Burger King (BKW) is the second largest fast food hamburger chain in the world which was founded in 1954; it operates in over 12,600 locations serving over 11 million customers daily in 83 countries and territories worldwide. About 95 percent of Burger King Restaurants are owned and operated by independent franchisees, many of them family-owned operations that have been in business for decades. This company became a publically traded company in this year June 20 2012. Therefore, only current year data will be presented in this report.
In general, a high Price Earnings Ratio recommends that investors expect higher earnings growth in the future relative to companies with a lower P/E. This multiple is useful to compare the P/E ratios of one company to other companies in the same sector. As presented by the P/E ratio graph above, P/E ratio of BKW is higher than average relative corporations which are 23.6812 and 19.73, respectively. The company has a greater P/E than the industry average; this implies that the market is expecting significant events over the years or less than years. The company could not maintain the same growth over the year; it could be fluctuated by revenues and earnings. Better to reduce the P/E ratio and be a high growth solidified company.
Analysis on Profitability ratios
Profitability ratios measure a company’s financial performance and its capability to raise its shareholders value and generate profits. It measures how much out of every dollar of sales a company actually keeps in earnings. There are four measurements to be presented in this report; which are, return on assets, return on equity, return on invested capital, and profit margin. Return of asset profitability measures the company’s ability to generate profits before leverage with its own assets. According to the table below, Return of asset of BKW is 1.56 percent which is lowest value in the industry. Average ROA of this sector is 10.71 percent. For the ROA, the highest this number is, the more effective the company is in utilizing its assets. The return on Equity measures the amount of profit that a company generates through the use of shareholders’ equity.
The table below shows ROE of the company that 7.06 percent which is relatively lower than average ROE in the sector. Hence, weak ability to generate cash flows internally. Moreover, ROA is low; it implies that the company is carrying high debt amount. Return on Invested Capital ratio is similar to the return on equity calculation; however, it includes long term debt as part of the leverage. As we see ROIC is greater than weighted average cost of capital (WACC), which are 5.0 percent, and 4.20 percent respectively. Thus, the company will be raising shareholders’ value. A profit margin is also useful when comparing companies in similar sectors.
A higher profit margins reflect a more profitable company which has control over its costs compared to its competitors. According to the graphs below, net profit margin is 3.77 percent which means the company has a net income of $0.0377 for each dollar of sales. Comparing with average net profit margin, BKW has 3.43% lower than average competitors sectors. Therefore, the BKW has relatively low ROA, ROE, and Profit Margins. However, the company has higher ROIC than WACC. Probably, the company spent lots of maintenance cost to maintain the corporation. It is new to stock market; it might have potential to become a larger corporation.
Regression model for BKW
The useful measurement of an asset’s risk and return in the markets is the beta coefficient. Essentially, it responds to market goes up and down. It is used in regression analysis and for the capital asset pricing model (CAPM). As displayed by the graphs above, it demonstrates how asset’s performances are sensitive to systematic risk. The company is the youngest publically traded company. Thus, time period presented is less than year. BKW has low value of R-squared, which is 0.062 and it means that much of the total risk is specific risk. The number close to 1 is higher R^2 than number close to 0. The R- squared of 0.062 suggests that 6.2 percent of the risk in BKW from market sources, and the balance of 73.8% of the risk come from corporation specific components.
Thus, it should not attract a higher expected return. Using historical data we obtained from linear regression. As presented by the graph above, BKW has higher beta than those in the similar industry sectors, which is 0.652. Basically, beta forecasts how much investor can expect a fund’s returns to a gain or loss of its benchmark. With a larger beta, investors should expect greater returns. BKW has a positive alpha which implies that fund returns will be higher than expected given beta.
BKW has high values in beta and alpha. Which are 0.652 and 0.092, respectively. Thus, investors possibly expect high return of funds. Overall, from the regression graph presented, greater variability is associated with higher risk, while high returns may be obtained from stocks with high beta shares. The graphs above show that BKW risk premium is lower than that of country risk premium; which is 6.23 percent and 8.68 percent in Q3, respectively. However, the company had the same amount of equity risk premium since Sep11 Q3.The investors will be able to wait to see the future results.
Credit ratings on BKW
A credit rating is an assessment by a third party of the creditworthiness of a financial security. It tells investors the default, or non-payment, by the issuer of its financial obligations. As presented the data above, MCD is the highest ranked by S&P, Moody’s, and Fitch. With rank of A would attract more investors. On the other hand, BKW was not ranked by S&P and Moody’s but Fitch. The company is ranked as B which is financial situation varies noticeably. This company expects to see their creditworthiness in the near future. In conclusion, BKW is a prospective corporation. It is expected to be a great and profitable company even though the company has lower return on assets, return on equity, and profit margins. However, the company’s return on invested capital is greater than weighted average of cost of capital.
In addition, the company has higher P/E ratio than average so investors are willing to expect significant events for more years. High risk and High return apply to the company due to high beta parameters and positive alpha. The beta parameter is historical data but sometimes does not tell the future results itself. Suggest that long term investors could rely on the CAPM formula and beta. By applying the findings above, high beta shares are not always good for investors; it could be a tragedy with the occurrence of economic crisis and in the event that market declines.
Moreover, the company credit ratings are not ranked on S&P and Moody’s. As mentioned in the introduction, BKW returns to public market in June 2012, there is not much history of analysis of company’s credit. Its disadvantage includes the lack of information in official public trading system. However, their operating system is not bad and is even better than some companies such as Domino Pizza, and Papa John. As known the company is second largest fast food hamburger chain corporation, its value grow quickly. Hence, it is highly recommended the investors who are willing to be a long term investors to invest in Burger King.