Can You Still Make Money Owning Burger King's Stock?

Burger King Worldwide's lead over McDonald's and Wendy's in gross margins should continue this quarter. That's one of three big keys to watch.

Apr 24, 2014 at 4:30PM

Slow growing fast food stocks don't make many (good) headlines these days. It makes you wonder if a fast food chain like Burger King Worldwide (NYSE:BKW) can still bring home the bacon? By looking for a few keys on its latest earnings report, and comparing it to competitors McDonald's (NYSE:MCD) and Wendy's (NASDAQ:WEN), we can decide. 

Burger King reports first quarter earnings this Friday, April 25. Here are three key points to watch. 

Images

Source: Burger King

Is Burger King a dividend stock?
Peter Lynch once said that you should "know what category your stocks fall in." By that he meant, of course, that you wouldn't treat a fast grower the same way you would a dividend stalwart. By knowing what category an investment matches, and what goals management has for shareholders, you can appropriately set your expectations. The problem is, I don't know exactly what Burger King wants to be.

That's a theme we'll touch on a few times, with some further analysis, but for starters look at Burger King's dividend plan. Fast growers are ill-advised to pay hefty dividends (needed for capital reinvestment), but the opposite is true of slow growers. So which is Burger King? It's paltry dividend of 1.1% is customary of a fast grower, but its competitors are slow growing dividend payers. Wendy's pays out a high yield of 2.4%, and McDonald's is even higher, 3.2%. 

Burger King grew earnings 22.4% last quarter, margins also expanded, and revenue growth was slow .  Burger King has the look and feel of a high dividend payer, but it remains to be seen if it will become one. It's unlikely that capital expenditures are the reason for the low yield; Wendy's has taken on a similar strategy of store expansion, and remodeling, all while doubling its dividend over the past two years. So the only logical reason to not raise the dividend, would be if management feels that Burger King has a rapid growth opportunity. That may be the case, but if so, Burger King should deliver comparable sales higher than Wendy's (2.5%-3.5%) 2014 guidance.  

For this quarter, I'm hoping that management clarifies what it's ultimate objective for shareholders is. If Burger King's dividend stays "as-is," perhaps growth expectations should be higher. 

Margin expansion thanks to re-franchising
Burger King followed Wendy's lead by selling 360 restaurants back to franchisees in 2013, and remodeling 30% of its stores. Franchising is a lower risk, non-capital intensive, model; and a fresher store look should lead to higher revenue per store. Thanks, in part, to this strategy, Burger King's  margins are now much fatter than McDonald's and Wendy's (despite Wendy's similar strategy). 

BKW Gross Profit Margin (Quarterly) Chart

BKW Gross Profit Margin (Quarterly) data by YCharts

Margins should continue to expand thanks to these steps; let's look for margins to (at least) stay steady. Further, last quarter same-store sales were up 1.7%, and we should faster growth thanks to better looking stores.

Picking growth, selectively
In the past Burger King had essentially copied many McDonald's items, via the "Big King" and premium coffee, with mild success. Last year, we saw a welcome "re-tooling" of that strategy, as Burger King launched some successful, original, products.  Popular items such as Satisfries and sweet potato fries were well received by customers, and Burger King's earnings grew substantially. There are many fast food examples (i.e. Dorito's tacos) that illustrate how creative menu items win. I'm hoping that management details plans to innovate further during this call.

Finally, it's worth noting that Burger King also opened 670 net new restaurants last year, and is planning on doing the same this year. I'm hoping that management tells us what percentage of new stores will be franchises, and how many will be in international locations. It makes sense for the company to open a higher percentage of franchises, in foreign locations with more room to run, given its level of market saturation. A strategy like that, coupled with some new menu innovation, could be a growth catalyst for this business.

Images

First Burger King pictured. Source: Burger King

What category does Burger King fit?
I think most investors are pleased with Burger King's recent performance, but would prefer to know if management favors operational effectiveness over growth. In my opinion, they should favor operational effectiveness and seek growth selectively.

During this earnings release look for a higher dividend, and strong guidance on new international stores. That coupled with more franchising, and innovative menu items, should be a winning formula for Burger King. 

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Adem Tahiri 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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