What’s Next for Restaurant Brands Stock?

Restaurant Brands stock has gained 25% in the last 12 months but has underperformed in the long term.

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Shares of Restaurant Brands International (TSX:QSR) shrugged off weakness late last year after prolonged pandemic woes. They have gained 25% since October 2022, beating broad market indexes. The Canadian quick-service restaurant chain operator came up with fourth quarter (Q4) 2022 and annual earnings last month. Although it reported a decent set of numbers for 2022, the upcoming year will likely to be full of challenges.

Should you buy QSR stock now?

Despite the recent rally, QSR stock is currently trading well below its pre-pandemic highs. Including dividends, it has returned 29% in the last five years and 136% in the last 10 years, underperforming peers.

For 2022, QSR reported total revenues of US$6.5 billion, marking a decent 13% increase year over year. Net restaurant growth for 2022 marginally slowed to 4.3% compared to 2021. Net restaurant growth refers to a rise in the net restaurant count in a particular period. Net income for the period came in at US$1.48 billion versus US$1.25 billion in 2021.

Restaurant Brands International operates approximately 30,000 restaurants in over 100 countries. This scale provides a significant competitive advantage to the company. However, at the same time, a large global presence exposes to risks as well. For example, a year-long war in Europe and earthquakes in Turkey and Syria could negatively impact its revenue growth.

The company operates popular banners like Tim Hortons, Burger King, Popeyes, and Firehouse Sub. Burger King remains the top revenue contributor among other segments. It brought in 65% of system-wide sales in 2022, while Tim Hortons and Popeyes generated 18% and 16%, respectively.

Inflation biting hard

While QSR’s 2022 performance indicates decent growth, the pressure of rising costs was quite visible and might dent its profitability in 2023. For example, its gross margin dipped to 38% in Q4 2022 compared to its long-term average of 42%. High prices of commodities will likely continue to squeeze its margins this year.

Hospitality was at the fore and bore the brunt during the pandemic. Now, as well, it is at the receiving end with record-high inflation and rapidly rising interest rates. It’s not just Restaurant Brands, but almost the entire consumer discretionary sector will feel the heat of rising costs and margin squeeze this year.  

Rapidly rising interest rates also weighed on its earnings last year. Restaurant Brands is a highly leveraged company and carries a high amount of debt on its books. At the end of 2022, the company had a net debt of US$12.2 billion. That’s three times equity and six times EBITDA (earnings before interest, taxes, depreciation, and amortization). Notably, 80% of this debt has a fixed interest rate through hedging, and 20% has a variable rate. Higher interest expenses might negatively impact its profitability amid the rising rate environment.

Restaurant Brands stock pays a stable dividend that yields 3.3%. It currently looks overvalued with its price-to-earnings ratio at 27 and enterprise value-to-EBITDA ratio at 14. Both measures are higher than the historical average and compared to the industry average.

Conclusion

The recent rally and a juicy dividend yield are quite encouraging for Restaurant Brands International investors. However, how the stock plays out later in the year, particularly on upcoming quarterly earnings, will be interesting to see.

Its highly leveraged balance sheet and concerns regarding rising costs could cap the stock in the short to medium term. It would be prudent for investors to revisit the QSR thesis in the second half of 2023 with more clarity on the global economic growth outlook.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.  Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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