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Bill Ackman Comments on Restaurant Brands International

- By Holly LaFon

Restaurant Brands International ("QSR")(NYSE:QSR)

QSR's franchised business model is a high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from three leading brands: Burger King, Tim Hortons and Popeyes. The company's unique business model allows it to capitalize on its significant long-term unit growth opportunity with minimal capital investment. QSR's strong overall business performance continued during 2018 with 25% EPS growth, which reflects strong business progress and the benefits of the refinancing of the 9% Buffett preferred. The company grew total net units by 5%, with 6% growth at Burger King, 2% at Tim Hortons and 7% at Popeyes. Same-store-sales increased by 2% at both Burger King and Popeyes and 1% at Tim Hortons.

Since the end of 2017, QSR has taken several actions to combat the recent slowdown in same-store sales at Tim Hortons. The company replaced Tim Hortons management with the team that had previously turned around weak same-store sales at Burger King, improved relations with franchisees, and unveiled a new operating plan entitled "Winning Together," which is focused on improving the restaurant experience, new product development, and brand communications.

During 2018, Tim Hortons launched all-day breakfast, a kids menu, and a store reimaging program. This month, the company also launched its loyalty program nationwide after successfully testing it in select markets. We believe the company's recent initiatives are already generating better results, as same-store sales momentum improved in each quarter throughout 2018, with a 2% increase in the fourth quarter. Earlier this year, QSR elevated Daniel Schwartz to Executive Chairman and promoted Jose Cil to CEO. We believe Jose's deep operational experience and successful 18-year track record at Burger King position him well to lead QSR.

In 2018, QSR's share price, including dividends, declined 12% due to concerns regarding soft same-store sales at Tim Hortons earlier in the year and the broader market downturn in the fourth quarter. The share price is up 23% this year, primarily reflecting significant improved fourth quarter results at Tim Hortons. QSR currently trades at 22 times our estimate of this year's free cash flow, which is a discount to lower-growth franchised peers and below our estimate of intrinsic value. We believe that continued improvement at Tim Hortons, and the opportunity for the company to tell its story at its first QSR investor day in May, will highlight the company's significant long-term growth potential and serve as potential catalysts for future share price appreciation.

From Bill Ackman (Trades, Portfolio)'s Pershing Square 2018 annual shareholder letter.
This article first appeared on GuruFocus.