Restaurant Brands trades at $72.95 per share and has stayed right on track with the overall market, gaining 8.1% over the last six months. At the same time, the S&P 500 has returned 8%.
Is there a buying opportunity in Restaurant Brands, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Restaurant Brands Not Exciting?
We’re cautious about Restaurant Brands. Here are three reasons why there are better opportunities than QSR, plus one stock we’d rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Restaurant Brands’s revenue to rise by 3.4%. This projection doesn’t excite us and indicates its menu offerings will see some demand headwinds.
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Restaurant Brands’s operating margin decreased by 1.6 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 24.7%.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Restaurant Brands’s EPS grew at an unimpressive 6% compounded annual growth rate over the last seven years, lower than its 8.6% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Restaurant Brands isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 18× forward P/E (or $72.95 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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