First off, the brands are unmatched; Burger King is one of the biggest fast-food giants internationally, and Tim Hortons is a Canadian classic that is being expanded aggressively across many countries.
Second, the management team is simply the best you could ask for. 3G Capital is a Brazilian firm with terrific managers who are relentless cost cutters and strive for operational efficiency and same-store sales growth; they’re experts in the field of international expansion.
Warren Buffett knows this, and that’s why he has such a huge holding in the company, as well as Kraft Heinz Co., which is also run by 3G Capital. There’s no question that Burger King is one of the benchmarks of international expansion, and the excellent strategy used on its expansion is being used for Tim Hortons, which has a very small international footprint outside Canada. It’s not a mystery that Tim Hortons has been a hit in other countries such as the U.S., U.A.E., and the Philippines, which is the next target for expansion.
Restaurant Brands International’s third-quarter results were released last month, and the stock responded by pulling back slightly before rallying a few days after. Revenues increased to $1.07 billion from $1.01 billion from Q3 of last year. The revenue jump can be attributed to a 1.7% and 2% jump in comparable sales on a constant currency basis at Burger King and Tim Hortons, respectively.
Although fast-food consumption has slowed in U.S. as of late, a big chunk of the reason why Burger King was able to increase revenues from the last quarter was due to the fact that Latin America and Asia were seeing stronger sales.
Restaurant Brands International still has quite a bit of debt, but it looks like this debt is under control. Fast food is a stable business, especially considering how fast the management team is growing revenue as well as earnings in the big picture. Net debt has declined from $8 billion to $7.65 billion over the last year, as most of the free cash flow was used to re-invest into growing the Tim Hortons brand internationally and to pay investors a very respectable 1.5% dividend yield.
The company is growing, and it’s growing fast, while simultaneously chipping away at its debt and rewarding its investors with a growing dividend. It seems to have found the perfect balance, and this is why Warren Buffett loves the stock. It’s a simple business with a proven model, and the experienced managers know exactly what they’re doing and how to do it.
What about valuation?
It’s a common misconception that Restaurant Brands International is an overly expensive stock with a mountain of debt. One must consider the growth potential of the stock as well as the value of the brands owned. The stock has a gigantic amount of growth potential, and the managers are masters of their craft.
Normally, I would be worried about the amount of debt the company took on, but they’re repaying it, while growing and paying dividends. It’s the perfect balance, and I’m not worried at all about the debt; it’s simply not an issue. Warren Buffett knows this, and he has bet big on this company and its management.
The stock actually looks quite cheap at these levels when considering the growth potential. With a fantastic team at the helm, you should feel confident picking up shares today.
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Fool contributor Joey Frenette has no position in any stocks mentioned.