Why You Should Buy Burger King’s Impressive Turnaround

There are a number of reasons why Burger King can improve further, and subsequently go higher.

Mar 11, 2014 at 6:28AM

HiBurger King Worldwide's (NYSE:BKW) refranchising efforts have helped the company turn around. Burger King's fourth-quarter results are proof that its strategies are working very well. With the stock already up around 15% this year, investors can expect the good times to continue. Burger King has already outperformed bigger peer McDonald's (NYSE:MCD), but it needs to keep a watch on Wendy's (NASDAQ:WEN), which is seeing strong demand because of its innovative menu items such as the pretzel bun and salads. 

Analyzing the quarter
In the previous quarter, Burger King's revenue was down 34% to $265.2 million, which is a given since the company is refranchising its restaurants in a bid to enhance profitability.  Burger King refranchised 360 company-owned restaurants in 2013, and the continuation of this initiative should yield better results in the long run. Globally, Burger King's same store sales increased 1.7%. Burger King also saw 6.2% sales growth in the Asia-Pacific region, driven by increased sales in Australia and South Korea. Moreover, Burger King opened 670 new restaurants in 2013 to increase its footprint across various markets. 

The company is moving in the right direction as it earned $66.8 million, or $0.19 a share in the last quarter, compared with a profit of $48.6 million, or $0.14 a share a year earlier. Excluding special items, it earned $0.24 per share, exceeding analysts' estimates of $0.23 per share.  

The way forward
Earnings growth can be expected to continue in the future as Burger King is also diversifying its menu. The addition of new items such as Satisfries have helped earnings growth and also attracted more customers to the chain. These fries have a 20% lower calorie count than the regular fries, adding to their popularity. In addition, the popularity of its other new menu items such as BBQ rib sandwiches and the Big King burger have led to demand growth in overseas markets.

Adding new menu items such as low-fat fries and bacon sundaes has enabled Burger King to compete against rivals McDonald's and Wendy's. Burger King CEO Daniel Schwartz reported improved sales trends as the year progressed on account of launching fewer, but more impactful products in North America. This sounds like a good strategy for the company as it has to compete against McDonald's Big Mac. 

Gauging the competition
Burger King has increased the size of its Big King burger so that it can take away market share from the Big Mac. This initiative is already leading to strong results probably, as McDonald's, which is way bigger in size than Burger King, reported lackluster results in January. McDonald's comparable sales in the U.S went down 1.4%, while analysts were expecting a 0.2% drop. In the Asia-Pacific, Middle East and Africa region, McDonald's saw same-store sales drop 2.4% in the quarter. In comparison, Burger King is recording growth in international operations.

Alex Macedo, the president for Burger King's North American operations, said that the company will focus on developing breakfast and chicken items. Also, as mentioned earlier, its new low-calorie Satisfries could turn out to be a differentiating factor for Burger King against rivals.

This is important for the company as rival Wendy's has been making some solid headway with its own menu items. Wendy's Pretzel Burger has been successful due to its high-quality bread, leading to a 3.2% increase in same-store sales in the previous quarter at company-owned restaurants and 3.1% jump at franchised restaurants. So, Burger King will have to focus greatly on the innovation of its menu items apart from the refranchising effort to ward off competition from Wendy's.

Also, activist investor Bill Ackman is positive about Burger King's prospects as he believes that the company's "superior global footprint and global brand awareness, which, when coupled with the company's global joint venture business model should allow for superior long-term growth and investment returns."

Also, Burger King's P/E ratio of 40 is not too high if we consider that the industry average P/E ratio is 41.5. Also, a dividend yield of 1.10% is another reason why investors could consider Burger King for their portfolio.

Bottom line
Burger King has done very well with its refranchising efforts and the company is also adding to its menu items to drive growth in the future. All in all, with expected earnings compounded annual growth rate, or CAGR, of 16% for the next five years, Burger King could be a good buy.

Renu Singh has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. 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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