Roll Out Carpet for Burger King

We are initiating coverage of Burger King (BKC - Analyst Report) with a Buy rating. The company has resumed unit growth after four years of negative or no growth and in our opinion, is poised for high-teens CAGR (Compound Annual Growth Rate) in earnings over the next five years.

We think BKC shares offer investors an excellent opportunity to participate in the fast-growing economies of Asia and South America, where it has a very small presence relative to McDonald's (MCD - Analyst Report), the category leader. We expect overseas expansion to be the primary driver of unit growth for the next decade.

Burger King is currently trading at the high end of the group, in line with McDonald’s on an EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization) basis but at a premium on a multiple of 2008 earnings per share. However, on a multiple of its growth rate, BKC shares are inexpensive relative to the group.

Our six-month price target is $30, which represents a multiple of 17.9x our estimate of 12-month forward earnings six months from now in line with our estimate of BKC’s 5-year growth rate. We believe investors will afford the stock a higher multiple as it executes on its strategy to grow overseas and raise margins in the U.S. Further, as the end of our current economic downturn becomes visible, we believe there will be a sector rotation back into consumer-driven stocks and multiples will expand industry-wide, providing upside to our price target.

Read the full analyst report on BKC

Read the full analyst report on MCD