Restaurant Brands, part 2…

Back to the beautiful world of deep fried chicken, with a serving of pizza, and a creamy coffee chocolate creme extravaganza!

So the first part of the story was just a simple look at how to identify a potentially undervalued company, in order to make yourself buckets of money which you can then use to buy buckets of deep fried chicken!

This second part goes more in-depth, and produces a snapshot image of the company, with a basic valuation. Heres the document, similar to the previous Michael Hill one, based on the Valueline reports produced by… well, Valueline, for US companies.

valueline-restaurantbrands

The big takeaways are that 1) the P/E is about ‘right’ for Restaurant Brands. 2) they have been increasing dividends fairly consistently after the Aussie Pizza Hut Debacle. and 3) margins are trending upwards, which is a sign that costs at Pizza Hut and Starbucks are under control.

An interesting aside is the treatment of leases. RBD obviously have some pretty big lease commitments, which are normally treated as an operating expense… But Damodaran argues that these should be treated as debt, because operating leases are much more like debt (in that if you don’t pay, really bad things happen to your company) than operating expenses. So I’ve broken these out and indicated that they are a form of debt.

So, my basic analysis indicates that Restaurant Brands is worth more. For people reasonably new to valuation, this is a pretty good example of a basic valuation. The “free cash flow” figure ($20,818,000) shows the money that the company gets every year. Assuming they keep making this forever, and pay off debt, how much is all those $20,000,000’s added up equal?

Obviously, a deep fried chicken coated in 11 different herbs and spices in the hand is worth 2 still clucking, so next years 20,000,000 is not worth as much as this years, and so on. The mechanics require a discount rate, which is makes next years (and the year after etc etc) 20,000,000 worth less. The discount rate chosen was 7.7% (PwC WACC), which includes 2% of growth (ie, rate of inflation, we assume that RBD can increase prices along with inflation). I suspect that the actual WACC should be a bit lower, which would increase the shareprice.

So finally, when all the mathmagic has been done, we get a share price of … $3.58! Current share price is $2.60, so RBD is sort of cheap according to me. The dividend is still around 4.8% which is pretty good for a stock with some potential upside. Rabobank are paying 5.3% for a 1yr term deposit, so at most you’re really risking 0.5%, and the KFC brand should see more boosting as the rest of the store upgrades start paying.

Let me know any comments, suggestions, corrections, blatant errors etc.

Disclosure: I sold out of RBD at $2.35, before I had done this valuation 🙂

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Restaurant Brands, part 2…

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