Is Burger King Worldwide the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Burger King Worldwide (NYSE: BKW  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Burger King Worldwide.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

0.6%

Fail

 

1-Year Revenue Growth > 12%

(1.4%)

Fail

Margins

Gross Margin > 35%

35.4%

Pass

 

Net Margin > 15%

5.5%

Fail

Balance Sheet

Debt to Equity < 50%

278.8%

Fail

 

Current Ratio > 1.3

1.72

Pass

Opportunities

Return on Equity > 15%

9.5%

Fail

Valuation

Normalized P/E < 20

29.17

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Burger King Worldwide only scores two points, leaving it looking somewhat unappetizing. The stock also hasn't left a great taste in shareholders' mouths, just barely trading above its offering price, and below its first-day closing price after its June IPO.

Burger King has been an interesting company to watch over the years, as it has gone through a succession of public offerings followed by private equity buyouts. Most recently, the company came public four months ago, after having gone private just a year-and-a-half earlier.

But 2012 has been a year of restaurant IPOs. Burger King arguably has the highest profile, but it shares one big attribute that fellow IPOs Bloomin' Brands (Nasdaq: BLMN  ) and Chuy's Holdings (Nasdaq: CHUY  ) have in abundance: debt. That's not unusual for companies coming public from private equity ownership, as private equity investors often use substantial leverage to maximize the returns on their equity investments.

Burger King may face an additional challenge in catching up to its rivals. McDonald's (NYSE: MCD  ) has done a good job adding healthier items to its menu to deflect criticism about its food offerings, but Burger King has lagged behind, and isn't being particularly innovative with its menu. For instance, it's only now getting into the smoothie craze, which McDonald's jumped on a long time ago, and which Starbucks (Nasdaq: SBUX  ) has adopted, as well.

For Burger King to improve, it needs to get its debt under control, and build up earnings to justify its current share price. Unless it can do so, Burger King won't cook up perfection anytime soon.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Burger King Worldwide to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks and has options positions on Starbucks. Motley Fool newsletter services recommend Burger King Worldwide, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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