The TAST-BKW Divergence

We’ve been following the breakdown in Carrol’s (TAST) stock price with interest over the last few months, particularly relative to the strong performance of Burger King (BKW). Carrols is the largest franchisee of the Burger King system, globally, and is considered by BKW’s management team to be one of the best.  All of its Burger King stores are located in the U.S., within the Northeastern, Midwestern, and Southeastern states. 

 

 

Stock of BKW’s Biggest and “Best” Franchisee Not Doing Well

 

Share in TAST have been underperforming the broader market and BKW since late 2012.  Some obvious reasons spring to mind; for instance, TAST has missed recent earnings expectations twice in succession while BKW has beat.   Perhaps the turnaround at the 278 Burger King stores that Carrols acquired in 2Q from the Company (BKW) is proving more cumbersome than expected.  On its last couple of earnings calls, Carrols’ management team has highlighted issues with staffing, deferred capex, and lower restaurant-level margins at the acquired restaurants as impairing its ability to provide guidance for FY13. 

 

Anyone can tell a story but the chart below evokes several questions that we think are worth posing.

  • If Carrols is struggling, how is the rest of the U.S. and Canada franchisee base doing?
  • Is BKW trading on fundamentals or is there a “3G halo” that is impacting sentiment?
  • Are BKW investors more focused on the international opportunity?
  • Is Carrols a reliable read on the state of the North American business?

Depending on your view on these questions, it may be worth avoiding BKW on the long side.  We have our bias, which is negative, but thankfully backed away from our call to short the stock recently given what was clearly poor timing.  From here, we think it’s worth considering what, if anything, the chart below is implying about the state of the North American business.

 

The TAST-BKW Divergence - bkw tast div chart

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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