Burger King Holdings Inc.BKC

Morningstar Rating

Stock Research and Analysis

by R.J. Hottovy, CFA

Product innovations, engaging marketing, and renovated restaurants have reinvigorated the Burger King brand over the past five years. Although consumer spending constraints could weigh down near-term results, we generally remain optimistic about the Read more

Bulls Say

The domestic quick-service hamburger category generates more than $62 billion in annual sales and is expected to increase at a 3% compound annual rate during the next five years, according to NPD Group.

Burger King produces stable cash flow, even in challenging economic times, because of long-term franchisee royalty and rent agreements. Franchisees typically pay between 4% and 5% of their gross sales to the firm on a monthly basis.

Innovations such as the flexible batch broiler, Kitchen Minder monitoring technology, and improved point-of-sale systems have improved operational efficiency and reduced depreciation and utility expenses.

Burger King has ample opportunities to expand in established markets such as Germany, Spain, and Mexico. Management also sees significant potential in Brazil and certain Asian markets.

The accelerated rollout of a smaller restaurant prototype, which emphasizes drive-through windows, should reduce average building costs by 25% and require less capital from franchisees. Read more

Bears Say

The quick-service restaurant industry is intensely competitive, marked by a history of price wars. Switching costs are virtually nonexistent.

Burger King and its franchisees must contend with a difficult consumer environment, heavy promotional activity, minimum-wage hikes, and volatile commodity costs. Foreign currency head winds and difficult year-over-year comparisons could disrupt quarterly results.

Tensions between Burger King and its franchisees could disrupt business operations. Franchisees sued the firm in 2009 over its $1 double cheeseburger promotion, claiming the low price forced them to take a loss.

Bankruptcies among quick-service franchisees have accelerated. Tighter credit markets could make it more difficult for franchisees to remodel existing locations and build new restaurants.

Negative publicity over foodborne illness, food tampering, or controversial marketing campaigns could adversely affect store traffic. Read more

Strategy

Burger King plans to bolster its average restaurant sales by increasing comparable sales by 2%-3% per year. Management intends to reach this goal through new product introductions and an enhanced value Read more

Management

John Chidsey has served as chairman since July 2008 and CEO since April 2006. We'd prefer the chairman and CEO roles be split to provide better corporate governance, but we haven't witnessed any abuses of power under this structure. Generally speaking, Read more

Profile

With almost $15 billion in systemwide sales in fiscal 2009, Burger King is the world's second-largest quick-service hamburger chain. The firm generates revenue through franchise Read more

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