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Why Burger King Shares Spiked

By Rich Smith - Apr 11, 2013 at 2:50PM

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Hint: It has little to do with the CEO getting ready to jump ship.

Burger King (BKW.DL) shares are soaring today after the company announced a transition plan for its management. Current CEO Bernardo Hees will be heading over to Heinz soon to run Berkshire Hathaway's newest subsidiary. In preparation for his departure, BK announced that when Hees leaves the building on July 1, chief financial officer Daniel Schwartz will move one more rung up the ladder and become BK's new CEO.

So, all this being understood, the question arises: Is the 3.6% spike in Burger King's share price today an indictment of Hees' leadership, and are investors rejoicing over his imminent departure? Or is it perhaps a vote of confidence in Schwartz's upcoming administration?

Actually, it's probably neither one of these. After all, under Hees' management, Burger King shares have enjoyed a real renaissance, rising 27% in value over the past year alone. It's unlikely investors are thrilled to see that kind of leader walk out the door. (Conversely, Berkshire shareholders should be thrilled.) It's also hard to see how Schwartz will be able to top such superb performance.

It's more likely that investors are reacting to Burger King's other announcements, namely:

  • Earnings in Q1 of this year are likely to grow 45% in comparison to last year's Q1.
  • BK's board is upping its quarterly dividend by 20% to $0.06 per share.
  • And the board has also authorized a $200 million share buyback.

The first announcement allays investor concerns by showing that Burger King's on track to grow profits and Hees is not abandoning a sinking ship. The second announcement demonstrates that these profits are real -- real enough that you can write a dividend check on them without fear that it will bounce. The third announcement confirms that Burger King's managers, at least, think the stock is undervalued. And even if they're wrong (the stock does cost 58 times earnings, after all), they'll be spending freely to support this overpriced share price.

Granted, the news doesn't sound quite as good when I phrase it that way. But at least Mr. Market seems to like it.

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