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QSR Stock: Restaurant Brands International Needs a Better Taco

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Restaurant Brands International (NYSE:QSR) rolled out tacos at their Burger King chain recently and the fans jeered.

QSR Stock: Restaurant Brands International Needs a Better Taco

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It was easy to see why. The Burger King version is a thoroughly American creation of ground beef and hamburger toppings inside a crisped shell. It’s not even as good as Taco Bell, the YUM! Brands (NYSE:YUM) chain that was once sued by customers claiming the meat inside wasn’t actually meat.

But the move does hint at something. Taco sales are up 4% in 2019. People like them. They’re also cheap and easy to make. For operators dedicated to growth like Restaurant Brands International, tacos are a natural fit. Note that QSR stock has risen nearly 40% so far in 2019.

Brazilian Magic

The Brazilians at 3G Capital formed Restaurant Brands in 2014, combining the Burger King and Tim Horton’s chains. In 2017 they added Popeye’s, a chicken franchise.

Under their zero-based budgeting system, in which every dollar spent must be justified every year, the chains have thrived. The shares are up 70% since the merger. There’s a 50 cent per share dividend yielding 2.81%, and 2018 sales were up 17%. There is 65 cents per share of profit on $1.39 billion in sales expected for the June quarter, which will be reported July 31.

It’s a stark contrast to 3G’s other big deal, Kraft Heinz (NASDAQ:KHC), which has been a disaster for shareholders since its formation at the start of 2015. Those shares are down 60% despite a dividend now yielding 5.11%.

Fast food yields to the zero-based touch more easily than food manufacturing. Corporate franchisees can crunch the numbers as just-another operational detail.

But, as a recent lawsuit by Tim Horton’s franchisees shows, you can only squeeze a concept so far. Critics have recently called QSR stock overvalued. The best way to keep growing may be with another franchise.

Some Tacos?

Mexican food can be a home run, if done right. Just look at Chipotle Mexican Grill (NYSE:CMG), which has now recovered from its scandals. CMG stock is up 70% so far in 2019.

All this brought me to Del Taco Restaurants (NASDAQ:TACO). (I’ve got a little interest in Del Taco. My brother once worked in one and burned his hand in a fryer.)

Del Taco has had a turbulent history but it makes a decent taco. They had sales of $505 million in fiscal 2019 and showed a small profit. The market cap is about $461 million, just short of the sales figure. QSR sells for over 3.5 times sales.

Del Taco has just the right size and just the right menu for an operator who wants to make it a national franchise. The fast food business is consolidating. The last two years have seen over 70 deals in the space. Private equity groups Roark Capital and JAB Holding are gobbling up chains by the handful. They’re all chasing YUM! Brands, which owns Taco Bell and McDonald’s (NYSE:MCD), which has more than doubled in value under CEO Steve Easterbrook.

Bottom Line on QSR Stock

The trend in fast food is for good operators to expand through acquisition and squeeze out fatter margins from chains and franchises. That’s QSR’s business model.

It’s a tough business that is rapidly consolidating. There aren’t many profitable operations of reasonable size left to be gobbled up. Tacos are a growing business and Del Taco would be a tasty bite for an acquirer. See how quickly QSR, or one of its rivals, pounces on it.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in QSR.

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