Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR), one of the world’s largest quick-service restaurant companies, announced third-quarter earnings results on the morning of October 27, and its stock responded by rising over 4% in the day’s trading session. Let’s take a closer look at the quarterly results to determine if this could be the start of a sustained rally higher, and if we should consider initiating positions today.
Breaking down the rally-enabling results
Here’s a summary of Restaurant Brands’s third-quarter earnings results compared with what analysts had expected and its pro-forma results in the same period a year ago. All figures are in U.S. dollars.
| Metric | Q3 2015 Actual | Q3 2015 Expected | Q3 2014 Actual |
| Adjusted Earnings Per Share | $0.34 | $0.28 | $0.27 |
| Revenue | $1.02 billion | $1.04 billion | $1.11 billion |
Source: Thomson Reuters Corp.
Restaurant Brands’s adjusted earnings per share increased 25.9% and its revenue decreased 8.4% compared with its pro-forma results in the third quarter of fiscal 2014. Its very strong earnings-per-share growth can be attributed to its adjusted net income increasing 26.8% to $162.7 million, helped by its total costs of sales decreasing 13.1% to $446.6 million.
Its weak revenue performance can be attributed entirely to the negative impact of foreign exchange on Tim Hortons’s results, which led to its total revenues decreasing 11.6% to $737.7 million in this segment, and this could not be offset by a 1.1% increase to $282 million in its Burger King segment. Excluding the negative impact of foreign exchange, Tim Hortons’s revenues increased 6.3%.
Here’s a quick breakdown of some other notable statistics from the report compared with the year-ago period:
- System-wide sales increased 1.6% to $4.52 billion at Burger King
- System-wide sales decreased 8.1% to $1.6 billion at Tim Hortons
- On a constant currency basis, system-wide sales increased 11.2% at Burger King and 8.2% at Tim Hortons
- On a constant currency basis, comparable-store sales increased 6.2% at Burger King and 5.3% at Tim Hortons
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 6.4% to $440.7 million
- Adjusted EBITDA increased 1.2% to $196.7 million at Burger King and 11% to $244 million at Tim Hortons
- Opened 141 net new Burger King Restaurants during the quarter, bringing its total count to 14,669
- Opened 69 net new Tim Hortons restaurants during the quarter, bringing its total count to 4,845
Restaurant Brands also declared a dividend of $0.13 per share for the fourth quarter, and it will be paid out on January 5 to shareholders of record at the close on business on November 25.
Should you buy in to or avoid the rally?
Excluding the negative impact of foreign exchange, it was a great quarter for Restaurant Brands, so I think its stock responded correctly by moving higher.
I think this could be the start of a sustained rally back towards its 52-week high, which it still sits more than 12% below, because its stock still trades at inexpensive forward valuations. I also think it represents one of the top long-term growth plays in the quick-service restaurant industry today, because its brands have ample room for expansion worldwide.
Restaurant Brands’s stock trades at a 38 times fiscal 2015’s estimated earnings per share of $1.05 and 31.7 times fiscal 2016’s estimated earnings per share of $1.26, both of which are inexpensive given its long-term growth rate of 11.7% and its industry average multiple of 42.9. I think the company’s stock could consistently command a fair multiple of at least 40, which would place its shares upwards $50 by the conclusion of fiscal 2016, representing upside of more than 25% from today’s levels.
There is still ample room for the company’s brands to expand both domestically and internationally. I think both Burger King and Tim Horton’s could one day have store counts that rival that of the industry leader, McDonald’s Corporation, which has over 36,000 locations today. I also think Restaurant Brands could achieve this expansion without ever running in to issues related to market densification.
With all of the information above in mind, I think Restaurant Brands International represents one of the best investment opportunities in the restaurant industry today. All Foolish investors should strongly consider beginning to scale in to long-term positions over the next couple of weeks.
