Burger King parent company Restaurant Brands has a stock worth devouring, long-time restaurant analyst David Palmer at Evercore ISI contended in a new note on Monday.
Palmer sees several catalysts on the horizon for the company, most notably out of Burger King U.S.
Restaurant Brands said earlier this month that the multinational fast food holding company would invest $400 million to bring Burger King into the future over the next two years. The investment consists of $150 million in advertising and digital investments to “Fuel the Flame” and $250 million for a “Royal Reset” involving restaurant technology, kitchen equipment, building enhancements, remodels, and relocations.
"It's a really exciting moment for us at the Burger King brand here in the U.S.," Restaurant Brands CEO Jose Cill said on Yahoo Finance Live (video above), adding: "We've spent the last 9 to 12 months with new leadership at Burger King in the U.S., working closely with our franchisees on building a plan to engage them, the broader system, our team members, and our guests on our path and plan to reclaim the flame."
Here are the details behind Palmer's call on Restaurant Brands stock:
Price Target: $75
Rating: Outperform (reiterated)
Stock price movement assumed: +27%
Palmer thinks Restaurant Brands' aggressive new investments in Burger King U.S. will lead to higher sales and profits.
"We believe the $400 million investment will be enough to kickstart the brand and we model 4% same-store sales growth in 3Q and 4Q of this year, as well as in 2023 and 2024," he wrote. "[Burger King U.S. President] Tom Curtis and team have been quietly laying the groundwork to get the most out of the incremental investments. We estimate that the 800 remodels will add 1 percentage point to same-store sales growth beginning in late 2023 as the lift should exceed the 12% historically."
Additionally, he said, "we believe that the 30% boost to marketing spend over the next two years and the $40,000 average refresh to 3,000 restaurants can provide an additional 1- 2 percentage point lift. Most importantly, we believe that 1) the success of the 800 remodels, 2) continuity at the management level, and 3) improved operations and marketing messaging will help accelerate additional remodels at the remaining 50% of restaurants. We would highlight that the consensus 3Q SSS growth estimate of 5% appears slightly aggressive."
Better Whoppers will also help, Palmer said, which he and his fellow analysts believe "hold as much brand equity" as Burger King's brand overall.
On top of that, "the Royal Crispy Chicken will be replacing the Ch’King, which will be easier to make and feature more flavors and should help ease operational challenges," Palmer stated. "We expect additional innovation across the menu, with high- low-price architecture with everyday value still a key focus."
Furthermore, Palmer added, don't sleep on the turnaround that has been unfolding at Restaurant Brands-owned Canadian coffee chain Tim Horton's.
"We are raising our already above consensus 3Q Tim Horton's Canada same-store sales growth estimate to +12% from +10% (consensus +8.5%), which translates to 6% growth vs. 2019," Palmer wrote. "On a 3-year basis, Tim Horton's Canada same-store sales growth in 1Q was -5% and in 2Q was +2%. We believe that the exit rate in 2Q was closer to +5% as trends improved through 2Q. We think this momentum has continued to build in 3Q due to 1) cold beverage and PM food improvements, 2) Canada reopening, and 3) improvements to marketing, digital, and drive thru."
Evercore ISI is raising its 2022 fourth-quarter and 2023 first-quarter same-store sales growth estimates for Tim Horton's to 10% in each quarter.
"Last week, Tim’s held its franchisee convention in Las Vegas," Palmer said. "We believe franchisee morale is the best in years due to improving sales and credible plans across marketing, menu, and digital capabilities."
Yahoo Finance's Brooke DiPalma contributed to this story.