Burger King parent Restaurant Brands International believes its stock is undervalued. | Photo by Jonathan Maze.
For much of the past couple of years, Restaurant Brands International, the parent company of Burger King, Popeyes, Tim Hortons and Firehouse Subs, has been buying up restaurants and investing in remodels.
The company doesn’t want to do that anymore, so long as it can help it. At their Investor Day presentation last week, executives with the Toronto-based operator revealed plans to return to the ultra-profitable business of franchising, with those profits sent back to shareholders in the form of dividends and share buybacks. It also plans to reduce debt and earn an “investment grade” credit rating that will reduce the cost of that debt.
And they believe the company’s shares are undervalued. “At some point the market—that means you—will recognize that our valuation today does not line up with the growth and free-cash-flow potential of this business,” Patrick Doyle, RBI’s executive chairman, told investors at the company’s offices in Miami.
He then referred to the investment he personally made in the company when he was lured out of retirement in 2022. “So to be clear, I already put all my money in, and now the company is going to start more consistently buying back shares with its own cash, and I invite you all to join us,” Doyle said.
RBI has acquired its brands over the years based on a strategy of franchising, a highly profitable business that has attracted numerous investors over the years. The plan has always been to use the cashflow generated from those businesses to send back to shareholders.
But various problems have gotten in the way over the years, notably the pandemic and its difficult aftermath. First, Tim Hortons had problems. Then Burger King’s U.S. market problems in particular created headaches and is as big a reason the company’s valuation today is not where executives believe it should be. Now Popeyes is having challenges.
Doyle was brought in to fix this. In the years since, RBI overhauled management, naming Josh Kobza CEO. It acquired Carrols Restaurant Group, its largest franchisee. It also agreed to help boost marketing and fund Burger King remodels, though the bulk of that agreement was reached before Doyle arrived.
The company also acquired the Chinese operations of its Burger King and Popeyes businesses.
Yet executives have been clear from the start that operating a lot of its own restaurants was a temporary measure designed to stabilize the business. In the U.S., the plan was to start remodeling the restaurants and flip them to operators, generally small-scale franchisees that own no more than 50 locations. In China, the goal was to stabilize the business.
RBI has already started refranchising its company restaurants in the U.S., in a couple of cases to Burger King executives that opt to try their hand at ownership. And it was able to quickly flip BK China at a substantial profit.
The company now believes it can complete its refranchising by 2027, a year early, which executives believe will fuel the cash-generating franchise business that was long envisioned.
“Our vision is that by 2028, RBI will be a 99% franchise company delivering 5%-plus net restaurant growth with predictable earnings growth, a strong investment grade balance sheet and attractive, double-digit total shareholder returns,” Kobza said.
RBI can certainly make the argument that it is undervalued relative to its performance. The company has an enterprise value multiple of 15 to 18 times EBITDA, or earnings before interest, taxes, depreciation and amortization. Yum Brands, a similarly constructed multi-brand operator with similar perception and performance concerns, has a multiple of over 20.
And Doyle argues that the company should improve from here. Once RBI reaches investment grade status, it will be able to increase its debt levels again, which should enable RBI to return more cash to shareholders. That’s something Doyle’s former company, Domino’s, has done adeptly over the years—the pizza giant averages a mid-teens total shareholder return.
“When I look at the multiple for companies with that kind of return relative to where we are trading today, I see a significant gap,” Doyle said. He said the company currently returns $1.5 billion to shareholders a year in the form of dividends and share repurchases, and he could envision that getting to $2.5 billion. “To me, that’s pretty compelling as an investor,” he said.
Ultimately, stock purchases are about perception as much as anything. For better or worse, investors are focused on Burger King’s domestic performance, even though it represents just 18% of the company’s operating profit. RBI will unlikely get the valuation it really wants until investors are convinced of that chain’s comeback.
