Bill Ackman’s Pershing Square recently released its Q1 2019 Investor Letter, in which it has shared its insights on the companies in its equity portfolio, and also reported a 36.9% increase of NAV per share during the quarter. You can track down a copy of its letter here. Among the stocks discussed in the letter was Restaurant Brands International Inc. (NYSE:QSR), for which the fund said its royalty-based, franchise model represents a fantastic long-term opportunity.
“Restaurant Brands International (“QSR”)
QSR’s most recent earnings results continue to reinforce our thesis that the company’s royalty-based, franchise model is a uniquely valuable business with a large, long-term, capital-light, unit-growth opportunity. This quarter, QSR’s unit count expanded by more than 5% while organic EBITDA grew 6% (excluding a 1% headwind from the timing of franchisee ad fund expenditures that temporarily exceeded contributions). Each of QSR’s three brands generated positive organic EBITDA growth with Burger King’s EBITDA up 10%.
Same-store sales grew more than 2% at Burger King and 1% at Popeyes despite difficult comparisons with the prior year. Tim Hortons’ same-store sales were slightly negative this quarter, lower than we expected and below the nearly 2% level last quarter due primarily to adverse weather according to management. While weather is never a favored explanation, management noted that same-store sales have returned to growth since the end of the quarter and were up nearly 2% in April. We believe that Tim Hortons’ same-store sales growth will benefit from the company’s recently implemented loyalty program which was launched a little over a month ago. Nearly 20% of Canadians have already signed up for the program, with roughly 50% of transactions now associated with a loyalty card.
While QSR’s shares have appreciated 28% this year, the shares currently trade at approximately 23 times our estimate of 2019 free cash flow per share, a discount to our view of intrinsic value and to slower-growing franchised-peers such as Yum and McDonalds, which trade at 26 to 27 times analyst estimates of 2019 free cash flow.
On May 15th, QSR hosted its first investor day, at which management highlighted the sustainability of the company’s long-term growth, announced a long-term target of 40,000 units in eight to 10 years, and outlined various initiatives to drive same-store sales growth and franchisee profitability. The stock has responded favorably since the presentation as we believe investors were impressed by management and the greater business transparency provided into the company’s and franchisee underlying business economics.”
Restaurant Brands International is a Canadian fast food holding company with a market cap of $31.45 billion. It was formed in 2014, as a result of the $12.5 billion merger between a famous fast food restaurant chain, Burger King, and a coffee shop and restaurant chain, Tim Hortons. Year-to-date, the company’s stock is up by 32.57%, having a closing price on May 28th of $68.17. The stock is trading at a P/E ratio of 28.95.
In its last financial report for the first quarter of 2019, Restaurant Brands International reported unaudited revenues of $1.27 billion and diluted earnings per share of $0.53, compared to revenues of $1.25 billion and diluted earnings per share of $0.59 in the same quarter of 2018. Recently, the company announced that it plans to broaden its business globally to 40,000 restaurants, which will make it one of the biggest restaurant companies in the world. On May 16th, Barclays raised its price target on the stock to $77.00 from $73 with ‘Overweight’ rating on it.
Among hedge funds tracked by Insider Monkey, Pershing Square actually held the largest stake in Restaurant Brands International at the end of March 2019, worth $1.19 billion on the account of 18.34 million shares. The second biggest position in the company was held by Warren Buffett’s Berkshire Hathaway, and it counted 8.44 million shares valued $549.41 million. Other investors with notable stakes in Restaurant Brands International at the end of Q1 2019 included Gabriel Plotkin’s Melvin Capital Management, Ricky Sandler’s Eminence Capital, and Aaron Cowen’s Suvretta Capital Management.
This article is originally published at Insider Monkey.