Tim Hortons-Burger King merger likely just the beginning for Oakville, Ont.-based parent, consumer goods stock Restaurant Brands International Inc.
Analysts at Vancouver-headquartered Odlum Brown are serving up a “buy” recommendation for Restaurant Brands International Inc. (TSX─QSR). They’re also handing it a 12-month price target of $60 a share. They write:
We’re enthusiastic about Restaurant Brands Intl., given its exceptional stewardship — stewardship guided by the company’s majority shareholder, 3G Capital. An investment firm run by Brazilian partners, 3G Capital boasts an outstanding track record.
In fact, U.S. investment guru Warren Buffett calls the company’s founders some of the best businessmen in the world.
For its part, 3G has worked wonders at Burger King, changing both management and the board of directors in 2010. Since then, the burger-and-fries behemoth, which was once an underperformer, has seen its fortunes take a dramatic improvement. Indeed, Burger King is now essentially a multinational corporation that collects franchise royalties from more than 14,000 restaurants in nearly 100 countries.
Not only is franchising an attractive business model — one with minimal capital requirements — but it’s also a business model with robust cash flows, as well as a high return on equity.
This global stock’s international markets are growing
Moreover, the company’s system-wide profitability has got a lift from major cost-cutting. In the meantime, Burger King has returned to growth — especially in international markets. And although the company has made significant improvements in its business, we think it can make even more.
Admittedly, Tim Hortons has been a true Canadian success story. But it should prove even more successful under Restaurant Brands’ management. Indeed, thanks to the latter’s legendary cost-cutting, Tim Hortons is likely to see an increase in system-wide profitability.
Then, too, Tims is likely to get excellent infrastructure and franchisee relationships to grow its brand globally, given Burger King’s 6,000-plus restaurants outside Canada and the U.S.
But the merger of Tims and Burger King is unlikely to be Restaurant Brands’ last big act. In fact, we think the company itself will serve as a platform for future acquisitions. After all, 3G is very ambitious. And we think this could be the beginning of a big, global consumer goods stock — one with many restaurant brands.
Meanwhile, we believe the synergy and growth potential of the Burger King-Tims merger will fuel robust earnings growth over the next several years.
Building multinational corporations in the consumer goods industry
Not only have three of 3G Capital’s founders — Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira — been building businesses together for decades, but they’re now among the wealthiest people in the world.
The three partners began working with each other at Banco Garantia, a bank in Rio de Janeiro, in the 1970s. There, they helped transform the company from a struggling brokerage firm into Brazil’s biggest investment bank — a bank bought by Credit Suisse Group (NYSE─CS) in 1998.
While at Garantia, the three partners decided to involve themselves in other businesses. For example, they turned around a struggling retailer, Lojas Americanas, transforming it into one of South America’s biggest retail chains. They also succeeded in turning around America Latina Logistica S.A. (OTC─ALLAY), a Brazilian railway company.
But the three partners’ most visible success was Anheuser-Busch InBev SA/NV (NYSE─BUD), the global brewing giant. In 1989, the Brazilians bought Brahma, an under-performing brewer, whose market cap was then just $242 million. They then transformed it into Anheuser-Busch InBev, the world’s biggest beer company whose market cap now tops $150 billion.
Recently, the three Brazilians teamed up with Mr. Buffett’s own company, Berkshire Hathaway Inc. (NYSE─BRK.A) to buy iconic food giant HJ Heinz. In fact, 3G Capital, which is responsible for Heinz’s operations, has already given that company’s profitability a big boost.
And in a recent development, Heinz is joining forces with Kraft Foods Group Inc. (NASDAQ─KRFT) to create the third-biggest food company in North America. Heinz will be backed by both Berkshire Hathaway and 3G Capital.
This top consumer goods stock’s formula: cut costs, reward talent
Much of the success attributed to Messrs. Lemann, Telles and Sicupira stems from the way they build businesses. To begin with, the three partners are obsessed with finding and then rewarding talented and ambitious people. These hires are then motivated by ambitious goals, as well as by the knowledge that they’ll share in the rewards of reaching those goals.
Messrs. Lemann, Telles and Sicupira are also adamant about meritocracy. Their employees are rewarded for performance, not tenure, status, or personal ties of friendship. Those employees who perform well move up quickly; they’re richly compensated. But those employees who don’t perform don’t last.
This process of finding great people, setting ambitious goals and rewarding achievement becomes a virtuous cycle as 3G grows. To drive performance, the company often cuts costs. Indeed, 3G Capital is legendary in wringing out non-productive costs, from outlawing color photocopying to having employees share desks.
But the company doesn’t stifle strategic costs that help the top line, encouraging marketing and sales expenses if justified.
Brahma provides a good example of 3G’s ability to grow a company’s revenue. In the mid-’90s, Brahma and rival Companhia Antarctica Paulista each boasted roughly 30 per cent of Brazil’s beer market.
But within a few years, Brahma had boosted its market share to 49 per cent, while Antarctica saw its share fall to 22 per cent. Not only did Brahma supplement its organic growth with acquisitions, but in 1999, it bought Antarctica itself. Brahma later bought such iconic brands as Stella Artois, Beck’s Brewery, Budweiser and Corona.
All in all, acquisitions are often a good thing for the Brazilians, given that they’re once again able to show their ability to give a big boost to the profitability of the companies they buy.
Investor’s Digest of Canada, MPL Communications Inc.
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