After a 10% decline since the beginning of this year, at the current price of around $68 per share, we believe Restaurant Brands International Inc. stock (NYSE: QSR), one of the largest fast-food restaurant chains in the world, including Burger King, Tim Hortons, Popeyes, and, since late 2021, also Firehouse Subs – could see modest gains in the near term. QSR stock has declined from around $78 to $68 year-t0-date, underperforming the broader indices, with the S&P growing about 20% over the same period. In comparison, QSR’s peer Starbucks’ (NASDAQ: SBUX) stock increased 3% year-to-date to $97.
QSR’s stock decline can be attributed to investors’ concern about rising costs and their effects on the company’s bottom line. The company’s stock has been modestly lower since its Q3 report – as increased sales and profits in Q3 did not improve as much as the market anticipated. QSR’s Q3 revenues grew 25% y-o-y to $2.3 billion, driven by an increase in system-wide sales primarily in the International and Tim Hortons segment. The company’s consolidated comparable sales came in at 0.3% compared to 7% a year ago. Among the five reporting segments, the company saw a notable decline across all segments – a negative 0.7% for Burger King, a negative 4.0% for Popeyes Louisiana Kitchen, Tim Hortons comp sales fell to 2.3% from 7.6% previously, and Firehouse Subs same-store sales fell to negative 4.8%. On the bottom line, the company’s earnings were flat y-o-y at 79 cents in the third quarter (while adjusted profits increased 4.6% to $0.93).
QSR is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market Returns for the stock were 3% in 2021, 11% in 2022, and 25% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period.
Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could QSR face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?
Restaurant Brands stock trades at a lower price-to-earnings ratio of ~17x – compared to a P/E ratio of 25x for Yum! Brands (NYSE: YUM), 26x for McDonald’s (NYSE: MCD), and 29x for Starbucks. That said, QSR’s current valuation is also lower than its own five-year average of 24.5x. We forecast QSR’s Revenues to be $8.2 billion for the fiscal year 2024, up almost 17% year over year. Looking at the bottom line, we now forecast EPS to come in at $4.01. Given the changes to our revenues and earnings forecast, we have revised our QSR’s Valuation to around $75 per share, based on $4.01 expected EPS and an 18.7x P/E multiple for the fiscal year 2024—which is 10% higher than the current market price.
The company has solid mid-to-long-term growth prospects. Tim Horton’s, Popeyes, and Firehouse Subs are far less penetrated internationally than McDonald’s or Burger King. That means more room to open new restaurants and a longer runway for revenue growth. The revenue stream of QSR is directly influenced by the system sales it generates across its brands, which can be increased by growing restaurant sales or by adding as many restaurants as possible. It should be noted that the company’s Q3 net restaurant growth expanded by 3.8% compared to the previous year (contributing to a total count of 31,525 restaurants globally) – despite cost inflation. [System-wide sales are different from revenues in that they refer to sales for all franchise restaurants, while revenues include supply chain sales, as well as royalty, property, and advertising revenues from the franchises.] It should be noted that QSR’s latest third-quarter results include the incorporation of Carrolls Restaurant Group and Popeyes China under a new reporting segment, Restaurant Holdings.
QSR released its five-year outlook earlier this year. The company expects a $60 billion system-wide sales figure in 2028. This represents a compounded annual growth rate (CAGR ) of ~7% from 2023. The company also expects the adjusted operating profit to rise to $2 billion by 2028, a CAGR of 7.8% from 2023. All in all, the company’s outlook seems optimistic for the next five years. This reflects that even if there’s a slowdown in the next year or two, the stock can still perform well.
While QSR stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Restaurant Brands’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
While investors have their fingers crossed for a soft landing by the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.
