Restaurant Brands Has An Upside At $56?

After a 71% rise since the March 23 low of this year, at the current price of around $56 per share, we believe Restaurant Brands’ Stock (NYSE: QSR) still has upside. Restaurant Brands’ stock has increased from $32 to $56 off the recent bottom, better than the S&P which increased by around 40%. The rise in stock price was helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The price further went up as Restaurant Brands’ Q1 2020 revenues beat market estimates driven by Popeyes Louisiana Kitchen which saw a comparable sales growth of 26.2% y-o-y. The stock is expected to improve further as at the end of last month the company announced the recovery of comparable sales for Burger King in the US driven by higher digital sales and Popeyes continued to show high growth in comparable sales.

The stock currently is 2% below the levels at which it was at the end of 2017 and it is still below the pre-Covid (February 2020) high of $67. We believe that the company’s stock has a possible upside, driven by the outlook for healthy revenue growth. Our dashboard ‘What Factors Drove -1.7% Change In Restaurant Brands Stock Between 2017 And Now?‘ has the underlying numbers.

Some of the stock price fall in the 2017-2019 period is offset by the 22% growth in revenues. Restaurant Brands’ revenues increased from $4.6 billion in 2017 to $5.6 billion in 2019, helped by the high growth in Popeyes restaurants. This was offset by a 10% decrease in profitability as net income margin declined from 27% in 2017 to 20% in 2019.

The stock price fell slightly during this period as margins fell but revenue grew, which led to a rise in the P/E multiple of 21x in 2017 to 26x in 2019. While Restaurant Brands’ P/E is down to about 23 now, given the volatility of the current situation, there is a possible upside for Restaurant Brands’ multiple when compared to levels seen in the past years – P/E of 26x at end of 2019.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Restaurant Brands’ stock is down by about 9% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 2%. Due to the coronavirus pandemic the company saw a 3% fall in Total revenues for Q1 2020. Popeyes offset the fall with a revenue growth recorded at 30% y-o-y. That said, slower lifting of social distancing measures over the coming months could likely lead to lower footfall in restaurants.

In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value.

Thus, with high revenue growth over the years, better than expected Q1 2020 revenue despite the crisis, has helped Restaurant Brands’ P/E multiple to recover to 23x currently. The company is expected to add close to $200 million to its revenue over 2020 and 2021. With investors’ focus shifting to 2021, the P/E multiple could rise further, leading to a rise in the stock price. As per Restaurant Brands’ valuation by Trefis, QSR’s fair price estimate comes to $70.

While Restaurant Brands offers a promising proposition to potential investors, could investing in debt-laden, down-but-not-out companies yield large upside post-Covid? Find out more in our analysis: The Leveraged 5: AAL, CTL, COTY, OXY, HOG.

For greater insight in to the restaurant space, check out how McDonald’s and Starbucks compare against each other.

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