Will Burger King (BKW) Beat Q3 Earnings on Higher Margins?

We expect leading fast food chain Burger King Worldwide, Inc. BKW, to beat expectations when it reports third-quarter 2014 results on Oct 24, 2014. Last quarter, the company posted an earnings surprise of 8.7%. Let us see what is in store for the company this quarter.

Why a Likely Positive Surprise?

Our proven model shows that Burger King is likely to beat earnings because it has the right combination of two key components.

Zacks ESP:  Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +3.70%. This is a very meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Burger King has a Zacks Rank #2 (Buy). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.  

The combination of Burger King's Zacks Rank #2 and +3.70% ESP makes us confident of an earnings beat.

What is Driving the Better-Than-Expected Earnings?

Burger King has been posting earnings beat for the past three quarters on the back of higher traffic at its restaurants and unit growth. The company has undertaken several initiatives to revamp its brand through menu innovation, franchising its company-owned stores and store expansion to significantly drive revenues. We believe that these operational improvements and international expansion will drive revenue growth in the to-be-reported quarter.

Burger King remains committed to accelerate international expansion in high-growth potential markets mainly through franchising. In fact, as a result of franchising its restaurants, Burger King has been able to significantly increase its adjusted EBITDA margin in the last few quarters and we expect the trend to continue in the third quarter as well. While most of the restaurant chains in the industry are grappling with margin pressure owing to cost inflation, Burger King's margin performance is noteworthy.

Amid these upsides, we cannot ignore the criticism faced by the company owing to its merger deal with Tim Hortons Inc. The merger would create one of the largest fast food companies in the world, with a market value of roughly $18 billion. The combined business would generate about $22 billion in sales and constitute more than 18,000 restaurants in 100 countries. However, the deal did not find favor with the White House as it is being considered as a tax inversion deal, with the parent company's headquarters planned to be relocated to Ontario, Canada. Also, a number of social media users reportedly expressed their dissatisfaction over the deal.

Moreover, like other food and restaurant companies, rising food costs, particularly higher-than-expected beef prices, would pose a major challenge to Burger King.

Other Stocks to Consider

Burger King is not the only firm looking up this earnings season. We also anticipate earnings beat from three other companies in the restaurant industry:

Red Robin Gourmet Burgers Inc. RRGB, with an Earnings ESP of +2.94% and a Zacks Rank #3 (Hold).

Buffalo Wild Wings Inc. BWLD, with an Earnings ESP of +0.94% and a Zacks Rank #3.

Einstein Noah Restaurant Group, Inc. BAGL, with an Earnings ESP of +4.55% and a Zacks Rank #3.

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