QSR - THE INDUSTRY IS BEING REVALUED...WHY?

I have never seen so many restaurant companies trading at 10x EV/EBITDA or better.

 

Every day I open my industry valuation models and, of late, I have been amazed to see the number of companies trading at double digit EV/EBITDA multiples.  As of today, there are ten companies with that distinction.  In the past, a double digit cash flow multiple was reserved for those companies that demonstrated 15-20% unit growth or had an international presence that made it look more like a consumer multi-national. 

 

Coming out of the Great Recession, the industry is being revalued despite some serious headwinds.  The double digit valuations are being achieved despite rampant food inflation, which has traditionally has caused investors to flee from the space (especially the more mature names). 

 

QSR - THE INDUSTRY IS BEING REVALUED...WHY? - QSR VALUATIONS

 

 

This is also inconsistent with traditional measures of future demand like consumer confidence, which has flat-lined since 2009.  More importantly the small improvement in consumer confidence since bottoming in late 2008 has been driven by the expectations component which is now rolling over.  Not surprisingly, we are now starting to see personal income and spending roll over too.

 

QSR - THE INDUSTRY IS BEING REVALUED...WHY? - personal income expectations

 

 

While overall demand for eating out is holding up, all of the restaurant companies that are valued by the street with double-digit cash flow multiples have seen same-restaurant sales slow on a one-year basis.  Looking at two-year trends, however, paints a more positive picture.  Two-year average trends are improving and much of the decline in one-year comps may be due to difficult compares.

 

QSR - THE INDUSTRY IS BEING REVALUED...WHY? - QSR Domestic SSS

 

QSR - THE INDUSTRY IS BEING REVALUED...WHY? - QSR Domestic SSS 2 year

 

 

On the positive side, restaurant companies have not been raising prices as aggressively as supermarkets and reduced spending on other more “durable” categories is helping maintain the consumer’s frequency of eating out.  The industry is not overly levered and the cash flow generation, dividend yields and high margin franchises business models of some of the more mature companies are very attractive.

 

With this being said, when trying to justify a revaluation of a business or an industry, there is an acute risk of stretching the facts.  The rolling over of consumer expectations is a concern for me, as are the peak multiples being awarded to restaurant companies at the present time.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more