The chairman of Restaurant Brands International (RBI), Patrick Doyle, a former CEO of Domino's, is concentrating on increasing franchise profitability. To improve the competitive positions of its brands, the company is concentrating on rethinking digital ordering, loyalty programs, and retail spaces. Over the coming years, it is anticipated that RBI's overseas operations will become increasingly significant to the company's overall performance. The company's focus on a turnaround at Burger King is probably a logical step after successfully revitalizing its Tim Hortons brand. Although Burger King's US business has experienced a controlled decline, RBI's goals and growth story continue to captivate. The business keeps using its robust global franchisee network to propel rapid international expansion.15,639 stores made up 49% of its total estate as of the end of 2024, and the 8% annual growth in foreign stores during 20212024 easily outpaced the 0.5% annual growth in its home markets. Over the ensuing ten years, this disparity is anticipated to continue.
Bill Ackman (Trades, Portfolio)'s Pershing Square Capital is heavily exposed to Restaurant Brand International with QSR constituting 16.07% of its portfolio. And Bill Ackman (Trades, Portfolio) has rewarded fairly as his average buying price is determined to be $41. With a $1.42 billion position, Pershing Square owns 7% of the Restaurant Brand International. Interesting Seth Klarman (Trades, Portfolio) has recently added RBI shares worth $179 million to his portfolio.
Investment Upsides
Due to fierce competition, low barriers to entry, and low consumer switching costs, the global restaurant industry makes it difficult for operators to create an economic moat. Franchisee interest and unit growth are boosted by moaty operators' strong store-level economics, sales outperformance, and superior returns on invested capital. Because of these factors, RBI, a well-known international brand with operations in more than 100 countries, has been given a narrow economic moat rating. However, RBI is unable to assign a broad economic moat due to growing international competition, the destruction of historical value, and recent difficulties with the Tim Hortons and Burger King brands. The RBI is currently working to increase franchise profitability, which has drastically decreased over the previous six months. With an average annual systemwide sales growth of 2.5% over the next ten years, RBI's US burger business continues to have the softest unit economics, even with a 50% increase in store-level EBITDA in 2023. It's possible that RBI's focus on a Burger King turnaround is a logical extension of its successful Tim Hortons brand revitalization.Even though Burger King's US business has seen a well-managed decline, RBI's goals and growth story are still compelling. With 15,639 stores at the end of 2024, accounting for 49% of its total estate, it is still using its robust global franchisee network to propel rapid growth overseas. The 0.5% annual growth produced in its home markets is easily outpaced by the 8% annual growth in international stores during 20212024, and this disparity is predicted to continue for the next ten years.
Due to smaller footprint locations and increased investments in cold beverage and espresso platforms, Tim Hortons has observed a slight appetite for growth in the US. Although 3G Capital, a private equity shareholder, has not been able to significantly speed up this growth, the progress is encouraging. The company has enhanced franchisee relationships and addressed franchisee concerns through its investments in digital drive-thrus, the Tim's Rewards loyalty program, and $80 million set aside for incremental marketing in 2021. After a few tumultuous years, unit-level EBITDA in Canada grew a strong 30% in 2023 and another 9% in 2024, wiping out the majority of the recent drawdown and easing franchisee concerns.
The existence of a brand intangible asset is suggested by Burger King's strong international comparable sales performance, international portability, and master franchise relationships. On the other hand, Burger King's US operations would probably receive a no-moat rating on their own. After lagging behind no-moat Wendy's and wide-moat McDonald's in recent years, the brand is regarded as the bronze medalist in the US. Anemic unleveraged payback periods and cash-on-cash returns are expected to fuel continuous, albeit slight, market share losses in the US, while weak systemwide sales growth and ongoing franchisee bankruptcy problems do little to allay worries.
With rapidly improving unit economics in the US, international white space, perhaps the best product launch since the Big Mac, and digital investments, Popeyes, on the other hand, is a brand in ascendancy. These factors position the Cajun-inspired concept as the RBI portfolio's growth engine. Since its viral debut, the chicken sandwich has increased average unit volumes by $400,000, or nearly 30%. Popeyes' increased volume cuts payback periods and cash-on-cash returns by almost a year, putting the company on par with major QSR rivals KFC and Wendy's but far behind industry titans like Starbucks and Domino's. This is in contrast to restaurant margins in the high teens in a normalized operating environment.
Consumers have stayed loyal to the brand because, historically, trial has been the biggest deterrent to purchase intent, not taste, design, or service. Customers have been coming back to try fried shrimp, red beans, and other fried chicken products because of the chicken sandwich, which has prompted testing throughout the menu. Over the next ten years, the concept has the potential to add over 1,600 domestic stores, which would represent an average annual growth in net units of 4.2%.Restaurant Brands International (RBI), the third-largest restaurant company in the world based on sales, has a big edge when it comes to technology investments, brand-level advertising, and procurement costs. RBI has a long-lasting advantage over smaller rivals thanks to its capacity to make technological investments, obtain affordable financing, and offer franchisees short-term support, even though it is at a disadvantage in some foreign markets. Brands gain from scale in marketing and procurement in markets with more than 100 foreign units. Because of its market share, RBI's Tim Hortons division can operate at lower costs than its Canadian rivals. The Popeyes and Burger King segments in the US benefited from the use of a purchasing co-op, which suggests scale-driven procurement advantages that are corroborated by industry management commentary.
Intrinsic Valuation
Restaurant Brands International : Why Bill Ackman is in love with this stock
With sales of $2.30 billion and earnings per share of USD 0.79 in Q4 2024, Restaurant Brands International (RBI) is projected to have a fair value estimate of USD 84.31 per share in 2025. Over the next five years, the company's operating profit is anticipated to increase at a 6.7% CAGR, propelled by gains from refranchising, comparable sales growth, unit growth, and modest operating leverage. Due to robust unit expansion, the international segment is anticipated to see a 10% yearly systemwide sales growth through 2029. With a projection of slightly over 48,500 units by 2034, the company's 40,000-unit target between 2027 and 2029 is deemed achievable, supporting system sales of USD 80.7 billion in that year.
Investment Downsides
RBI, a restaurant chain, is influenced by the state of the macroeconomy; the main demand inputs are inflation in nondiscretionary expenses like housing and healthcare, unemployment, and gas prices. Through digital acuity, customization, and menu innovation, the company competes with other QSR concepts for labor, real estate, and franchise operators, as well as for consumer interest. Chained restaurants are gaining market share in the industry, and RBI is up against wealthy, competitive rivals. Worker relations are the most sensitive, with limited resources and a low pay scale leading to issues with fair labor scheduling and wage theft. Although these risks are unlikely to have a significant impact on QSR restaurants' brand, they could still put pressure on profitability if the labor pool is still more scarce than it was prior to the pandemic.The ability to pass on increases in input costs to customers, capital availability, and master franchise partners are all critical components of RBI's unit-growth strategy.
Portfolio Management
Although RBI's balance sheet looks sound, there are issues with the management's inconsistent track record with acquisitions, internal projects, and slight underinvestment in its brands. At the end of the fourth quarter of 2024, the company's net debt to EBITDA ratio was 4.8 times, indicating that it continues to carry a significant debt load. It has comparable leverage to other highly franchised quick-service restaurant peers, though, and is on the verge of receiving an investment-grade rating. Through 2029, the company is expected to have adjusted EBITDA/net interest expense coverage of 5.1 times and an average net debt/EBITDA coverage of 3.3 times. 3G Capital, which owns about 30% of the ownership interest through redeemable partnership exchangeable units, has had an impact on RBI's internal procedures. With the help of a robust network of master franchise partners, 3G has effectively accelerated unit growth at Popeyes and Burger King, pushing median annual unit growth up 2.5% at Popeyes and 2% at Burger King. However, until younger restaurant technology has demonstrated a definite return on investment, investment is likely to be postponed due to worries about the organization's operational capabilities, strict performance-based incentives, and cost management. This seems to be shifting under the direction of Chair Patrick Doyle and CEO Josh Kobza, as investments in restaurant renovations, equipment upgrades, and putting franchisee profitability first seem to be more in line with long-term investor objectives. The final pillar of RBI's investment assessment takes into account the conflicting concerns of shareholders. Income investors continue to find the company's roughly 75% dividend payout ratio appealing, and additional capital returns through share buybacks provide incremental upside. Nonetheless, RBI is giving investors a little too much money back, since bigger expenditures in marketing, technology, or menu research and development might yield better returns.
