I previously wrote about Restaurant Brands International (QSR 1.03%) this summer, calling it a good stock for a volatile market thanks to its resilient business and generous dividend. Since that point, the stock has done even better than I expected, as shares rose based on impressive second- and third-quarter results. The stock is up 15% over the past year, trouncing the broader indexes, which are in bear market territory.
The stock wasn't exactly in need of a catalyst, but it got a major boost last week when former Domino's Pizza CEO Patrick Doyle joined Restaurant Brands as executive chairman. Restaurant Brands has been a strong performer year to date (up roughly 11%), but the party doesn't have to end anytime soon. Here's why its stock could have upside of 80% or more over the next few years.
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What is Restaurant Brands International?
Restaurant Brands International is the parent company of Burger King, Popeyes Louisiana Kitchen, Tim Hortons, and Firehouse Subs. Across these concepts, Restaurant Brands collectively has a footprint of about 29,000 restaurants in 100 countries. The Toronto-based company franchises out the vast majority of these restaurants, meaning that franchisees pay it royalty fees for the right to operate one of its restaurants. A franchise-based business model is advantageous because franchisees help the parent company grow by footing the bill to open new locations. Furthermore, the parent company receives durable, recurring revenue via royalty fees, which are based on franchisee revenue. Restaurant Brands also makes money from franchise fees that it receives from individuals who want to open a new restaurant, sales at the restaurants it owns itself, and sometimes from lease payments from properties that it leases to franchisees.
Palatable valuation and tasty dividend
With a strong performance year to date, shares of Restaurant Brands aren't necessarily cheap at 22 times earnings. But this also isn't overly expensive for a company with strong, durable earnings like Restaurant Brands. This valuation is also a lot cheaper than shares of its main competitor, McDonald's, which trade at 34 times earnings. It's also lower than Wendy's, which trades at 25 times earnings, and Yum! Brands, which trades at 28 times earnings.
Additionally, Restaurant Brands pays a generous dividend and shares currently yield just over 3%. The company has steadily increased this payout, with 40 consecutive quarters of year-over-year dividend growth, and considers growing this dividend further to be a key part of its capital allocation strategy.
A new sheriff in town
The company received a major boost when Doyle came on board as executive chairman. He was a superstar CEO during his time at Domino's, where the stock gained 2,200% during his eight-year tenure. Doyle is widely credited with improving the quality of the company's pizza, and he was ahead of his time in successfully pioneering its online delivery platform. He helped increase Domino's sales at a time when other restaurant chains struggled, growing same-store sales 8% in his final year there, at a time when other restaurant chains were reporting declines. The company also posted increasing quarterly earnings for six straight years.
Getting a leader of Doyle's caliber on board is already exciting, but here's what's even more exciting: He isn't taking a salary here. Instead, his compensation will come in the form of performance share units that will be awarded based on results. Many of these equity awards will vest if the company's share price is higher than $81.32 in five years, which seems achievable from a current share price of around $68 (or around $60 before the news of Doyle's joining broke, as shares spiked following). Doyle can earn even more if shares rise to $122, which would be more than double the preannouncement price. He also bought 5 million shares of Restaurant Brands for their market value of around $30 million as part of the deal. Doyle stated, "My investment in this is the best indication I can give you that there's a lot of value that can be created here."
This is exciting for two reasons. Not only does Doyle have significant skin in the game, investing alongside everyday Restaurant Brands shareholders, but also because he likely believes that he can hit this stretch goal of $122, which is over 80% higher than today's prices. If Doyle didn't think that the company could achieve this, he most likely wouldn't forgo a salary in exchange for these incentives. In the words of legendary investor Charlie Munger, "Show me the incentive, and I will show you the outcome."
Big-time upside
Overall, this looks like a decidedly attractive investment opportunity. The company has a resilient business model that should hold up well in any economic environment -- most customers aren't going to stop eating at Burger King or Popeyes in the event of a recession. The company's royalty-based revenue streams are also attractive. Finally, a solid dividend will also add to returns over time.
Take this whole package and add in the presence of one of the top restaurant executives of our generation -- not to mention one that is highly motivated to drive the share price higher because of his performance-laden compensation package -- and Restaurant Brands looks like a home run. As Munger famously said, the incentives often point to the eventual outcome, and it looks feasible that this restaurant stock could hit the high-end target of $122 within the next five years. That would give Restaurant Brands shareholders upside of 80%.
