Urbanization And Digital Ordering Will Expand Global Dining Options

Key Takeaways

• Aggressive cost savings, operational focus, and executive leadership could drive accelerated earnings and cash flow improvement beyond current expectations.
  
• Expansion into digital channels and international markets, plus better facility utilization, positions the company for sustained revenue and margin growth.
  
• High-calorie restaurant focus, heavy debt, operational complexity, labor headwinds, and shifting consumer preferences threaten profitability and growth prospects.

Catalysts

A multi-brand restaurant franchising company, acquires, develops, markets, and manages quick service, fast casual, casual dining, and polished casual dining restaurant concepts in the United States, Canada, and internationally.

• Analyst consensus views the separation and public listing of Twin Hospitality Group as providing a growth runway for Twin Peaks, but the continued hands-on involvement of proven scaling leaders, combined with an aggressive operational focus and the removal of legal distractions, could rapidly accelerate unit growth and operational margin gains well beyond current expectations, potentially driving a step-change in consolidated earnings and free cash flow generation.
  
• While analyst consensus regards the commitment to debt reduction and paused dividends as means to strengthen net margins, the elimination of $30 million in annual litigation costs, deeper-than-expected SG&A cuts, and accelerated refranchising could yield cost savings that translate into substantially improved net margins and enable return to sustained positive cash flow far ahead of consensus timelines.
  
• Expansion of digital sales channels-already comprising over 25 percent of some brand sales and trending upward-combined with loyalty programs that induce higher spending, sets up a sustained mix shift toward higher-margin off-premise revenue streams, providing leverage to both revenue growth and EBITDA margins.
  
• International development momentum is likely understated, as FAT Brands' early-stage presence in fast-growing global markets aligns directly with increasing urbanization and rising middle-class incomes, positioning the company for multi-year royalty and franchise fee growth that could outpace North America and materially lift top-line revenue.
  
• The underutilized Georgia manufacturing facility, operating at less than half its capacity but delivering 37 percent EBITDA margins, represents an immediate catalyst; swift expansion of production and high-volume virtual brand partnerships with large operators could double facility revenue and meaningfully increase consolidated gross profit and operating margins.

FAT Brands Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on FAT Brands compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming FAT Brands's revenue will grow by 7.2% annually over the next 3 years.
• Even the bullish analysts are not forecasting that FAT Brands will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate FAT Brands's profit margin will increase from -38.2% to the average US Hospitality industry of 8.2% in 3 years.
• If FAT Brands's profit margin were to converge on the industry average, you could expect earnings to reach $58.5 million (and earnings per share of $2.92) by about August 2028, up from $-220.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, up from -0.1x today. This future PE is lower than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 4.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.84%, as per the Simply Wall St company report.

FAT Brands Future Earnings Per Share Growth

Risks

• FAT Brands operates many indulgent, high-calorie dining concepts such as Fatburger, Johnny Rockets, and Marble Slab Creamery, which are at risk of declining consumer demand due to the long-term secular trend of growing health and wellness consciousness, potentially reducing customer traffic and impacting future revenue growth.
  
• The company's heavy reliance on debt-financed acquisitions and ongoing high leverage makes it highly sensitive to rising interest rates and refinancing risk, threatening to increase interest expense and depress net income and earnings over the long term.
  
• FAT Brands' sprawling brand portfolio and frequent acquisitions create risk of over-diversification, possible management distraction, and operational inefficiencies that could erode net margins and reduce earnings quality if integration fails to keep pace.
  
• Persistent industry-wide labor shortages and rising minimum wage trends, especially in states like California, are likely to drive up labor costs for franchisees and corporate locations, which could compress operating margins and profitability.
  
• The growing preference for food delivery, takeout, and ghost kitchens may challenge the relevance and traffic of traditional dine-in and casual dining franchises central to FAT Brands' portfolio, risking long-term pressure on system-wide sales and revenue.

Valuation

• The assumed bullish price target for FAT Brands is $15.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of FAT Brands's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $710.9 million, earnings will come to $58.5 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 9.8%.
• Given the current share price of $1.85, the bullish analyst price target of $15.0 is 87.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.