Restaurant Brands has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9.4% to $68.50 per share while the index has gained 7.2%.
Is now the time to buy Restaurant Brands, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Restaurant Brands Not Exciting?
We're cautious about Restaurant Brands. Here are three reasons you should be careful with QSR and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Restaurant Brands’s revenue to rise by 4.3%. This projection is underwhelming and implies its menu offerings will see some demand headwinds.
2. Shrinking Operating Margin
Operating margin is a key profitability metric because it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.
Analyzing the trend in its profitability, Restaurant Brands’s operating margin decreased by 5.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 23.3%.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Restaurant Brands’s EPS grew at an unimpressive 5.1% compounded annual growth rate over the last six years, lower than its 9.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Restaurant Brands isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 16.7× forward P/E (or $68.50 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
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