In times of economic growth, when people have more disposable income, fast-food chains and other restaurants benefit from increased spending. As Canada’s economy continues to grow, it might be a good idea to invest in the restaurant industry. I am going to evaluate two of the larger companies in this industry to see which stock might be the better investment.
Cara Operations Ltd. (TSX:CARA) owns many big-name restaurant brands, including Swiss Chalet, Harvey’s, Montana’s, and many others. The company recently released its quarterly results which showed revenues had doubled from the prior year. However, despite the strong top-line result, the company saw a decline in its net income by almost 4% from a year ago.
Overall, the company has been doing very well over the years, and in the last fiscal year, sales totaling $463 million were up 42% from the prior year and had increased over 71% in just three years. The company has also posted profits in the last three fiscal years, while also growing operating income by over 133% during that time.
Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) does not have as many brands as Cara does, but it has some big fast-food chains, including Tim Hortons, Burger King, and Popeyes. Restaurant Brands contends with more saturated markets, so opportunity to grow revenue is much more limited. However, the recent acquisition of Popeyes gives the company an opportunity to grow its revenue through a new brand.
In its most recent quarter, the company recorded revenue of $1.1 billion, which was up almost 9% from the prior year, while profits were flat. In its most recent fiscal year, the company saw revenue growth of just 2%, but it was able to increase its bottom line by 64%.
Stock performance and valuation
Restaurant Brands has seen its stock price increase by over 23% in the past 12 months and by 87% in the last five years. Currently, the stock trades at a multiple of 53 times its earnings and over seven times its book value.
Cara’s stock currently trades at a multiple of 14 times earnings and is a little more than two times its book value. The company has only been publicly traded for less than three years, and in that time the stock has declined by over 32%. The current year has not been much better with the stock yielding a loss of over 10% year to date.
Bottom line
These two companies are in very different situations and present different opportunities. Restaurant Brands has some very strong fast-food chains that have already seen lots of growth, and the opportunity for much more is limited to the company’s acquisition and expansion efforts. Although Restaurant Brands will be able to grow its sales through Popeyes and its expansion of Tim Hortons into Spain, Cara will likely be able to see more growth only because it has more brands and less saturation.
The tiebreaker for me is the current stock valuation, and this is where Cara provides better value. For the high multiple that Restaurant Brands currently trades at, I do not see the growth potential there to justify the premium.
