Restaurant Brands Stock Has Less Than 10% Upside

At the current price of around $65 per share, we believe Restaurant Brands’ International stock (NYSE: QSR) has moderate growth potential in the near term. QSR stock has risen by 24% since the end of 2018 compared to the S&P500 which has increased by 57% in the same period. Both revenue and earnings declined in 2020 due to the impact of Covid-19, though they are expected to recover in 2021. Over the recent years, the company has seen earnings fall while its P/E multiple has increased. Our dashboard ‘Buy or Sell Restaurant Brands’ Stock?‘ provides the key numbers behind our thinking.

Restaurant Brands’ revenue fell from $5.4 billion in 2018 to $5 billion in 2020 primarily due to the  Covid-19 pandemic. Net income margin fell from 11.4% in 2018 to 9.8% in 2020. On a per share basis, earnings went down from $2.46 to $1.61, accentuated by a 21.2% increase in shares outstanding.

During the same period, the P/E multiple jumped from 21.3x to around 38x. The P/E improved slightly in 2021 and is currently around 40.4x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This, in turn, adversely affected consumption and consumer spending. The restaurant sector was one of the worst affected and Restaurant Brands was no exception as it saw its revenues fall in the first half of 2020. The revenues recovered in Q3 and Q4 but were still below revenues recorded in the same period of the previous year.

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. Following the Fed stimulus — which 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. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. In 2021 we expect QSR revenues to rise to $5.5 billion, up 11% y-o-y. Further, its net income is likely to rise to $644 million, increasing its EPS figure to $2.11, which coupled with the P/E multiple of 33.6x will lead to Restaurant Brands’ valuation around $71 per share, up by 9% from the current market price.

While Restaurant Brands stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Restaurant Brands International vs. Atlas Air Worldwide Holdings shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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