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Betting on 3G's Burger Bet
Posted by: Fede Zaldua (IP Logged)
Date: October 28, 2013 05:22PM

Once again its possible to witness the huge skill-set owned by managers hired by 3G, the private equity firm backed by the Brazilian trio who controls AB-InBev (BUD): Lemann, Sicupira and Telles. This time, the trio is outperforming the market with their investment in Burger King Worldwide (BKW), which has returned 40% to its owners since its IPO in June 2012. This more than triples McDonald's (MCD) performance during the same period.

Third Quarter Results

After an aggressive reorganization process that re-franchised most of its restaurant locations, Burger King has finished this quarter with just 74 company-owned restaurants, down by 521 restaurants year-over-year. Thanks to its cost-cutting strategies and its successful re-franchising strategy (which lowers Capex in an extraordinary way) the company was able to post stunning results: If you exclude amortization and other special items, Earnings Per Share (EPS) were up by more than 35%, while operating cash-flow grew by 17%.

Even when same-store-sales eroded by 0.3% in North America while McDonald's was able to post a 0.7% gain, same-store-sales growth in EMEA, Latin America and Asia remained strong at 2.4%, 2.1% and 3.7%, respectively. Great things are still coming for Burger King, I do not think the party is over yet.

The Future Ahead

After finishing its re-franchising process, Burger King will keep on remodeling existing restaurants and launching its ambitious growth strategy in Emerging Markets. Above all in highly populated countries such as Brazil, where the company plans to open hundreds of restaurants in the next few years.

On the cost side, the job is pretty much done. After all, the company was able to push down operating costs and expenses by as much as 64% year-over-year. That said, there is one huge task that remains undone: Burger King needs to de-leverage itself. The company has now a net debt to cash flow multiple of 5 times (or almost 3.4 times its estimated 2014 EBITDA), which seems somewhat high even for a company with a lean structure and a great management team. That said, 3G's track-record on getting rid-off debt is impeccable. The job done at AB-InBev after Anheuser-Busch's $52 billion acquisition is a clear example of what this people are intending to do with Burger King.

Bottom Line

Burger King Worldwide, which is largely held by the billionaire investor Bill Ackman (who owns nearly 11% of the company's shares), still trades at a reasonable level considering that I would expect the company to be able to grow its EBITDA a mid-to-high single digit rates and its bottom-line at double digit rates in the foreseeable future. Burger King trades at 20 times 2014 earnings while McDonald's, which has been posting weak top-line trends, sells for 16 times 2014 earnings. I think the premium is more than justified. After all, Burger King's organic growth should be just starting.


Stocks Discussed: BKW, BUD, MCD,
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