New Menu Items And Global Expansion Will Attract More Customers To Tim Hortons And Popeyes

Key Takeaways

• Strategic acquisitions and enhanced digital capabilities are positioned to boost market presence and facilitate significant revenue growth.
  
• Innovation in menu offerings and operational improvements are likely to drive customer traffic and strengthen franchisee profitability and margins.
  
• Geopolitical and market challenges could affect growth and profitability across international markets and specific brands like Burger King and Firehouse Subs.

Catalysts

Operates as a quick-service restaurant company in Canada, the United States, and internationally.

• The acquisition of Carrols Restaurant Group and Popeyes China in 2024 is expected to enhance future growth by consolidating market presence and expanding regional operations, potentially boosting revenue.
  
• The launch of modernized restaurant images across brands like Burger King and the alignment on new advertising rates and franchise agreements with Popeyes are likely to drive increased customer traffic and improve franchisee profitability, impacting net margins positively.
  
• Enhanced digital capabilities and global expansion across 110 brand market combinations will facilitate a seamless guest experience and elevate system-wide sales growth, contributing to revenue growth.
  
• Continued focus on innovation with new menu items and strategic partnerships, such as celebrity collaborations and enhanced breakfast offerings at Tim Hortons, are likely to attract more customers, supporting revenue and earnings growth.
  
• Operational improvements, such as reduced drive-through times at Tim Hortons and systemwide upgrades at Popeyes, are expected to enhance customer satisfaction, leading to a potential increase in revenue and improved net margins.

Restaurant Brands International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Restaurant Brands International's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 19.9% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $4.62) by about April 2028, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, up from 21.4x today. This future PE is greater than the current PE for the US Hospitality industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 2.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

Restaurant Brands International Future Earnings Per Share Growth

Risks

• The company faces risks from geopolitical pressures that have impacted growth in certain international markets and led to net closures, specifically in BK China. This could impact net margins and revenues as these international operations are significant contributors.
  
• There are challenges in the sub sandwich category affecting Firehouse Subs, leading to a decline in its profitability. This could affect overall earnings unless the category dynamics improve.
  
• Increased commodity costs, particularly in the U.S., have impacted franchisee profitability, particularly at Burger King. This could compress margins if inflationary pressures continue.
  
• The company’s ability to achieve its net restaurant growth target is uncertain, partly due to pending resolutions in China, which could impact future revenues and system-wide sales growth.
  
• Franchisee profitability remains a concern, with certain brands like Burger King in the U.S. and Firehouse experiencing stability issues, which might impede overall financial growth and profitability.

Valuation

• The analysts have a consensus price target of $77.092 for Restaurant Brands International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $93.0, and the most bearish reporting a price target of just $67.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.9 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 8.9%.
• Given the current share price of $67.17, the analyst price target of $77.09 is 12.9% 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.