Screen of the week – Restaurants
Weekly Screens – Explained
We spend a lot of time searching through names and screening through various companies, but not always are we able to pursue every interesting business that comes up. In this new segment we are sharing the most interesting names that we have found, but haven’t be able to pursue in depth.
Although the restaurant sector as a whole tends to have low margins and is at the whim of cost inflation and consumer spending habits, some names stand out as value. We also believe that long term restaurant spending will remain solid and continue to grow, hence our interest in restuarants.
Jack in the box
What stands out is the highly franchised model with a management team that returns large amounts of cash to shareholders. The company continues to buy back stock at a high rate with its 8% FCF yield, and GDP+ y/y SS comps continue to chug along. 94% franchised rate continues to offer predictable FCF and very limited Capex, meaning the share buyback and dividend increases should continue. Over the last 5 years, shares outstanding have shrunk over 40% and should continue to occur under this management team.
Del taco wins on price in its menu and its valuation. The company continues to open new stores and re-franchise non-core markets and continues to trade very cheap. This one has “Private Equity target” written all over it and has plenty of room to continue to grow units. Another aspect we like is how efficient they operate. These guys can make money selling food under a dollar meaning they should thrive no matter the economic climate.
RECP owns some of the largest and most well-known dining brands in Canada including Harvey’s, Swiss Chalet, East Side Mario’s, and Montana’s. The company is very cheap with the negative downdrafts restaurants have experienced with negative y/y comps, yet trades at a compelling 7x cash flow multiple, with high FCF conversion. As well, RECP continues to buy back shares and make acquisitions growing there brand holdings, and growing per share cashflow. Although fairly low amount of there restaurants being franchised vs the other 2, the leading brands and market positions in Canada continue to act as a strong advantage.
A&W Royalty fund
Although A&W only has royalties in Canada, the brand has successfully developed as an innovator that resonates with its customers. investors are looking at an ~5% dividend with a company that has been a rockstar at growing Same-store sales above GDP, with there ability to adapt to what consumers want (1st to implement Beyond meat in Canada, pivoted to a more quality-focused approach, sustainable beef). on top of Same-store sales growth, the company continues to see new openings under the A&W brand with net 37 stores additions last fiscal year which will continue to grow its royalty stream.