Over the last six months, Restaurant Brands’s shares have sunk to $61.96, producing a disappointing 8.9% loss - a stark contrast to the S&P 500’s 17.4% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Restaurant Brands, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Restaurant Brands Not Exciting?
Even though the stock has become cheaper, we're swiping left on Restaurant Brands for now. Here are three reasons we avoid QSR and a 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 4.5%, a deceleration versus This projection doesn't excite us and indicates its menu offerings will see some demand headwinds.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Restaurant Brands’s operating margin decreased by 6.8 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 23.4%.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Restaurant Brands’s $15.77 billion of debt exceeds the $1.03 billion of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $2.84 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Restaurant Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Restaurant Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Restaurant Brands isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 18.4× forward EV-to-EBITDA (or $61.96 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
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