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Restaurant Brands Now a Buy: What's Driving the Stock?

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On Aug 29, we upgraded Restaurant Brands International Inc. (QSR - Free Report) by a notch to a Zacks Rank #2 (Buy).

Shares of the company have surged 30.5% in the last year, widely outperforming its industry’s growth of 5.6%.

Moreover, the company witnessed its current-quarter and current-year earnings estimates revise upwards by 2.1% and 5%, respectively, in the last month. This reflects ongoing optimism in the stock’s prospects.

Popeyes’ Acquisition a Huge Positive

On Mar 27, Restaurant Brands completed the acquisition of Popeyes Louisiana Kitchen for $1.8 billion. Popeyes global footprint complements Restaurant Brands’ portfolio of over 20,000 restaurants worldwide under its other two brands – Tim Hortons and Burger King.

In fact, building on the momentum of recent years, Restaurant Brands plans to carry on developing the Popeyes brand at an increasing pace in the United States and international markets.

The acquisition of Popeyes has thus added a booming, highly-regarded brand to Restaurant Brands that has a distinctive position within a compelling segment along with strong customer loyalty and riveting prospects for growth in the United States as well as globally.

Solid Expansion Efforts for all the Brands

The company believes that there is an attractive opportunity to grow all its brands around the world by expanding its presence in existing markets as well as entering new markets.

In this regard, Restaurant Brands has formed partnerships for the development of its Tim Hortons brand in Mexico, Spain, Great Britain and the Philippines. In fact, continued expansion in the Middle East, combined with growth in these markets (Asia, Europe and Latin America) is expected to allow the company to accelerate the pace of restaurant growth, internationally.

Moreover, as part of its international growth strategy for Burger King, the company has created strategic master franchise joint ventures in various markets across Europe, the Middle East and Africa (“EMEA”), Asia Pacific (“APAC”) and Latin America and the Caribbean (“LAC”). In the first quarter of 2017, Restaurant Brands also inked a multi-country development agreement in sub-Saharan Africa, which is believed to be a high-potential consumer market.

Additionally, the company has signed a number of development agreements for both expanding these brands in the United States.

Meanwhile, the company also continues to expand the Popeyes brand globally with particular strength in the United States, Turkey and Canada.

Notably, it recently opened its first restaurant in South Africa, and the initial feedback and sales performance has been impressive.

Efforts to Boost Sales Bode Well

Restaurant Brands continues to focus on improving its level of service through comprehensive training, improved restaurant operations, reimaging efforts and attractive menu options to enhance overall guest satisfaction and thus drive comps.

The company’s focus on new product development is expected to drive traffic by expanding the customer base, spreading out into new dayparts, and continuing to build brand leadership in food quality and taste.

On one hand, the company’s unwavering focus on its goal to drive traffic and revenues at the Burger King brand through core product platforms, continual focus on a balanced menu design, expansion of delivery business, promotional offerings, efforts to grow breakfast daypart and product launches, is encouraging.

Meanwhile, on the other hand, growth across each of its breakfast, lunch and dinner dayparts, supported by new products, is driving incremental sales at Tim Hortons restaurants. Additionally, Restaurant Brands debuted its TIM’s mobile app recently and is looking forward to its complete national rollout later in 2017.

Some Concerns

Lingering uncertainties in various international markets where the company operates is a major cause of concern. Going forward, continued softness in Western Canada is likely to impact sales growth at Tim Hortons, which has a majority of its base in the region. Also, sales at Tim Hortons restaurants based in the Middle East might get affected by the political unrest and lower government spending affecting the region’s economy.

A challenging retail environment in the U.S. restaurants space is expected to continue weighing on sales too. Particularly, softness in certain product categories is hampering comps growth at Tim Hortons' while increased competitive pressure is leading to comps decline at Popeyes.

Further, costs related to various sales boosting initiatives are anticipated to impact margins, despite the continued cost discipline. Given the company’s large international exposure, foreign currency fluctuation also remains a huge concern.

Key Picks

Some other top-ranked restaurant stocks include Del Taco Restaurants, Inc. (TACO - Free Report) , Bravo Brio Restaurant Group, Inc. and Papa John's International, Inc. (PZZA - Free Report) . All of these companies carry the same bullish rank as Restaurant Brands. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the trailing four quarters, Del Taco, Bravo Brio and Papa John’s pulled off an average positive earnings surprise of 3.61%, 28.27% and 5.10%, respectively.

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