Food Chains on the Rise
Wonderful Strategy in Place
I like Burger King's strategy of growing internationally through creating huge franchise networks in emerging markets from Brazil to China. That said, what I like the most about Burger King is its ultra-efficient management, which is closely watched by the company's control group, the Brazilian trio (Lemann, Sicupira and Telles) that controls AB-InBev (BUD), the most profitable global brewer in the world.
The re-franchising strategy was implemented at full speed. In 2012, Burger King had 1,169 company-owned restaurants and 797 franchisees. At the end of 2013, Burger King expects to have just 215 company-owned restaurants and more than 920 franchisees. This dynamics will keep on going until 2015, when Burger King expects the ratio of franchisees to fully owned restaurants to stabilize and top-line to start growing once again. Undoubtedly, the strategy set by management has worked well. Even when the company's revenues are set to diminish by 42% year-over-year (yoy) in 2013, operating margins should soar from 27.5% in 2012 to over 52% in 2013. The result of the new strategy is a leaner and much more profitable company.
As a matter of fact, I expect EPS to grow from 66 cents in 2012 to over 80 cents in 2013. I also expect EBITDA to grow at high single-digit figures from 2013 onwards. Trading at 23 times 2014 earnings, I think you could make a bet on Burger King if you can hold this stock for the long term. This is what Lemann, Sicupira, Telles and even hedge fund investor Bill Ackman have been doing for some time now.
More Sales and Higher Margins
With the new bakery roll-out on motion (La Boulange products are in 3,000 stores going to 100% within the next year) and coffee prices down by 62% from 2011's peak, I believe Starbucks is set to keep improving its top and bottom line. According to Oppenheimer estimates, the bakery upgrade alone could drive same store sales by as much as 7%. Moreover, more food changes such as breakfast sandwiches are in Starbuck's pipeline. A direct result of more food product offerings is increased store-traffic and higher average checks. Overall, strong fundamentals are getting even better. Starbucks is proving its ability to cross-leverage its retail system and fully owned consumer products.
On the other hand, the company is set to leverage its under-utilized balance sheet to increase dividends or finance stock buybacks. Trading at 29 times earnings, Starbucks looks fully valued but you should keep it in your watch list. The stock is held by Mario Gabelli, Ron Baron and John Burbank.
Both companies own fantastic businesses and managements at both companies have been implementing the correct strategies for some time. Results are visible at first sight. Starbucks and Burger King are much more profitable and efficient companies now than ever before. Even if fully valued, you should keep both companies into your watch list.