Is Burger King a Safe Bet Now? - Analyst Blog

On May 22, 2014, we issued an updated research report on Burger King Worldwide, Inc. BKW.

We are encouraged by Burger King's performance on the margin front, especially when most of the restaurant chains in the industry are grappling with margin pressure owing to cost inflation as well as excessive focus on value-driven offerings. For Burger King, EBITDA margin for the year 2013 was 58.1%, far better than 33.1% in 2012.

In keeping with the trend, EBITDA margin soared 2210 basis points (bps) year over year to 66.3% in the first quarter of 2014. This uptrend reflects the company's disciplined cost management and the adoption of a zero-based budgeting program that helped it save costs.

On Apr 25, this leading restaurateur reported solid first-quarter results, as earnings as well as revenues beat the Zacks Consensus Estimate. The company's adjusted earnings per share increased 19.3% year over year owing to lower operating costs and expenses. However, on the flipside, currency headwinds and an adverse impact of refranchising the company-owned restaurants pulled down the total revenue by 26.5% on a year-over-year basis.

Despite the inclement weather in the U.S., comps in the quarter nudged up 2.0%, higher than the prior-quarter comps growth of 1.7%. Comps in the quarter also compared favorably with a comps decline of 1.4% in the year-ago quarter as strong international performance made up for softer comps in the U.S. and Canada due to severe weather.

We believe the company is well-positioned for growth due to its strong international presence. Moreover, Burger King safeguards its position and growth prospects amid a sluggish macro-environment through its focus on franchising. The restaurateur is transitioning its business model through product introductions, restaurant upgrades, a proper marketing mix and improved operations.

However, weak consumer spending is a matter of concern for this Zacks Rank #2 (Buy) company. U.S. consumers are burdened with higher gasoline prices, payroll tax increases and delayed tax refund checks that limits discretionary spending. Also, rising food costs keep us concerned as it would hurt margins, going forward.

Some other stocks in the restaurant industry which can be considered include Fiesta Restaurant Group, Inc. FRGI, Carrols Restaurant Group, Inc. TAST and Red Robin Gourmet Burgers Inc. RRGB. All these stocks have a Zacks Rank #2.