There are two optimal actions in a cyclical bear market…
Hide from the volatility with an elevated cash position until there’s clear evidence of a market bottom, or find stocks that are cheap enough and are paying one to wait to justify putting hard-earned capital at risk.
The problem? There is a dearth of these setups out there currently, even with the S&P-500 (SPY) down 25% from its highs.
However, if one digs deep enough through the rubble, a few names are getting close to meeting these criteria in the large-cap space, and one now meets this criterion after last week’s sell-off.
While this might not seem helpful when putting capital to work if there are just a few ideas, many of the most successful investors have run a very concentrated portfolio. I believe this strategy is acceptable as long as one is extremely rigid in their stock selection.
When it comes to Restaurant Brands International (QSR), the company checks all the boxes and pays one of the most attractive dividend yields in the Retail Space. Let’s take a look below.
Where Growth & Value Intersect
Restaurant Brands International is a large-cap restaurant stock with a market cap of $16.0BB with four iconic brands: Tim Hortons, Burger King, Popeyes Chicken, and Firehouse Subs. The company has 29,700 restaurants, with its two largest brands being Tim Hortons and Burger King.
Based on recent guidance, the company is confident that it can grow its system to 40,000+ restaurants by 202, representing nearly 40% growth.
This is one of the highest-growth rates among its large-cap peers, benefiting from considerable white space outside of North America and newly acquired brands with relatively small footprints (Firehouse Subs/Popeyes Chicken).
Restaurant Brands International’s business model is far superior to most of its peers, benefiting from a 99% franchised model.
In a normal environment, this might not seem all that important. However, in an inflationary environment where rising food costs and rising wages are pinching operators, this franchised model has allowed QSR to report strong earnings growth relative to those with a higher portion of stores being operated.
In fact, the company reported 6% earnings growth in its most recent quarter and 14% sales growth, despite the minor impact from its Russian business (800 stores), which was a headwind in the period.
On a full-year basis, annual EPS is expected to hit a new all-time high at $2.91 (+3% year-over-year).
Some investors might not understand the allure behind owning a business in a discretionary category in a recessionary environment, and this is certainly a valid point when it comes to most of the industry.
However, while casual dining and family dining names struggle to maintain traffic, quick-service restaurants and pizza tend to outperform, given that they benefit from trading down.
The reason is that many consumers can’t give up the convenience and habit of dining out easily, but they settle by simply going after cheaper options.
In QSR’s case, all of its brands have an average ticket below $10.00, are well-known, and benefit from being backed up by strong cash flow generation to help get operators through any speed bumps.
An example of the latter is QSR’s recent investment in Burger King, with $400MM to be invested over two years to increase advertising, drive restaurant enhancements and remodels and support technology/digital investments.
Armed with new leadership (Tom Curtis as President & COO – previously spent 35 years at Domino’s Pizza as EVP after starting as a franchisee) and additional investments, I see a very bright future for the brand and market share gains.
The good news is that QSR is priced attractively as a turnaround story.
In fact, it’s trading at a valuation reserved for a business that is losing significant market share, which is not the case at all, especially not at Firehouse Subs, Tim Hortons, and Popeyes, which are growing market share.
The Fundamental Case
From a valuation standpoint, QSR trades well below its competitors, sitting at ~15.5x FY2023 earnings estimates ($3.28) vs. MCD at ~22.5x earnings and YUM at ~20.4x earnings.
This massive discount is completely unjustified, especially given that QSR offers the best store growth rate.
On a PEG basis, QSR trades at 1.5, a very reasonable valuation for a low-risk and attractive business model such as a relatively recession-proven global franchisor.
The Technical Picture
If we look at the technical picture, QSRâTMs momentum may be to the downside, but it’s nearing a key area where it’s due for a reversal.
This is because the stock has retreated to key support at $51.20, an area that it broke out from in August.
In addition, it’s becoming short-term oversold. The last time it was this oversold was in early June, right before it bottomed out and began a 25% rally.
History doesn’t have to repeat itself, but it often rhymes, and I would expect any positive momentum in the market to help the stock to bottom out near current levels.
The Bottom Line
Based on QSR’s FY2023 annual EPS estimates of $3.28 and a fair earnings multiple of 21 (5% below its peer group), I see a fair value for QSR of $68.90, translating to a 33% upside from current levels.
If we combine this with a 2% share buyback and 4.0% dividend yield though, the return is closer to 39% on a total return basis. To summarize, I see this pullback below $51.30 in QSR as a gift.
Disclosure: I am long SPY, QSR
The above analysis of Restaurant Brands International (QSR) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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