If you hadn’t heard of Cara Operations Ltd. (TSX:CAO) before it announced in March that it was buying rival chicken franchise Groupe St. Hubert Inc. for $537 million, you certainly have now, because with one swift move, it’s more than doubled the number of restaurants it operates in the province of Quebec.
While Restaurant Brands International Inc. (TSX: QSR)(NYSE: QSR) is certainly the much bigger player in the Canadian market, let me explain why Cara–and not Tim Hortons’ parent–is the restaurant stock to own here in Canada.
First, let’s talk about leadership.
Bill Gregson has been CEO of Cara since October 2013 when he was hired by Prem Watsa of Fairfax Financial Holdings Ltd. and the Phelan family, Cara’s controlling shareholder, to grow the company. As part of the announcement, Cara announced that Watsa was not only providing growth funding to the restaurant operator, but he was also contributing its Prime Pubs subsidiary to the deal.
Prior to Cara, Gregson turned around The Brick over a four-year period before selling the furniture retailer to Leon’s Furniture for $700 million in 2012. Before that, Gregson spent 11 years growing Forzani Group, which is now part of Canadian Tire. He brought to Cara’s table experience in both franchise and corporate operations as well as with publicly traded companies, an asset that would come in handy two years later when Cara went public in April 2015 at $23 per share.
One year later, Cara stock trades 40% higher with more room to grow on the way.
Second, it has nice profits.
In 2015, Cara delivered operating EBITDA of $111.4 million, 33% higher year over year from 2014. More importantly, it upped its operating EBITDA margin 140 basis points to 6.3%. With the acquisition of St. Hubert, its fiscal 2015 pro forma operating EBITDA jumped to $161 million with an operating EBITDA margin of 6.5%.
When Cara went public last April it set five- to seven-year targets of $175-240 million for operating EBITDA and 7-8% for operating EBITDA margin. With six years left on those targets, the company sits ready to achieve them much earlier than anticipated.
Finally, no discussion about a stock would be complete without mentioning valuation.
Cara paid 12 times adjusted EBITDA for St. Hubert. Its current market cap of $1.58 billion would suggest the company, on a pro forma basis, is trading for 9.8 times operating EBITDA, and that’s without any savings from synergies between Swiss Chalet and St. Hubert. Meanwhile, Restaurant Brands International trades for about 13 times EBITDA.
All around, Cara’s the better buy. And Gregson’s only just getting started.
