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.”
Jonathan Weiss/Shutterstock.com
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.
Disclosure: None.
This article is originally published at Insider Monkey.
Interactive Strength Inc. (NASDAQ:TRNR – d/b/a/”FORME”) operates a digital fitness platform that combines premium connected award-winning fitness hardware products with 1:1 personal training and coaching (from real humans) to deliver an immersive experience and better outcomes for both consumers and trainers. Management believes that TRNR is the pioneer brand in the emerging sector of virtual personal training and health coaching. Moreover, this approach accelerates a powerful shift towards outcome-driven fitness solutions. It is part of a growing group of emerging companies that seek to leverage the Internet to provide users with a gym like experience within the comfort of their homes, however TRNR is differentiated with a virtual personal training offering and business model that capitalizes on time-zone efficiency. The Company recently announced the signing of an LOI to acquire a profitable, growing connected fitness business, which could dramatically changes outlook, revenue, profitability, and valuation for TRNR. The acquisition expected to close by the fourth quarter of 2023.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
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