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Burger King Initiated at Outperform

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We are initiating coverage on Burger King Worldwide Inc. with an Outperform recommendation. We are positive on the company’s strong brand positioning in the quick service restaurant (QSR) segment, its ability to post solid earnings growth in recent times; a strong overseas presence and several brand-building initiatives.

Why an Outperform Recommendation?

Burger King is the world’s second largest fast food hamburger restaurant (FFHR) chain, operating for more than 50 years. It operates in the FFHR category, the largest category in the quick service restaurant (QSR) segment. The QSR segment is the largest restaurant segment in the U.S., having grown at an annual rate of 3% over the past 10 years ending Nov 2012. At the end of 2012, Burger King accounted for nearly 12% of total FFHR consumer spending in the US, thereby commanding a major share of the total market.

The fast food chain’s earnings have not fallen short of the Zacks Consensus Estimate in any of the quarters since Jun 2012. In the recently concluded second quarter, despite a year-over-year revenue decline, increased EBITDA and lower interest expense led to higher earnings. Also, Burger King’s second quarter results signaled a sequential improvement across most regions and indicators.

Burger King offers immense growth potential worldwide. In the recent times, it has initiated ventures in key markets like Russia, China, Mexico, France, Central America, South Africa, the Nordic countries, Singapore, Malaysia, Korea and Vietnam.

Focus on franchising remains another sweet spot on the company’s growth story. At the end of Dec 2012, 97% of the Burger King units were franchised. Most of Burger King’s future unit growth will be achieved through franchising. Management expects to have 100% of its system franchised by the end of 2013 since it believes that franchising a large chunk of its system will facilitate earnings and return on equity growth and lower its capital requirements. Alongside, free cash flow continues to grow, allowing reinvestment for increasing brand recognition and enhancing shareholder return.

This hamburger chain has also been investing heavily in sales-building initiatives to focus on some key areas of operations like a re-imaging program, menu innovation and balanced marketing mix.

The company also initiated a delivery program namely ‘BK Delivers’ in 2012. This initiative was intended to take Burger King beyond its outlets and deliver products to its customers at their places. After its inception, this Zacks Rank #2 (Buy) company opened more than 75 delivery units in the U.S. and several more are in the offing. The expansion trail confirms that the delivery program is gaining considerable customer acceptance, which is why we believe that the delivery system will be a significant growth driver in the years to come.

Other Stocks to Consider

Others players in the same industry, which look attractive at current levels include CEC Entertainment Inc. , Domino’s Pizza Inc. (DPZ - Free Report) and AFC Enterprises Inc. (, all carrying a Zacks Rank #2.


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