Burger King Slump Leads Longbow To Downgrade Restaurant Brands

The bearish case for restaurant holding company Restaurant Brands International Inc QSR can now be made for three reasons, according to Longbow.

The Analyst

Longbow Research's Alton Stump downgraded Restaurant Brands from Neutral to Underperform with a new $55 price target

The Thesis

The parent company of Burger King, Tim Hortons and Popeyes, continues to show signs of concerning comps, Stump wrote in the note. Specifically, Burger King's comps decelerated in the third quarter of 2018 and, after a brief improvement in fourth-quarter comps, decelerated again in the first quarter of 2019. The research firm's first-hand checks with franchisee contacts expressed concern that new menu items have "lost steam" over the past year.

McDonald's Corp MCD introduced multiple successful product launches over the past year, the analyst said. This is evident in McDonald's outperforming Burger King in terms of comps in the U.S. market over the past four quarters.

The research firm's checks with Burger King franchisees in the U.S. also signaled a "worsening" corporate/franchise relationship. Many franchisees are "still not pleased" over margin dilutive promotions, including the 10 chicken nuggets for $1 deal that was introduced late 2018. Meanwhile, the corporate/franchise relationship at Tim Hortons' has improved since late summer 2018 but remains "not great" after first quarter 2019 comps came in negative and marks a "step backward" in trends.

Price Action

Shares of Restaurant Brands traded lower by 2 percent at $65.83 Monday afternoon.

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