Burger King parent company Restaurant Brands has a stock worth devouring, Evercore ISI restaurant analyst David Palmer claimed in a new note Monday.
Palmer sees several catalysts on the horizon for the company, most notably from Burger King US
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 for “Fuel the Flame” and $250 million for a “Royal Reset” involving restaurant technology, kitchen appliances, building improvements, remodeling and relocations.
“It’s a very exciting moment for us at the Burger King brand here in the US,” Jose Cill, CEO of Restaurant Brands, said on Yahoo Finance Live (video above), adding: “We have spent the past 9 to Spent 12 months under new leadership at Burger King in the US where we work closely with our franchisees to create a plan to engage and plan for them, the wider system, our team members and our guests reclaim the flame.”
Here are the details behind Palmer’s call on Restaurant Brands’ stock:
Palmer believes Restaurant Brands’ aggressive new investments in Burger King US will lead to increased sales and profits.
“We believe the $400 million investment will be enough to kick-start the brand and we are modeling 4% revenue growth in the third quarter and fourth quarter of this year, as well as in 2023 and 2024,” he wrote. “[Burger King U.S. President] Tom Curtis and team have quietly laid the groundwork for getting the most out of incremental investments. We estimate that the 800 refurbishments will add 1 percentage point to same-store sales growth from the end of 2023, as the increase should exceed 12% historically.”
In addition, he said, “we believe that the 30% increase in marketing spend over the next two years and the $40,000 average renewal to 3,000 restaurants could deliver an additional 1 to 2 percentage points increase. Most importantly, we believe that 1) the success of the 800 refurbishments, 2) management-level continuity, and 3) improved operations and marketing messaging will help accelerate additional refurbishments at the remaining 50% of the restaurants.We would like to emphasize that the consensus 3Q SSS growth estimate of 5 % seems somewhat aggressive .”
Better Whoppers will also help, Palmer said, which he and his fellow analysts believe have “just as much brand equity” as the Burger King brand in general.
In addition, “the Royal Crispy Chicken will replace the Ch’King, which will be easier to make and contain more flavors and should ease operational challenges,” Palmer said. “We expect additional innovation across the menu, with a high-low price architecture with everyday value still a key focus.”
In addition, Palmer added, don’t sleep over the turnaround that has taken place at Canadian coffee chain Tim Horton’s, owned by Restaurant Brands.
“We are increasing our already above consensus 3Q Tim Horton’s estimate of same store sales growth in Canada from +10% to +12% (consensus +8.5%), translating to 6% growth over 2019,” it wrote. palmer. “On a three-year basis, Tim Horton’s sales growth in Canada was -5% in Q1 and +2% in Q2. We believe the exit rate in Q2 was closer to +5% as trends We believe this momentum has continued to build in Q3 due to 1) improvements in cold drinks and PM foods, 2) reopening of Canada and 3) improvements in marketing, digital and drive-thru.”
Evercore ISI boosts revenue growth estimates in Q4 2022 and Q1 2023 for Tim Horton’s to 10% in each quarter.
“Last week, Tim’s held its franchisee convention in Las Vegas,” Palmer said. “We believe franchisee morale is the best in years thanks to improved sales and credible marketing, menu and digital capabilities plans.”
Brooke DiPalma of Yahoo Finance contributed to this story.
Brian Sozzi is a great editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.
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