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Takeaway: We remain bearish on Burger King (BKW) as the company was never properly "fixed" when it went private.

Howard Penney – Restaurants: SHORT Burger King (BKW)

BKW was taken private in 2010, then IPO’d again in 2012 after only 18 months, in what Penney calls “one of the best charades put over on restaurant investors in 2012.”  Penney says there are issues in BKW’s North American operation that have persisted since before the company went private in 2010 and have still not been addressed, and the private owners appear to have starved BKW of cash, deferring much needed capital expenditures.

Sentiment on BKW is very high in the investing community, with analysts championing it as a successful turnaround and a play on global consumer growth.  But Penney says the building blocks of a successful business are just not in place.  BKW made a big deal over cost cutting – one executive said the management team in Miami were “sitting on pickle buckets” rather than spend corporate cash on office furniture – but a company doesn’t cut its way to sustainable profitability and, says Penney, the revenue side is simply not there.  There has been significant deterioration in same store sales (SSS) across the US and Canada.  Penney thinks SSS declined 4%, versus the consensus of analysts covering the company of only around a 2% decline, and he expects sales growth for the last quarter to be only 2%, short of the 3.4% average expectation.

Calling BKW “the turnaround that failed to turn around,” Penney says the company could significantly disappoint when it reports earnings this Friday.  He acknowledges that the stock has drifted lower in recent weeks, but he expects disappointing numbers that could rattle largely positive sentiment in the near term as folks realize BKW is not the global growth vehicle its boosters say it is.  If negative surprises lead to downgrades, Penney thinks the stock could drop by as much as $4-$5 in the near term.