We consider Restaurant Brands’ (QSR, Financial) franchised business model to be a high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from its three brands: Burger King, Tim Hortons and Popeyes. The company has an extremely capable management team, is backed by an owner-oriented sponsor (3G), and has a large unit growth opportunity that requires virtually no incremental capital. The company’s operating strategy is highly scalable and replicable, which should provide opportunities for additional value-creating acquisitions over time.
Restaurant Brands reported continued earnings growth for the third quarter of 2017. The company delivered strong net unit growth at each of its three brands and made progress with Popeyes’ cost structure. Performance at Burger King was particularly impressive this quarter, but was somewhat offset by softness at Tim Hortons.
Same-store-sales this quarter grew 3.6% at Burger King, with 4% growth in the US as the company continues to improve its mix of premium and value offerings. Tim Hortons’ same-store-sales were roughly flat, as customers have been slow to try the espresso-based drinks and new offerings on the lunch menu that were introduced at the end of the quarter. We believe sales in recent quarters have also been negatively impacted by the recent public dispute with a group of franchisees. Net units grew 6%, reflecting strong growth across all of the brands. Burger King reported 7% net unit growth, which was its highest level in the last decade.
Organic EBITDA grew 8%, with 16% growth at Burger King, 1% declines at Tim Hortons, and a 40% increase at Popeyes. Growth at Burger King reflected strong same-store sales, substantial net unit growth, and improved franchised margins. The slight decline at Tim Hortons was due primarily to a price reduction on supplies sold to its franchisees and an increase in costs. While these items depressed earnings in the current quarter, they represent an investment in improving relationships with Tim Hortons’ franchisees. Popeyes’ growth was due to unit growth and cost reductions. Overall, Restaurant Brand’s reported EBITDA grew 10%, due to a 2% tailwind from the weaker USD.
We believe that Restaurant Brands remains a compelling value at 21 times our estimate of 2018 free cash flow per share in light of our belief that the company can grow free cash per share in the mid-to-high teens for the foreseeable future.
From Bill Ackman (Trades, Portfolio)'s third quarter 2017 shareholder letter.
