Restaurant Brands Earnings: Strong Momentum Is Inspiring, but Shares Look Unappetizing

Restaurant Brands International QSR delivered strong second-quarter results, including $1.78 billion in sales (up 8.2%) and $0.85 in adjusted EPS that handily surpassed our respective $1.73 billion and $0.72 estimates. As a result, we plan to lift our $67/CAD 92 fair value estimates by low-single-digit percentages. However, shares appear a tad overvalued, and as such, we’d suggest investors await a more compelling entry point.

By brand, Tim Hortons achieved healthy comparable sales growth of 11.4%, primarily through leveraging cross-selling opportunities with menu additions; for example, suggesting modest market share gains, cold beverages, and afternoon food offerings grew 16.6% and 14.2%, respectively. Moreover, Burger King U.S. saw impressive 8.3% same-store sales, further narrowing its performance gap with wide-moat McDonald’s (to 2%, from 3.9% a quarter ago). While Restaurant Brands’ efforts to revitalize Burger King through pruning underperforming stores, store remodeling, and digital and ad investments are likely to provide operational improvements, we remain cautious considering traffic remains negative and wide-moat Yum had limited success with a similar strategy at Pizza Hut and KFC. Outside its home turf, Burger King and Popeyes showed strong momentum, posting whopping 18.4% and 47.9%, respectively, systemwide sales growth. These marks affirm our narrow moat rating on Restaurant Brands, which is based on the strength of its brands supported by menu innovation and brand positioning that caters to local tastes and preferences and strong unit development.

Looking ahead, we continue to expect the firm’s growth narrative to stem from unit developments in international markets, investments in digital capabilities and its stores, and product innovation, providing meaningful operating leverage for the business. Consequently, we view our 6% sales CAGR and low-30s operating margins forecast over the next five years as attainable.