Burger King parent company Restaurant Brands has a stock worth devouring, contends long-time restaurant analyst David Palmer at Evercore ISI in a new note on Monday.
Palmer sees several catalysts on the horizon for the company, most notably out of Burger King U.S.
Restaurant Brands said earlier this month that the multinational fast food holding company would invest $400 million to bring Burger King into the future over the next two years. The investment consists of $150 million in advertising and digital investments to “Fuel the Flame” and $250 million for a “Royal Reset” involving restaurant technology, kitchen equipment, building enhancements, remodels, and relocations.
"It's a really exciting moment for us at the Burger King brand here in the U.S.," Restaurant Brands CEO Jose Cill said on Yahoo Finance Live (video above), adding: "We've spent the last 9 to 12 months with new leadership at Burger King in the U.S., working closely with our franchisees on building a plan to engage them, the broader system, our team members, and our guests on our path and plan to reclaim the flame."
Here are the details behind Palmer's call on Restaurant Brands stock:
Price Target: $75
Rating: Outperform (reiterated)
Stock price movement assumed: +27%
"We believe the $400 million investment will be enough to kickstart the brand and we model 4% same-store sales growth in 3Q and 4Q of this year, as well as in 2023 and 2024," he wrote. "[Burger King U.S. President] Tom Curtis and team have been quietly laying the groundwork to get the most out of the incremental investments. We estimate that the 800 remodels will add 1 percentage point to same-store sales growth beginning in late 2023 as the lift should exceed the 12% historically. Additionally, we believe that the 30% boost to marketing spend over the next two years and the $40,000 average refresh to 3,000 restaurants can provide an additional 1- 2 percentage point lift. Most importantly, we believe that 1) the success of the 800 remodels, 2) continuity at the management level, and 3) improved operations and marketing messaging will help accelerate additional remodels at the remaining 50% of restaurants. We would highlight that the consensus 3Q SSS growth estimate of 5% appears slightly aggressive."
"The company plans to focus on its premium Whopper (flame broiled emphasis) and flavor extensions going forward, which we believe hold as much brand equity as the Burger King brand itself," Palmer stated. "Additionally, the Royal Crispy Chicken will be replacing the Ch’King, which will be easier to make and feature more flavors and should help ease operational challenges. We expect additional innovation across the menu, with high- low-price architecture with everyday value still a key focus."
"We are raising our already above consensus 3Q Tim Horton's Canada same-store sales growth estimate to +12% from +10% (consensus +8.5%), which translates to 6% growth vs. 2019. On a 3-year basis, Tim Horton's Canada same-store sales growth in 1Q was -5% and in 2Q was +2%. We believe that the exit rate in 2Q was closer to +5% as trends improved through 2Q. We think this momentum has continued to build in 3Q due to 1) cold beverage and PM food improvements, 2) Canada reopening, and 3) improvements to marketing, digital, and drive thru. We are also raising our 4Q22 and 1Q23 same-store sales growth estimates for the brand to 10% in each quarter (cons. +5% in both quarters). Last week, Tim’s held its franchisee convention in Las Vegas. We believe franchisee morale is the best in years due to improving sales and credible plans across marketing, menu, and digital capabilities."
Taster Whoppers will mean tastier profits, Cil hinted in this mid-February interview. To that end, don't expect $1 Whoppers anytime soon despite the economic slowdown roiling the stock market.
Yahoo Finance's Brooke DiPalma contributed to this story.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Click here for the latest trending stock tickers of the Yahoo Finance platform
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
