Burger King Offers Affordable Overseas Growth

By Ryan C. Fuhrmann | August 25, 2010 AAA

Fast-food operator Burger King (NYSE:BKC) has its sights firmly set on international growth opportunities. Given the reasonable valuation, there is downside protection in the share price and relative valuation appeal compared to a couple of key rivals.
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Fourth-Quarter Review
Sales fell a modest 0.7% to $623 million as the addition of a net 59 new restaurants was more than offset by a 2.4% drop in same-store sales. The top line came in below analyst expectations, though management said that store traffic improved across its international store base. Comps did improve in the Asian, European and Latin American regions, but fell in the U.S. and Canada as competition remains fierce with rivals including Wendy's/Arby's (NYSE:WEN) and Jack in the Box (Nasdaq:JACK) fighting for domestic market share.

Cost controls helped expenses fall faster than sales, but a higher income tax expense pushed net income down 17% to $49 million, or 36 cents per diluted share. Despite the drop, profits beat analyst projections.

Full-Year Recap
Full-year sales also struggled slightly, falling 1.4% to $2.5 billion as negative comps of 2.3% again offset new store expansion. For the year, Burger King added a net 249 new stores, 90% of which stemmed outside of the U.S. and Canada. Comps again fell the most in these two regions and higher taxes offset decent expense controls. Net income ended up falling 7% to $1.36 per diluted share.

Outlook
For the coming year, analysts expect sales to grow 3.1% to $2.6 billion and for earnings to reach $1.44 per share, for modest year-over-year growth. The company detailed that it plans to open between 225 and 275 net stores and maintain 90% of this growth overseas. It also expects comp growth to remain difficult given the challenging employment trends across the world.

Cash Flow and Debt
In its financial results press release Burger King mentioned that cash flow generation remains strong and that it was able to pay down $68 million in debt during the year. Strangely enough though it did not provide a cash flow statement or balance sheet in the release.

Burger King has managed to whittle down its debt load, which stood at $690 million as of the end of its third quarter. And though operating cash flow has been strong and has increased steadily over the past three fiscal years, most of it is being used to remodel new stores and grow the existing store base.

In the past 2.5 years, the company has remodeled 170 of 12,000 existing restaurants. It remains to be seen if reimaging and expansion plans eventually boost free cash flow production. At a forward P/E of 11.5 times, the bar is set pretty low and the stock could see a jump as store improvements combine with an improving economic climate to boost fundamentals.

Bottom Line
Burger King's focus on international growth could also pay dividends and mirrors Yum! Brands (NYSE:YUM) global ambitions, though Yum trades at a much more frothy 17 times forward earnings. Both are also actively selling North American stores to free up capital for their overseas ambitions. Investors wanting to stay closer to home should look at Chipotle Mexican Grill (NYSE:CMG), though the valuation already discounts much of its growth potential. (To learn more, see Sinking Your Teeth Into Restaurant Stocks.)

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