We wouldn't require much margin of safety before taking a position in this narrow-moat firm.
By R.J. Hottovy, CFA | 02-13-17 | 11:00 AM | Email Article

With narrow-moat  Restaurant Brands International  pre-announcing key metrics last week, its full fourth-quarter update was a chance to take a qualitative look at the numbers and revisit our longer-term assumptions.

R.J. Hottovy, CFA, is a consumer strategist for Morningstar.

While a more promotional environment in the U.S. and Canada was likely the impetus behind Tim Hortons' posting 0.2% comps (its fourth straight quarter of two-year stacked comp deceleration), we also believe management's explanation of unfavorable weather, western Canada weakness, and a calendar shift for its hockey card promotion has some merit. While these trends will likely weigh on first-quarter results, we expect improvement during the year through a nationwide espresso launch in Canada and rollout of a digital ordering/payment app in the spring. With Burger King also continuing to find good value/premium balance on its menu across its operating markets, we expect both brands to deliver comps in the low-single-digit growth range next year.

We view the recent master franchise joint venture, or MFJV, for Tim Hortons in the Philippines, Great Britain, and Mexico were the most noteworthy development on the new-unit front. This marks a shift to the next phase in Restaurant Brands' post-acquisition strategy for Tim Hortons, which first focused on making the brand more scalable before finding MFJV partners. As such, our model continues to expect gradual improvement in Tim Hortons unit growth, moving from 4% this year to the mid- to high single digits over the next 10 years.

Combining new comp levers and the foundation for unit expansion with continued cost discipline, we remain comfortable with our assumptions calling for 5% annual average top-line growth and longer-term adjusted EBITDA margins growing to the mid-50s over the next 10 years. We plan to raise our $46/CAD 62 fair values by a few dollars because of the time value of money, and while this implies shares are fairly valued, we wouldn't require much margin of safety before taking a position.

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R.J. Hottovy, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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