2 fast-food chains to buy

Both Restaurant Brands International and McDonald’s Corp. are buys for growth and income.

consumer_stocks_to buy

Restaurant Brands and McDonald’s both operate their fast-food empires on a global scale.

Restaurant Brands International (TSX—QSR; NYSE—QSR)

Things are getting better at consumer stock Restaurant Brands. In its latest quarter, the company saw sequential improvements in each of its brands and around the world, including notable growth at Tim Hortons Canada and Burger King US. Digital sales and restaurant growth are two areas of particular strength. In 2021, digital sales soared 67 per cent; as well, 1,200 net new restaurants were opened.

Restaurant Brands International Inc. is one of the world’s largest fast-food restaurants, with over 29,000 restaurants in more than 100 countries. It owns four of the world’s largest, most prominent and iconic fast-food restaurant brands—Tim Hortons, Burger King, Popeyes Louisiana Kitchen and Firehouse Subs. The latter was acquired in December for $1.0 billion (all figures in US dollars unless otherwise noted).

For the year ended Dec. 31, 2021, RBI made $1.3 billion (adjusted), or $2.82 a share, compared with $948 million, or $2.03 a share, in 2020. The increase was primarily driven by higher adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) at Tim Hortons and Burger King, and a decrease in adjusted interest expense.

Adjusted EBITDA at Tim Hortons rose 21.1 per cent to $997 million, driven by an increase in system-wide sales and cash distributions received from equity-method investments. Adjusted EBITDA at Burger King was $1.0 billion, up 24.1 per cent, thanks to an increase in system-wide sales, cash distributions from equity method investments and franchise fees, and bad debt recoveries in 2021 compared to bad debt expense in 2020.

Free cash flow was $1.6 billion, allowing RBI to make important investments in its business while returning over $1.5 billion to shareholders through dividends and share buybacks. With the release of its 2021 results, the company declared a 1.9-per-cent increase in its quarterly dividend, to $0.54 a share. Free cash flow has also let it acquire Firehouse Subs, which has good global growth prospects.

The shares trade at a reasonable 18.4 times the company’s likely 2022 earnings of C$3.80 a share. Its annual dividend of C$2.76 a share yields 3.9 per cent.

Restaurant Brands is a buy for growth and income.

McDonald’s Corp. (NYSE—MCD)

McDonald’s has closed restaurants in Ukraine, and there exists the possibility that it may have to close restaurants in Russia too because of the latter’s invasion of Ukraine. Investors are not pleased with this state of affairs. Since the beginning of February, McDonald’s stock has underperformed the overall market, losing 7.7 per cent. Over the same time, the S&P 500 is down 4.7 per cent.

Much of the media coverage of the company has highlighted the fact that nine per cent of the company’s revenues come from Russia and Ukraine. This is true. Keep in mind, however, that a high percentage of McDonald’s restaurants in these two countries are company-operated businesses. All the revenues from these businesses are passed on to the company. But about 93 per cent of McDonald’s worldwide restaurants are operated by franchisees. The revenue the company gets from these restaurants is in the form of fees, which are not as robust as sales.

When sales from both types of restaurants are factored into the equation, Russia and Ukraine make up just two per cent of what’s known as system-wide sales. Also, these restaurants account for less than three per cent of operating income. In total, McDonald’s operates, franchises or licenses 39,676 fast-food restaurants in Canada, the US and around the world. Just 955 of these restaurants are located in Russia and Ukraine. The company, therefore, is well diversified, and this should help it to weather any fallout from the events in Europe.

Aside from these events, the company has been doing well. For the year ended Dec. 31, 2021, McDonald’s made $9.28 a share (adjusted), compared with $6.05 a share in 2020. Revenues rose 20.9 per cent (18 per cent in constant currencies) to $23.2 billion, after declining 8.9 per cent in 2020 due to COVID-19. The 2021 figure is up an encouraging 10.2 per cent from revenues of $21.1 billion in 2019.

Right now, McDonald’s is projected to earn $10.15 a share in 2022. The stock trades at 23.6 times that figure, which is a reasonable multiple, given where the shares have traded in recent years.

We would use any share-price weakness stemming from the Russo-Ukrainian war as an opportunity to buy the stock for long-term gains. McDonald’s is a buy for growth and some income.

This is an edited version of an article that was originally published for subscribers in the March 2022/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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