Is Restaurant Brands’ Stock Undervalued At $60?

[Updated 01/06/2021] Restaurant Brands Update

Having remained nearly flat in 2020, Restaurant Brands’ Stock (NYSE: QSR) has growth potential in the near term. QSR’s stock remained nearly flat at $61 compared to the S&P 500 which gained 15% in 2020. The company has seen a high revenue growth over recent years, and its P/E multiple has also risen steadily. We believe the stock, after the recent rally, has a moderate upside. Our dashboard ‘What Factors Drove 8% Change In Restaurant Brands International Inc. Stock Between 2017 And Now?‘ has the underlying numbers.

Due to the Covid-19 crisis, Restaurant Brands saw its revenue fall by 12% in the first 3 quarters of 2020 as the pandemic forced restaurants to operate more on take-away and delivery mode. In Q3 2020, Restaurant Brands saw some recovery as it beat consensus estimates for revenue recorded at $1.3 billion, down 8% y-o-y and earnings recorded at $0.48 compared to $0.75 in the same period of the previous year. The fall in EPS is due to higher operational expenses during the pandemic. Further, the company reported $608 million of cash inflows from operating activities for the first nine months.

We expect Restaurant Brands’ revenues to remain flat at $5.6 billion for 2020 due to expected growth in Q4 revenue. Further, its net income is likely to fall to $547 million, decreasing its EPS figure to $1.79 in 2020. Thereafter, revenues are expected to grow further to $5.9 billion in 2021. In addition, the EPS figure is likely to improve to $2.10, which coupled with the P/E multiple of around 34x will lead to Restaurant Brands’ valuation around $71, more than 15% upside compared to the current market price.

[Updated 07/28/2020] 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.

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.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

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