Robert FloydRestaurant Brands InternationalQSR.TOHOLDJan 15, 2009

Popeye's used to be the big part. Did well with Tim Horton's and now the focus is on Burger King but there is more competition. The recent quarter was OK.

CEO turned around Domino's Pizza, and that's why he owns the stock. Nothing to fix at Tim's, still working on Burger King. Tim's is undervalued. Headwinds:  beef prices are higher, food prices have gone up, delivery costs have increased. Multiple's not high, very well run. 

Royalty business, all free cashflow. Spending to spruce up BK should end this year, and cashflow should gush. Yield is ~3%.

It is doing well and has positive same store sales. It wants to grow its store count by 5% per year over the next couple of years and also wants to get franchised stores from 95% to 99%. It has oscillated over the past few years so buy on the low side. It is at a reasonable valuation.

Little has changed since November. Horton's and their international business are both performing very well. US Burger King is underperforming due to high beef prices. Trades at a large discount to peers.

Consumer space has seen some winners, but lots of losers, especially in discretionary. If your holding period is 3-5 years, this is a reasonable opportunity to buy when it's out of favour. Tim's and BK are strong brands.

Reason not to buy hinges on the consumer -- housing, inflation, job market. He hopes they're in a better position 5 years from now.

Entire space under pressure. Worries about inflation and high prices of fast food for low-income earners. Bad January weather won't help these companies.

In midst of final transformation of improving Burger King operations, so $$ spent on that should slow down in next year or so. After that expects it to gush cash, with significant dividend increases and share buybacks. Very attractive valuation. Tim's is doing fantastically. International segments are sizzling. A non-AI, sleep-at-night name for the long term.

Are three years into a turnaround and we're starting to see the fruits of it. It trades at a discount to other fast food companies. As they re-franchise stores they acquired for Burger King, free cash flow will rise and the multiple will converge with other stocks. Burger King needed to update, using technology to drive sales.

QSR is up 85.5% in the past 10 years. Not a stellar return, but reasonable. There was a lot of excitement with the management change, but higher costs and labour issues have offset much of the excitement. The last quarter was mixed; Looking ahead to Q3 (results out on Wednesday).  Restaurant Brands' 3Q consolidated same-store sales may have improved vs. 2Q's 2.4% gain as year-over-year comparisons eased across all home and international markets. Burger King's gain may have been fueled by improved operations, value, remodels and family-based marketing activations. Faster speed of service and cold and espresso-based beverage growth likely boosted Tim Hortons' results. Popeyes may have seen a modest lift from better operations but results likely lagged behind Burger King and Tim Hortons. International same-store sales may have outperformed the US and Canada due to newer stores and less competition, and strong operations and value. But, QSR has missed 4 of the past five quarters, so investors tend to not believe its forecasts too much. At 18X earnings, we think it is priced OK. It may do better when the party in other sectors (i.e. tech) fades. Debt reamins very high, at about 7X cash flow, and we really think this is one reason investors are not supporting the stock much. Growth next year is expected to be about 10%. It has 34 analysts, with 20 at BUY, 13 HOLD and 1 SELL. We would consider it OK but agree it is not hugely compelling other than its relative safety and income. We do have it in our income portfolio but at a fairly low commitment level.
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She's nervous about the consumer, particularly in Canada. Highly indebted consumer is being more cautious on discretionary spending. If it were just Tim's, she'd be OK with it because she likes the trade-down economics. Burger King is still closing stores, lots of competition and margin pressure.

It has recently pulled back. The executive chairman did very well with Dominoes as their CEO and is moving the stock price up. He had to buy $30 million of stock with his own money for $200 million in compensation. Although his success with Dominoes is good for the stock, it hasn't moved up too much.

Trades at 20x EBIT over EBITDA, about normal. Shares are below a declining 200-day MA, but still above 200-week MA. Rising input costs of labour and commodities, as well as competition, have really held shares back. Question of saturation in Canada. Challenge to scale meaningfully outside NA. Franchise execution risk.

Good business economics. Really strong brands that generate a lot of cashflow. His hangup is the balance sheet, it's not investment grade. In times of turmoil access to credit could be restricted, and acquisitions are not in easy grasp. Lots of value at 16x PE.

As the economic situation gets tighter, discretionary items get cut. Consumers may not want to cut, but they may have to. Unemployment in both Canada and US are ticking up, and any discretionary items will be impacted.

Quality management lets you hold a name for a very long time. New chairman turned around DPZ, hired to do the same here. Hasn't yet happened, spending lots to remodel Burger Kings. Tim's and Popeye's doing well. Tough macro. Cheapest in the restaurant space.

The valuation assumes there is no growth happening but there is. It is expanding, including overseas, but not focused on China like its peers. Has a new CEO from Dominoes which did very well.

Not buying it now. For options, you could go out to the May $94 put and sell it for close to $4. If it pulls back, you're force to buy at $94. The implied volatility is decent. Pays a 3% dividend; you can get more yield by selling upside calls.