Market Commentary: 1 Food Stock That Defies All Odds

Famously, it’s been said that the restaurant business is a horrible one. You have to pay the rent, the staff, the food costs, and keep the lights on, and when you’re done with all that you have to hope your menu is right, the chefs show up each day, and the customers like the food.

If they do, you can expect to pocket a small fraction of what they pay at the end of the month because what’s leftover after all the expenses is not much at all. So why then would you ever buy a stock that is a conglomerate of restaurants?

It seems like you’re not only taking on the burden described above but multiplying it many times over. And yet, against all odds, one business in the food sector has figured out how to flip the script on the traditional financial setup and actually squeeze out a very good profit, so how did Restaurant Brands International do it?

Key Points

• RBI has replicated McDonald’s franchising model, significantly boosting revenues by over 6x in the past decade.
• It aims to expand in India and China, leveraging mobile payments and loyalty programs to tap into these high-growth markets.
• Analysts have set RBI’s stock price target around $77, reflecting optimism about its future performance.

RBI Is No Ordinary Restaurant

There’s an old story that McDonald’s isn’t in the food business it’s in the real estate business. Because it has operations in prime locations around the world, it’s hard to argue with that claim.

But what’s less well-known is that McDonald’s is in the franchising business too. And it’s a smart one because McDonald’s gets to collect a fixed amount of sales each month while offloading the operational burdens to small business owners. The model has been so successful it’s been employed by another restaurant giant, Restaurant Brands International.

Over the past decade, the strategy has clearly been a winner with revenues up from $1.1 billion in 2013 to $6.5 billion last year.  Earnings per share in that same time frame have risen from $0.67 per share to $3.25 per share.

And yet the story of RBI is arguably not even in the second inning because it’s got a lot of other factors in its favor.

Is RBI Stock a Buy?

While the past financial history of RBI has been stellar, the future could be still brighter. That’s because the company’s market size and opportunity is expanding by the way. Management has shared its ambitions to penetrate markets in India and China, which if successful, offers enormous upside thanks to a rising middle class who have more disposable income.

So too has the company adopted mobile payments and loyalty programs to heighten the ease of ordering and boost repeat business. All of that will be highly beneficial when attempting to grow in countries that have fully embraced a mobile-first experience.

It seems analysts have gotten behind the stock too with a consensus price target just above $77 per share. A discounted cash flow forecast analysis is even more optimistic, pegging fair value at $84 per share.

It’s no wonder that Pershing Square Capital was willing to risk over $1 billion of its portfolio on the company. If indeed it has the growth trajectory that international expansion should bring, the upside could be substantially more than what analysts are forecasting.