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We maintain our Outperform recommendation on Burger King Worldwide, Inc. (BKW - Analyst Report), as the restaurateur is witnessing strong momentum. Its international expansion plans, rising margins, initiatives to boost sales and strong third quarter results encourage us.

Why the Reiteration?

Burger King, the world’s second largest fast food hamburger restaurant chain is well positioned to sustain growth in existing and new markets through product introductions, prototype design upgrades, and longer restaurant hours.

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 earnings and return on equity growth owing to lower capital requirements. The company’s franchised business model allows it to generate strong free cash flow, thereby helping it to maintain a healthy balance sheet. Moreover, international expansion through franchising helps in increasing brand recognition.

Meanwhile, Burger King’s “four-pillar” strategy, which includes restaurant re-imaging, menu improvement, marketing initiatives and improving operational efficiency allows it to focus on key areas of operation and stay competitive in the saturated U.S. restaurant industry while boosting sales.

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’s performance on the margin front is worth mentioning. The company witnessed a consistent rise in margins in all the three quarters of the year thanks to its disciplined cost management.

Driven by these factors, the company posted strong third quarter results with earnings beating the Zack Consensus Estimate by 9.5% and revenues by 3.4%. Estimates for 2013 and 2014 largely moved upwards over the past 60 days, reflecting the strong results. The Zacks Consensus Estimate for 2014 increased 1.08% to 94 cents over the same period.

Also, the practice of increasing dividend affirms the company’s optimistic outlook and growth prospects.

Other Stocks to Consider

The company presently has a Zacks Rank #2 (Buy). Other players in the restaurant 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 a Zacks Rank #2.

 

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