Popeyes' Chicken Sandwich: What's It Worth?

In this episode of MarketFoolery, host Chris Hill and Fool contributor Jason Moser chat about the restaurant industry with a focus on Restaurant Brands International (QSR -0.98%), which saw higher-than-expected revenue and earnings growth, driven by Burger King and Popeyes' performance. They also share some advice for Instructure (INST) and briefly discuss the just-concluded Oscars.

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This video was recorded on Feb. 10, 2020.

Chris Hill: It's Monday, Feb. 10, welcome to MarketFoolery. I'm Chris Hill. With me in studio, Mr. Jason Moser. Thanks for being here!

Jason Moser: Hey, thanks for having me!

Hill: We're going to talk buyouts, we're going to talk Oscars, we're going to talk insurance. Hang on, people, we're going to talk insurance. But, no, that's actually going to be -- well, anyway, we'll get to the insurance. Let's start with the restaurant industry -- and, in particular, Restaurant Brands International, which is the decidedly unsexy name of the parent company of Burger King, Popeyes, and Tim Hortons. Fourth-quarter profits and revenue for Restaurant Brands, slightly higher than expected. And all of the credit, 100% of the credit, goes to Popeyes.

Moser: Yeah, there's no question there --

Hill: Because when we talk about same-store sales -- and I think it was either on this show or on Motley Fool Money last week, we were talking about Chipotle, which put up same-store-sales growth of 13%. And I said, "Boy! most restaurants would kill for that." Can I interest you in same-store-sales growth of 38%? Thirty-eight percent! That looks comical, like, when you look at the chart, as you and I both did this morning. It looks ridiculous. But now we know what that spicy chicken sandwich is worth.

Moser: Well, and if you listen to Ron Gross' scathing, scathing review ...

Hill: It was not a good review.

Moser: ... you wonder how many people going forward going would actually rather give that sandwich a try. Now, I know I'm not. I haven't tried it yet. And I don't know that I actually will. Part of that is just because I'm probably too lazy and I don't really like to eat a lot of fast food. But I do feel like this, for Restaurant Brands, this really does feel like their McDonald's breakfast moment. I mean, I think it was a little bit less expected. I mean, they certainly planned this sandwich, obviously. I don't know that they even really expected the results that they're getting. But you take what you can get in this line of work, because it's not always easy to come across.

And I think the big question for Restaurant Brands is, can they sustain it? Because, yes, they are diversified and then they have Popeyes and Tim Hortons and Burger King, but this really is -- the growth is coming from this chicken sandwich. And so the question is, is that sustainable? And we don't know that. It's kind of like that greater investing lesson. And no pun intended, but you're not looking to put all of your eggs in one basket. In this case, you don't want to put all of your chicken sandwiches in one basket.

And I think when you look at Restaurant Brands, this really is a Burger King business, first and foremost. Burger King is responsible for close to 70% of the company's total revenue. And Popeyes is actually the smallest revenue generator of the three. But that said, the laggard really is Tim Hortons. And that to me is the bigger question, because I don't have any doubt that they can continue to perform well with Popeyes, even if the chicken sandwich doesn't bring this explosive growth going forward. And it probably won't, but it'll probably do pretty well. It's been received well, because a lot of people think it's really good.

The question for me is, what are they going to do with Tim Hortons? Because Tim Hortons is really -- this is kind of like the Pizza Hut ...

Hill: I was just going to say it. This is like the conversation we had about Yum! Brands, where it was yet another quarter of KFC and Taco Bell are doing just fine, thank you very much, and Pizza Hut, just -- I'm just, I'm almost speechless, because I'm genuinely surprised that when Pizza Hut was handed the opportunity that they were of Papa John's and all of the controversy around John Schnatter ...

Moser: And the NFL deal.

Hill: ... and the NFL deal -- they still can't make that concept work.

Moser: No, I think we could make the argument at this point now that Tim Hortons could prep for a spinoff and Pizza Hut could prep for a spinoff. You put those two together, you know what their ticker would be, Chris? LAG. Because those two together will just lag the market for quarters and years to come, I bet. And I don't know why that is on the Pizza Hut side. Pizza is one of those things -- I mean, Domino's recognized a while back, "Hey, listen, we're not selling a lot of stuff, because apparently our food isn't that great. So let's make good food." And for whatever reason, Tim Hortons isn't quite resonating as well.

And maybe it is a geography thing. I mean, it's certainly not a brand that I think has much opportunity South of the border. When you bring that thing in the United States, I just don't think it's going to do what it could possibly do in Canada. But the comps of minus-4.3%. Now, I will say management attributed some of that to their rewards program. And they're essentially investing a lot in this rewards program to stoke traffic, bring people back in. And I appreciate that. That makes sense. We see a lot of these restaurants do it. And Starbucks, I think, is one of the companies out there who really wrote the book on how to do it well.

Tim Hortons. Maybe these are just some of the lumps that come with investing in that, but it's taking a little bit of a hit in the short run for hopefully a little bit more long-term sustainability. That remains to be seen, whether it's really going to work out. I'm not that optimistic, whereas I feel like with Burger King and Popeyes, there is a more universal, geographical reach where people are going to probably flock to those brands a little bit more consistently.

So, for me, Burger King and Popeyes -- strength there. Tim Hortons, a lot of questions. They're going to continue to make investments in their rewards program. But I mean, this is a company that has some big aspirations with somewhere in the neighborhood of 27,000 total restaurants today. Their aim is for 40,000 restaurants in the next eight to 10 years. And so you've got to believe that most of that is going to come on the Burger King and Popeyes side. And we very well may see them make another acquisition and bring another brand under their umbrella, so to speak. That remains to be seen. But yeah, I mean, for all of the success that Popeyes has had, Burger King, I get it. Tim Hortons is the real big question mark. And I don't know what they do to fix that.

Hill: To go back to something you said earlier regarding can Popeyes sustain this? No, no. Anyone who's looking at this thinking, "Boy! can they do this every quarter?" No. You would you like to see, maybe not 38% growth, but you'd like to see -- given the comps that they had a year ago, then, yeah, you'd like to see some double-digit growth. But when we get to 12 months from now, honestly, if they can do low-single-digit growth off of a 38% comp bump, then fantastic.

I think the other restaurant that has to be looking very closely at this is McDonald's. And Chris Kempczinski, who's been CEO for maybe almost three months now, it's going to be interesting to see where they go with their chicken sandwich and what they're able to do with it.

Moser: Well. We have gotten some boots-on-the-ground research on that already. And apparently, they've got some work to do on that front. That's a really competitive space. Who would have figured we'd be sitting here just shining such a light on the chicken sandwich? This really has become front and center for the quick-service restaurant industry, hasn't it?

Hill: It has. But the business opportunity for McDonald's and everyone else who's not Chick-fil-A, is that Chick-fil-A is closed on Sundays. [laughs] You know you don't need to get all of their business; you just need to get some of their business.

Moser: You need to get some of it. And again, I think, to your point about the chicken sandwich with Popeyes. No, it's not sustainable, but it seems to be a good product, Ron Gross' review be damned. I do think, man, it would be really neat to see them come up with something like that for the Burger King side of the business. That would be extremely meaningful, because, yeah, again, as great of a success as the chicken sandwich with Popeyes has been, it's still the smallest part of the business. And that has to be taken into consideration. This a Burger King story first and foremost, so I bet you management is in a room somewhere trying to figure out, how do we capture that lightning in a bottle for Burger King? Maybe they thought the Impossible Whopper had that potential; it doesn't seem like it's going to. I mean, I don't know what it is, but it does seem like no matter what, it's going to revolve around chicken in some way, shape, or form.

Hill: Our email address is [email protected]. Question from Eric Potter in Columbia, Missouri. And this a timely question, because this morning we have some -- not hard news, but reports in the buyout space. Potentially Xerox and HP getting together, L Brands looking to spin off Victoria's Secret potentially. Which leads us to Eric's question about a company called Instructure.

Eric writes: "I've been considering an investment in Instructure. I see they've had a buyout offer of $47.60. And talk of a competing offer in the range of $54 to $57 a share. Shareholders are going to vote on the first offer on Feb. 13. And at least one analyst has suggested that the potential acquirer could increase its offer price. Meanwhile the stock is trading at $47.57.

"Investing for a potential gain of $0.03 per share sounds like a tremendous waste of time."

Moser: [laughs] It is.

Hill: [laughs] I agree. "Hoping for a 13% gain is better, however, but the current stock price seems to indicate the market believes shareholders will approve the original offer. Do you have any insight into their situation, in particular, and/or how investors should think in general about buying a company that has buyout offers and rumors swirling about? Thanks. Love the show."

Thanks, Eric. Thanks for listening and thanks for the question. Thoughts on either, specifically, for Instructure's situation, or just buyouts in general?

Moser: Yeah. Let's look at both. Because I do feel like it's a very good question that we always want to revisit. We always talk about we won't invest in a company based on an acquisition thesis, right? I'm not going to buy shares in a business just because I think it might be acquired. If you already own shares of the business and then there are acquisition rumors flowing around, that's just part of the deal. That happens all the time. You've got to dig in a little bit and understand better. But I would not invest in a business just based on an acquisition or, in the case of Instructure, thinking that maybe there is some type of arbitrage play there, where a potential higher bid might come in. Sometimes it does and sometimes it doesn't. It's really difficult to say.

And you could be intimately familiar with the business and have everything nailed down and still be wrong. It's just a matter of the interest level out there in the potential acquirers. Now, when we talk about Instructure, I mean, this an interesting business. Now, for listeners who don't know what Instructure is, this is a SaaS business. They provide applications for learning, assessment, and performance management through their SaaS business. And they focus on primarily educational institutions.

So they have two platforms: Canvas, which is learning management for Kindergarten through 12th grade and higher education. Then they also have this other part of the business called Bridge, which is essentially an employee development and engagement platform. So think big corporations -- they might use Instructure's Bridge offering in order to serve as continuing education or something like that.

Hill: And, by the way, I've never heard of Instructure. But with one kid in college and one in high school, I feel like, "Oh, it's the company that owns Canvas. Oh, OK. Got it."

Moser: Yeah. Chances are they know it well. And yeah, I think it's a good example of one of those companies, you may not know that name, but the products that they offer become a little bit more familiar once you start poking around. So Instructure, I think, is a business that has a lot of potential. I mean, the mission of this business -- you've got to love the mission here -- it's to help people learn and develop from their first day of school to their last day at work. I think we can all get behind that.

And so I really do feel like there's a lot of potential to the business. And I felt so much so that it actually was a stock on my radar in the augmented-reality service, because they started incorporating some augmented reality features in there in some of their partners, whether it was Apple or Microsoft. So there's a lot of potential there, just from what they do and the partners that they are saddling up with.

When we go to the actual acquisition here, it's anybody's guess as to whether a higher bid comes in. Now, there was a 35-day go-shop period. And as the email noted, there's going to be a meeting on the 13th where shareholders can voice their dissent, if they care. The acquirer -- I think it's worth noting who the acquirer is. It's Thoma Bravo. And that is the same firm that bought Ellie Mae a little while back. And Ellie Mae was the mortgage software provider that a number of us here really liked a lot. They had just a very admirable competitive position. We felt like they got Ellie Mae for a steal.

So it all kind of goes to say, Thoma Bravo, really, they kind of know what they're doing. And so I would not be surprised at all to see this acquisition go through at the offered price. Again, anything can happen, and we'll learn more on this actual date of the 13th, where there's a meeting and you'll find some potential dissent or potential counteroffers. My guess is that this probably goes through at the price offered. It's a neat business, but it's not a business that didn't have some challenges, and the growth wasn't quite there.

The Bridge offering, the employee-focused offering, has been having a lot of trouble. So it really is primarily a Canvas story. Again, like the business. I just don't know that I would count on a counteroffer coming in. That said, it's certainly possible. I wouldn't bet on it.

Hill: Isn't it an absolute certainty that there are investors, just a few investors out there, who actually are looking at this, like, I can make $0.03 per share? [laughs]

Moser: [laughs] One hundred percent certainty, particularly in this day and age of zero cost commissions.

Hill: Markel, the specialty insurance company, reported its fourth-quarter results last week. And if you just looked at the headline, you'd say, "Oh, boy! maybe not such a great quarter." And in fact, shares of Markel are up 10% since they reported a week ago. And once again, this is a very quiet, steadily great business.

Moser: It is. I like the way, when you go through their fourth-quarter results, their focus is very much on the full year. I mean, this is just not a company that focuses on the short term. And with that in mind, I wanted to just talk a little bit about something that came up in the call. At the very beginning of the call, there's a passage in there that really shines a light on what this business is about. And I think it's something that encapsulates our Foolish investing philosophy and why it works. And they were looking at this 10-year stretch. They were talking about 10 years ago in 2009 versus today, and how far along they've come in that decade.

And so, just to go through some of the numbers real quick. Ten years ago, in 2009, the total revenues of Markel were $2 billion. In 2019, $9.5 billion. Of that $2 billion, 10 years ago, the earned premiums for their insurance operations were $1.8 billion. So almost all dependent, really, on that insurance business. Today, the earned premiums were $5 billion. And so we're seeing signs of a more diversified business. Ten years ago, the recurring interest and dividend portion of their investment returns were about $250 million. Remember this is an insurance company. They run an investment portfolio, and a really good one, I might add. Two hundred and fifty million 10 years ago -- in 2019 that's $450 million. And then, finally, Markel Ventures -- I just love this part of the business. Markel Ventures produced revenue of $86 million in 2009. In 2019, that was over $2 billion.

And so, No. 1, the numbers just tell you the story why the stock has done well over time. But also, just that passage in the call with that focus on that 10-year window, to me, it was just so utterly Foolish. I just love reading it. I think it's a great lesson for not only people who invest the way we invest, but also for people who are coming into our universe now. When they want to learn a little bit more about us, I would point them to this passage and say this really does tell the tale. And that's the kind of stuff that we're looking for.

Hill: And the "Hey, let's look back 10 years," that would hold less water, if 10 years ago the stock didn't do what it did. Like, 10 years ago the stock is at around $350 a share. Today it's over $1,300 a share. So that whole, well, let's forget the quarter we just had; let's look back 10 years. There's a way to do that if you're not actually performing, where you're just sort of covering your butt. It's just like, "Well, but please don't look at these numbers, look at the long term." It's, like, no. They're just very quietly, methodically crushing it year after year.

Moser: Yeah. And we can sit here and rattle off any number of numbers through any window of time to try to express that point. But listeners, all you have to do is just go to the stock chart and look over and over any long period of time, go to their annual letter every year. I mean, they put all of that stuff in there for you to see. And there's a reason why we call it our baby Berkshire, because they really are building this business very much in that model. And co-CEO Tom Gayner -- we've obviously had him here before. We've spoken to him a number of times, gone down to that meeting. Just a lot of good things about this company. And they continue to execute.

There are three operating engines -- they call them operating engines of the business. It's insurance, investments, and Markel Ventures. And quarter in and quarter out, that's what you go to first and foremost. You look at how those three areas of the business are performing. They'll give you a great idea as to how management is feeling about the state of affairs, not only today but over the course of the next five to 10 years. And there's just, there's so much good here that whenever you see that little hiccup -- I mean, a good example is that ongoing litigation in regard to CATCo. Remember that reserves for CATCo...

Hill: Oh, right. Yeah. They had that one weird quarter.

Moser: Yeah. And remember, when the headline came out for that -- it maybe was a year ago; it feels like it's been about a year ago now. And it's an investigation into the reserves of this catastrophic insurance side of the business called CATCo. When you look at the numbers -- I don't want to say it's meaningless, but it is not the most important part of this business. And stuff like this happens in insurance all the time. But my point is, you've got so many strong parts of this business, so much strength in other parts of this business that you could see even through this call that CATCo concern has more or less been pushed aside now, because they will resolve it and it's not going to be meaningful to the numbers one way or the other.

Hill: Markel is based in Richmond, right?

Moser: Yes.

Hill: So I think next time, instead of Tom Gayner, having him come up here, we go down there and then we work on a trip to ZZQ, which is a phenomenal barbecue place down in Richmond.

Moser: Well, I mean, ZZQ, for sure. I've never heard of that, but...

Hill: It sounds like you're saying, you know what? Let's just skip visiting Markel. Let's just go on a road trip...

Moser: I mean, they're taking a lesson from Zillow there, right? Going Z with the barbecue. That's an attention-getter. Yeah, I've been to that meeting before, and it's a really good one. I mean, shoot, man, let's go ahead and get that on the calendar.

Hill: Real quick before we wrap up. The Academy Awards were last night. Twitter, Amazon, Disney getting some shouts out from the stage. Netflix as well. Interesting that I forget which winner -- it was something that Netflix had produced. And Reed Hastings didn't get a shout out, [laughs] but Ted Sarandos did. And shout out to our friend Steve May and the folks at Pixar for another win in the animated category.

They've got the Humanitarian Award at the Academy Awards, which was named for Jean Hersholt. I feel like another couple of years, they're just going to rename the Best Animated Film Award. They're just going to rename it to Pixar Awards. [laughs]

But the other thing -- we were talking about this right before we started -- the other thing I noticed, having watched much of the Academy Awards, was there were a bunch of -- you know, we've talked all about the streaming wars: Disney+, Hulu, Netflix, CBS getting into the game, Apple. There were a bunch of television commercials for Quibi. Q-U-I-B-I, which as I've since learned is short for "Quick Bites." And it's this, we're going to give you videos in 10 minutes or less. And I'm not saying that the videos themselves aren't going to end up being entertaining, because there's certainly a lot of ways to do short videos that are very entertaining. I will say that whatever money the people at Quibi -- Meg Whitman and Jeffrey Katzenberg, who started this company. Whatever money they're paying the advertising firm, they need to just stop right now. [laughs] Because as someone who watches a lot of video, their TV ads make me want to actively avoid Quibi.

Moser: What was it that --

Hill: I mean, I don't know what they were trying to do. But it really should have just been as straightforward as "Hey, you like movies. How about really short movies?" I don't know. But it was so convoluted. Particularly, by the way, it's a slightly odd name. So you have to try and figure out, well, wait what is that? And there's enough competition in the streaming space, which I'm sure they're aware of, but it's like, the more questions you make me ask, in any business, the more questions you make me, as a potential customer, ask, the less likely it is that I'm going to spend time and money on your thing.

Moser: I feel like we have a consulting business in the making here, because between your observations of the advertising campaign here -- and you remember last week or maybe the week before, when we were talking about SiriusXM and that led into the broader discussion of, like, companies that make you call to cancel services? That's just a guarantee that I'm never reupping with you ever again, because you're just making my life a living hell for like the 20 minutes that I had to call.

I feel like, maybe there's some consulting, right? We're the smartest guys in the room. Maybe in this room we are. We're the only guys in this room. But I mean, there are executives getting paid millions upon millions of dollars, and it just seems to me that some of these observations are so obvious, yet they're either not making them or they're just thinking, you know, maybe it's just not the biggest bet in the world, so they feel like they can go ahead and take it. And if you lose everything, it's no big deal. But yeah, it makes me wonder sometimes, what goes on behind those closed doors?

I will say I didn't tune into the Oscars, and I can't say that I tune into the Tonys either, but I want to give a quick shout out to Robinson Secondary School here, locally in Fairfax. My daughters go to Robinson. This is a seventh and eighth and then high school. This weekend marked the opening weekend for the seventh and eighth graders', the middle schoolers', production of Cinderella. And this thing is like Broadway Junior. I mean, you want to talk about award-worthy? I've got one kid in the show, and my high school will work in the show. This is Broadway Junior. I'm always impressed, never surprised, always impressed. And I just wanted to give Robinson a shout out; the drama department, well done. They've got more shows coming this weekend. So any of you locals -- any of you listeners who are local here, you may want to go check that out, because if you're looking for award-winning performances, that's your ticket right there.

Hill: Nothing like a live show.

Moser: No.

Hill: But on the flipside, I mean, those high school drama teachers, they're paid so much money.

Moser: [laughs] I don't think so. Yet they should be. When you see what they do, you immediately, as a parent, you're like, double that teacher's salary.

Hill: Thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.