While most restaurants are now closed thanks to the novel coronavirus, most fast food operations are still open. When I delivered medical supplies to a friend in southern Georgia recently, Burger King was there for me. But stock in Burger King’s parent company, Restaurant Brands (NYSE:QSR), has fallen out of bed anyway. In fact, QSR stock was due to open April 6 at $35/share. On Valentine’s Day it was at $67.
Before the virus, QSR was one of the stars of my personal portfolio. Now I’m out of the money.
As a trader, I goofed. Was I wrong as an investor?
Is QSR Stock Strong?
Traders look at their stocks daily, while investors should be in it for the long haul.
I have owned shares in QSR since 2017. I paid about $54.60 each for 200 shares, which have since accumulated $684 in dividends. One check arrived just today. But that doesn’t compensate for the paper loss on the equity, currently at $4,200.
Traders would be horrified by this performance. Investors might see it as a buying opportunity.
In a normal year QSR, which owns Popeye’s and Tim Horton’s as well as Burger King, can earn about $2.50 per share. Last year it had nearly $1.5 billion in operating cash flow. Spread that cash flow over about 300 million shares and you’re looking at $5 per share. Which means that, right now, this company is selling for just 7 times cash flow.
That won’t hold in 2020. QSR is next due to report earnings May 4. Analysts are expecting 54 cents per share of earnings and revenue of $1.33 billion. If management saw something completely different, they might not have paid that dividend, which currently yields nearly 6%.
Is It Weak?
Management is warning that those quarterly estimates are off. The company has drawn down its $1 billion revolving credit line and says it now has $2.5 billion of cash. It has also taken out a new note of $500 million, due in five years at an interest rate of 5.75%.
Restaurant Brands is a franchiser. The risks of running the business are borne by the franchisees, who run the restaurants. They’re hurting. So the company is sending $70 million of that cash back to North American franchisees, and offering to defer rent.
QSR operations around the world are being impacted by the virus. While 90% of those in China have re-opened, sales remain below what they were before the pandemic. Elsewhere QSR outlets are take-out and delivery only. For the March quarter the company estimates Tim Horton’s sales will be down over 10%, slightly less at Burger King, and up at Popeye’s, which is much smaller by volume.
Franchisees have begun taking employee temperatures before every shift. But I still felt paranoid after my recent trip, because people can shed the virus for days before developing symptoms. (The trip was a week ago. I’m fine.)
The Bottom Line
If Restaurant Brands halts its dividend for a quarter or two, it will save about $300 million. While the company has enough cash to avoid that, such a move would not surprise me. It’s already priced into the stock.
Whether you would buy QSR shares today, then, depends on how long you think the virus will depress sales. As management has indicated, sales could be down for some time.
But they won’t be down much and, as the virus’ impact lifts, QSR is well-armed to go after other restaurant chains. Jack in a Box (NASDAQ:JACK) is worth just $720 million now. Papa John’s (NASDAQ:PZZA), which has held up pretty well through the pandemic, is worth $1.7 billion. QSR is worth $10 billion.
On balance, I’ll be picking up more QSR stock.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in QSR.