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There has been no material news, and the last news of any kind was a target price upgrade at National Bank in early December. Small caps had a rough December, and tariff fears are playing out in many sectors. But we have no news here and would consider it quite attractive today.
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Names in the restaurant industry and some companies that are considered “value names” have been under pressure recently. In addition, the weak revenue growth of QSR in recent quarters also compressed the valuation multiples of QSR from around 20x to 17.6x now. QSR has the lowest P/E among the restaurant royalty names like YUM, MCD, and DPZ.
We think QSR is a high-quality capital-light royalty name that is facing a near-term headwind; its valuation looks more decent than ever before. We think QSR continues to have a long runway for growth in the international markets, given its brand portfolio is still relatively underpenetrated in emerging markets. It could be considered within the top 10% of Canadian names in terms of business quality. That being said, the restaurant industry is fiercely competitive, so we would size the position appropriately.
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Nothing has changed from our view. As mentioned in a prior question, yesterdat nearly every growth stock got hit. Bond yields moved higher which put investors in a 'risk off' mood. We would still consider SHOP a premier CanadIan growth stock.
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What is the Private Equity playbook in the public market?
Firstly, Private Equity investors do not look for the “traditional compounders” of high-growth, disruptive businesses early in their life cycle and hold on for decades. The primary criteria the private equity industry tends to look for are businesses with a high degree of predictability and a low risk of disruption.
In addition, these investors constantly seek companies with a high degree of recurring revenue, low customer churn, strong pricing power, and consistent cash flow generation. The purest forms of such businesses are subscription-based businesses like software, consumables, consumer brands and other high-recurring revenue products/services, etc. These businesses tend to be highly durable, independent of access to the capital market and able to support a decent amount of debt on the balance sheet even during a tough environment.
One of the primary value-creation engines of private equity investors is to raise prices prudently, control costs efficiently and put a moderate to high level of the amount of debt on these companies’ balance sheets. The debt level tends to vary for different companies, as some are more well-equipped to carry a higher level of debt, but the target leverage levels usually range between 2.0x – 5.0x net debt/EBITDA. The purpose of the debt is to amplify the value creation of the business either through organic growth or cost management.
As the business can grow EBITDA, then the leverage levels naturally go down, and these companies can leverage up again to maintain the target leverage levels and use the proceeds to do some value-creating strategies like acquisitions, buying back shares or paying out special dividends. The model reinforces itself, making even a low, moderate-growth business in EBITDA become a double-digit total return investment over time.
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The AI PC has disappointed--he expected it to mean more and doesn't expect it to. There are better stocks out there, despite a low 9x PE and 3.64% dividend. Shares are -8% the past month. Nothing will move the needle here.