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Shares of leading restaurateur Burger King Worldwide, Inc. (BKW - Analyst Report) reached a 52-week high of $22.43 on Tuesday, Dec 24, 2013 ahead of its fourth-quarter 2013 results.

While most of the restaurant chains are grappling with margin pressure owing to cost inflation as well as excessive focus on value-driven offerings, Burger King is doing well on this front. The company has witnessed a consistent rise in margins in all the three quarters of the year thanks to its disciplined cost management. Burger King has been able to significantly increase its adjusted EBITDA margin since the last few quarters. EBITDA margin was up 64.0%, 58.4% and 44.0% in the third, second and first quarters of 2013, respectively.

In fact, Burger King’s share price has been on the rise ever since it reported impressive third quarter earnings on Oct 28, 2013. Burger King’s third-quarter adjusted earnings per share of 23 cents beat the Zacks Consensus Estimate of 21 cents by 9.5% and increased 35.3% year over year on increased margins and lower company restaurant expenses. Revenues also beat the Zacks Consensus Estimate. Organically, revenues were up 8% year over year driven by positive comps in all the regions except, the U.S. and Canada.

Driven by the strong results, estimates for 2013 and 2014 largely moved upwards. The Zacks Consensus Estimate for 2013 and 2014 increased 2.44% and 1.08% to 84 cents and 94 cents, respectively, over the past 60 days.

We expect the company’s fourth-quarter results to be no different. Margins are expected to be strong once again, thus bolstering the bottom line. The Zacks Consensus Estimate for the fourth-quarter stands at 84 cents, representing a growth rate of 21.7% year over year.

Though comps were not great during the third quarter, Burger King’s strategy of product introductions, prototype design upgrades, and longer restaurant hours would help in improving comps and thereby sales, going forward. Moreover, the company remains committed to accelerate international expansion in high-growth potential markets mainly through franchising. We believe franchising a large chunk of its system facilitates the company’s earnings and return on equity growth as it reduces capital requirements. Also, the company’s franchised business model allows it to generate strong free cash flow, thereby helping it to maintain a healthy balance sheet.

Other Stocks to Consider

The company presently has a Zacks Rank #2 (Buy). Other players in the industry, which look attractive at current levels, include Brinker International, Inc. (EAT - Analyst Report), Buffalo Wild Wings Inc. (BWLD - Analyst Report) and The Cheesecake Factory Incorporated (CAKE - Analyst Report). All these stocks carry the same rank as Burger King.


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