Why We Placed a Take-Out Order on Restaurant Brands

Earlier this week, we sold our position in Restaurant Brands International. This is the operator of Tim Hortons, Burger King, Popeyes, and Firehouse Subs.

Our clients had a good run. We executed a block purchase around CDN$66/share in July 2022. We sold our position for just over CDN$102/share the other day. Including the CDN$4.39 in dividends received over the last seventeen months, clients made about 60% on their investment.

Here’s why we bought it in July 2022.

• At the time, it was a contrarian stock. In the three months leading up to our purchase, the stock price had dropped by almost 15%.

• The dividend was very compelling, offering a yield of 4.4%.

Today, the attributes that attracted us to the stock seventeen months ago are no longer there. Here’s why we sold it.

• Unlike in July 2022, many are now optimistic about the future. Perhaps too optimistic. Patrick Doyle, the chief executive that is credited with turning around Domino’s Pizza last decade, was hired in September 2022. His compensation includes 2 million stock options vesting in 5 years; 500 thousand restricted share units vesting over five years; and 750,000 performance share units that will pay off depending on the performance of the share price. The Domino’s turnaround, however, involved a complete refresh of the menu, something we doubt will happen at Burger King and Tim Hortons. Furthermore, the added shareholder value usually doesn’t match the same hype when “rock star CEOS” join a Canadian company (think John Chen of Blackberry and Guy Laurence of Rogers Communications).

• The valuation is stretched. Despite the expectation for 6% profit growth in 2024 compared to 2023, the stock trades at a 22x earnings multiple. By comparison, the overall market historically trades at 16x earnings. In fact, when we bought the stock, it traded at 16x earnings, a far more reasonable valuation for this kind of a company. Though expectations are for 10-12% profit growth in 2025 and 2026, let’s get through 2024 before we start looking that far ahead.

We found another quick-service restaurant to replace it with. Pizza Pizza has similar attributes to the ones Restaurant Brands had in 2022. The stock is off its 52-week high, pays a 6.5% dividend yield (which will be sought after as interest rates fall), and is one of the few remaining affordable options for a family looking to order-in after a year of startling food cost inflation.

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