following analysts have revised their target prices.
- Barclays’ Jeffrey Bernstein to US$77 from US$73.
- Goldman Sachs’ Jared Garber to US$59 from US$66
- Evercore ISI’s David Palmer to US$75 from US$78
- KeyBanc’s Eric Gonzalez to US$75 from US$77.
- Wells Fargo’s Jon Tower to US$86 from US$83.
Financial forecasts
According to Bloomberg, the consensus EBITDA estimates are US$2.23-billion in 2021, up from US$1.86-billion reported in 2020, and forecast to rise to US$2.48-billion in 2022. The Street is forecasting earnings per share of US$2.64 in 2021, which is anticipated to rise 17 per cent to US$3.10 in 2022.
In recent months, earnings expectations have remained steady for 2021, while increasing modestly for 2022. For instance, three months ago, the Street was forecasting earnings per share of US$2.63 for 2021 and US$3.02 for 2022.
For comparison purposes, looking at McDonald’s (MCD-N) the consensus earnings per share estimates are US$8.64 for 2021, increasing 11 per cent to US$9.58 in 2022.
Valuation
According to Bloomberg, the stock is trading at a P/E (price-to-earnings) multiple of 19.1 times the 2022 consensus estimate and at an enterprise value-to-EBITDA multiple of 15.5 times the 2022 consensus estimate. These are in-line with the three-year historical average P/E and EV/EBITDA multiples of 18.9 times and 15.3 times, respectively.
The average one-year target price is US$74.39, implying the share price may appreciate 13 per cent over the next 12 months.
Industry peer McDonald’s is trading at a P/E multiple of 23.3 times the 2022 consensus estimate, four multiple points higher.
Insider transaction activity
Last month, there was mixed trading activity reported by insiders with both buyers and sellers in the public market. Listed below are several of these transactions.
On June 18, chief financial officer Matt Dunnigan sold 10,000 shares at a price per share of US$66.64, trimming this particular account’s position to 45,492 shares. Proceeds from the sale totaled US$666,400, not including trading fees.
That day, director Marc Lemann purchased 15,000 shares at a cost per share of US$67.15 for an account in which he has indirect ownership (Maai Ltd.), initiating a position in this specific account. The cost of this investment totaled over US$1-million, excluding commission charges.
On June 17, president of Popeyes Americas Sami Siddiqui divested 10,290 shares at a price per share of US$68.74, after which this specific account held 157,778 shares. Proceeds from the sale totaled over US$707,000, excluding trading fees.
On June 14, director John Prato invested over $247,000 (Canadian) in shares of RBI. He acquired 3,000 shares at a cost per share of $82.45, initiating a position in this specific account.
On June 11, controller and chief accounting officer Jacqueline Friesner exercised her options, receiving 46,005 shares at an exercise price of US$42.26, and sold 46,005 shares at a price per share of US$67.78, leaving 109,065 shares in this particular account. Net proceeds exceeded US$1.1-million, excluding any associated transaction fees.
Chart watch
The stock has been a laggard. Year-to-date, the share price is only up 6 per cent. Since the beginning of March, the share price has been trading sideways, hovering around the $80 (Canadian) level.
The stock is still trading below its pre-COVID levels. To illustrate, on Feb. 20, 2020, the stock price closed at $88.03. On July 23, 2021, the share price closed at $82.80.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $90. There is a major ceiling of resistance between $100 and $105. Looking at the downside, there is strong technical support around $80, close to its 50-day moving average (at $81.62) and its 200-day moving average (at $79.21).
This report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty