Burger King Looks Expensive, but Is It Worth It?

Burger King Worldwide (NYSE: BKW  )  may not be everyone's cup of tea. At first glance, the company looks expensive compared it its competitors, especially burger behemoth McDonald's (NYSE: MCD  ) . In addition, the company's brand is not as well known as some of its peers. 

To illustrate this point, here is a list of the most valuable fast food brands in the world (this is the intangible brand value, not the market capitalization or enterprise value):

2013 brand value, in billions

  1. McDonald's: $90.2
  2. Starbucks: $17.9
  3. Subway: $16.7
  4. KFC: $10
  5. Pizza Hut: $6
  6. Chipotle: $5
  7. Time Hortons: $3.4
  8. Panera: $3
  9. Burger King: $2.4
  10. Taco Bell: $2
The Burger King brand is valued at about $2.4 billion, under Panera, Tim Hortons, Chipotle Mexican Grill  (NYSE: CMG  )  , Pizza Hut, KFC (Yum! Brands  (NYSE: YUM  ) ) and Subway.  
 
Still, even though the Burger King brand is not worth as much as some of its peers, the company has many traits that make up for this.

Debt
The first thing to point out about Burger King is its debt, which at first glance appears to have grown to worrying levels.The company's debt-to-equity ratio is 230%, while its debt-to-asset ratio is a more reasonable 54%.

Burger King is extremely cash generative, however. The company generated $150 million in cash during the first half of this year with no additional debt or stock issuance -- this was around 150% of net income. This resulted in the company's cash pile growing to $650 million at the end of the second quarter, up 72% year-over-year, and bringing the net debt-to-asset ratio down to 43%.

Moreover, it is likely that the company could generate more cash by refinancing its debt. At the end of the second quarter, Burger King had $3,048 million in long and short-term debt on its balance sheet. Interest for the quarter was $48 million, or $191 million annualized, indicating an interest rate of 6.3%. With the insatiable demand for corporate debt in the markets at the moment and continuation of loose monetary policy, Burger King could refinance this debt at lower rates . This is actually a change that Bill Ackman is pushing for.

Expansion, sale, and leaseback
My second point is the company's sale and leaseback plan, coupled with its goal of changing all of its restaurants to a franchise model. At the end of the fiscal second quarter, 99.4% of Burger King restaurants worldwide were franchises. What's more, during the second quarter earnings conference call, management stated that the company was on track to be 100% franchised by year end. Additionally, 125 new restaurants opened during the second quarter. 522 new units opened year-over-year, an increase of 95%.  

It's thanks to this franchising model that the company has been able to achieve such a high level of cash flow, as I noted above.

Driving efficiencies
Burger King's management is also driving something known as zero-based budgeting, which involves departmental budgets being dropped to a base of zero as opposed to starting up from the prior year's base. This sounds complicated, but the key takeaway is that this aggressive cost-accountability, along with franchising the business, resulted in a 25% expansion in the company's year-on-year EBITDA margin for the second quarter -- from 32% to 60%.

What's the company worth?
All of these factors highlight the big changes that are going on in the company to drive profits and investor returns. It's Burger King's valuation that really attracts me to the company, though. Look at how the company has grown year-over-year to the end of the second quarter, in comparison to its largest peers: Yum!, McDonald's, Panera, and Chipotle.

 

YoY Sales growth

YoY EBIT growth

YoY EBIT margin growth

Burger King

-49%

11%

25%

YUM!

(8%)

(18%)

(1.5%)

McDonald's

2.5%

2%

0

Panera

11%

14%

0.5%

Chipotle

18%

9%

(1.5%)

While sales have declined due the company's sale of restaurants to franchisees, ultimately, this has translated into rapid earnings per share and margin growth, far outpacing that of its peers.

What's more, using the price-to-cash-flow ratio Burger King is the cheapest in the group.

 

TTM P/E

P/C

Burger King

45

11

Yum!

23

64

McDonald's

18

42

Panera

25

14

Chipotle

45

27

Foolish summary
While Burger King is not the largest company in its peer group, the company has a huge scope for growth. It is highly cash generative, and on a price-to-cash-flow basis it is by far the cheapest of its peers. Furthermore, Burger King's cash generation is almost second to none. The company should be able to use this to its advantage in future, either through increasing shareholder returns or acquiring competitors. One thing that is for sure is that Burger King's outlook looks flush with cash.

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