Burgers Up: The Redhead, Clown And King Face Off In This Citi Showdown

Commodities Help As Same-Store Sales Slow

Citi's Gregory Badishkanian noted that same-store sales for these restaurants have been slowing a bit thus far in the third quarter relative to the second quarter. Widened price gaps between food at home versus away from home, deal fatigue within the burger segment, lack of new product innovation, tougher comparisons, macroeconomic concerns and election uncertainty were offered by the analyst as some of the reasons for the potential weakness.

Related Link: McDonald's Has Raised Its Dividend Every Year Since 1976

However, the analyst sees lower commodity prices as a saving grace, helping to counter the hit due to competitive pressure. Accordingly, the analyst believes the near-term impact will be limited.

Citi was looking at these three large QSR Burger companies from the perspective of domestic outlook, international outlook, promotions & product innovations, digital, mobile/loyalty and valuation

Burger King

• Burger King is likely to benefit from successful product innovations such as two for $5 sandwich promotion, the two for $10 Whopper deal and the five for $4 deal. Accordingly, domestically, it takes the top spot along with Wendy's.
• On the international front, the company is the winner, given its successful expansion in the international market due to it asset-light franchised market. Citi sees scope for more expansion due to its master franchisee JV partners. The firm also sees opportunity from the global roll out of the Tim Horton's brand.
• Citi commented the company for its effective production introductions and promotions without having to increase back-of-the house complexity and accords it the first place.
• Citi is of the view that valuation is compelling too, especially if Tim Horton is able to show unit growth, both domestically and internationally.

Wendy's

• Wendy's, according to Citi, is the joint winner from the domestic perspective. The firm sees it benefiting from refranchising and its Image Activation remodels. Franchisee returns will be the key, Citi noted.
• In terms of valuation, Citi said Wendy's is the clear winner despite the three stocks outperforming the broader market over the past year. According to Citi, Wendy's provide the best blend of value and a solid near-term outlook.

McDonald's

• Despite the benefit from the launch of its All Day Breakfast, Citi believes the expanded menu is unlikely to be enough of a tailwind, as its franchisees strive to reduce the menu complexities.
• McDonald's international growth has been tepid and Citi sees no near term catalysts as well.
• Domestically, McDonald's is facing tougher 2H comparisons, as it gets ready to lap last year's nationwide roll out of the All Day Breakfast.
• While noting that McDonald's is trading at a premium valuation, Citi said its near-term outlook doesn't deserve a premium, given the challenges associated with the roll out of All Day Breakfast.

At the time of writing, the shares of McDonald's were up 0.49 percent at $115.37, those of Wendy's were up 0.28 percent at $10.66 and Restaurant Brands was up 0.29 percent at $58.11.

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