Burger King just posted its strongest revenue growth in almost 10 years, and that helped Restaurant Brands International Inc (NYSE:QSR) — formed when Burger King acquired Tim Hortons last year — to beat Wall Street estimates.
QSR stock rose smartly on the news, and the fast-food combo is increasingly looking like a much better investment than its bigger, ubiquitous rival McDonald’s Corporation (NYSE:MCD).
QSR Earnings
The marriage of Burger King and Tim Horton — a Canadian doughnut and coffee chain — to form the world’s third-largest fast-food chain certainly got off to a strong start in 2015. By most measures, QSR revenue growth was strong in the first quarter.
At Burger King, comparable-store sales — a key measure of health — rose 4.6%. Analysts were looking for comps growth of 2.5%. For comparison, McDonald’s saw same-store sales fall 2.3% globally in the first quarter. Systemwide sales rose 9.6% after adjusting for currency fluctuations.
QSR’s Tim Hortons chain also enjoyed robust top-line growth. Comparable-store sales gained 5.3% against a forecast of 3.5%, while systemwide sales increased 8.1%.
Total revenue at QSR ballooned to $932 million from $241 million in last year’s first quarter, which came before the acquisition. That was short of analysts average forecast of $944 million, according to a survey by Thomson Reuters, but the market didn’t care. If not for the strong dollar, revenue would have grown almost 10%.
Burger King drove results with promotions, discounts and the success of its low-cost chicken nuggets. At one point in January, Burger King sold chicken nuggets for 15 cents a piece to counter MCD’s price of 20 cents.
Burger King also enjoyed success with its spicy BLT whopper sandwich and its two-sandwiches-or-burgers-for-$5 special.
Continuing the poultry theme, Tim Horton’s comparable-store sales were fueled by demand for its new crispy chicken club sandwich. Dark roast coffee was also a hit.
QSR Tops Estimates
Margin-boosting comps growth helped QSR exceed Wall Street profit estimate. For the first three months of the year, QSR earnings rose to 18 cents a share on an adjusted basis (which is what analysts and the market care about). That topped the average forecast by a penny.
Burger King bought Tim Horton’s late last summer for $11.5 billion. At the time, critics said the deal was mostly about lowering corporate taxes. Another concern was that the doughnut-and-coffee business is crowded at a time when more consumers are searching for healthier offerings.
However, the early returns suggest that the deal was a wise move.
The market certainly likes it. Shares in QSR are up more than 8% so far this year, beating the broader market by 5 percentage points. In another sign of optimism, QSR stocks goes for 36 times forward earnings.
To put that premium in perspective, the S&P 500 trades at 18 times forward earnings. MCD goes for 19 times forward earnings, while high-growth Starbucks Corporation (NASDAQ:SBUX) trades at 28 times forward earnings.
QSR results prove that the traditional fast-food chains can fare well in the current competitive landscape. It’s all about getting the promotions and menu items just right.
As a result, when it comes to quick-service restaurant stocks, QSR looks a lot better than MCD these days.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
