While in Canada recently, thinking about the value to investors of brand loyalty, I came upon a great example in Tim Hortons. Tim Hortons is more than a coffee-and-donut shop. It’s how Canadians express patriotism. Plunk a Starbucks Corporation (NASDAQ:SBUX) unit near a Tim’s and you are going to find an empty Starbucks. In late 2014, the boys at 3G Capital put Tim’s together with Burger King and launched Restaurant Brands International Inc (NYSE:QSR).
The first trade, on December 12, 2014, went off at $35.41. The group opens for trading Sept. 8 at $48.16. So far, so good.
What 3G, which also controls Anheuser Busch Inbev SA (ADR) (NYSE:BUD) and Kraft Heinz Co (NASDAQ:KHC) and which often works with Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), brings to the party is zero-based budgeting. Every budget year starts with a blank sheet. The search for improvement is continuous. No one is really safe.
That’s true of Tim’s as well. The company is now on its third President since 3G took over. Sami Siddiqui had been with Burger King until early 2015.
The mandate is to constantly try things that may help the top- or bottom-line, in short to hustle. Tim’s makes breakfast sandwiches, but if you just want coffee there’s an express line. It is launching a new ad campaign with hockey great Sidney Crosby delivering the donuts.
Furthermore, QSR is expanding Tim’s geographically, into England, Ireland and the Philippines.
Is This Working for QSR?
The numbers say the 3G approach is working on the bottom line, if not yet on the top line. Revenue of $1.019 billion in the September 2015 quarter only grew to $1.040 billion in the June 2016 quarter, but net income rose from $116 million to $153.9 million. Net income applicable to common shares nearly doubled, from $49.5 million to $90.9 million.
Investors are starting to notice. The 52-week low on the stock, reached in February, was below $30 per share. QSR stock has since gone straight up, to the present level of over $48. This has mainly resulted in a dramatic expansion in the price-to-earnings ratio, which now stands at an incredible 44.6. The average analyst sees growth at over 20%.
Not bad for coffee and donuts.
Can They Do It with Burger King?
QSR bulls are betting the boys from Brazil can work similar things with Burger King, which lacks the brand loyalty of Tim’s but has potential.
So far, they are trying stuff. Doritos on a burger? Check. A hashtag called #I’mWithKing meant to attract media reviews of the hot dog? Why not? Buying the name of a Russian soccer team? They’ll try it. A “Meatatarian” menu? OK, then.
Note that most of these ideas come from outside the U.S. Burger King; unlike Tim’s, this is a global change, and managers are being encouraged to become creative on a global level. Burger King isn’t iconic, but that means it can become a bunch of local icons, if management is willing to try.
The Bottom Line on QSR Stock
The bottom line here is that investors are lining up for QSR stock, becoming as loyal to Tim’s and the 3G guys, as shoppers are at, say, Costco Wholesale Corporation (NASDAQ:COST).
When analysts are willing to bid up stocks based on something other than financial performance, the lesson of the week is that ordinary investors should take notice. Sometimes they know something.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. At the time of writing he owned shares in COST.
