Is Tim Hortons Dragging Restaurant Brands International (TSX:QSR) Down?

Restaurant Brands International (TSX:QSR) posted third quarters earnings before the bell this morning, and despite strong growth in some segments, the stock has taken a near 4% hit to its price due to lackluster results from its Tim Horton’s franchise.

Restaurant Brands International’s (TSE:QSR) earnings snapshot

In terms of sales growth, Burger King and Popeyes saw significant year over year growth. Burger King saw year over year sales increase 10.7% while Popeyes was the front-runner at 15.7%. This marks the highest quarterly sales growth for Burger King since 2015, and Popeyes had its strongest sales growth results in nearly 2 decades.

Tim Hortons on the other hand saw sales growth shrink by 0.1%, and is a significant laggard in nearly every area when compared to its other franchises. Restaurant growth for the Canadian coffee giant was only 1.7%, compared to 5.8% and 5.5% for Burger King and Popeyes respectively. Comparable sales for Tim Hortons also saw some year over year reductions at a loss of 1.4%.

Overall though, it was a relatively strong quarter for the company. Revenue is up 6% year over year and the company’s EPS is up 41.5% over the same time period. Diluted earnings per share of $0.72 came in well above analyst estimates of $0.65, and revenue of $1.458 billion was right in line with estimates of $1.5 billion.

Free cash flows are up to $1.33 billion from $1.14 billion last year and adjusted EBITDA is up $31 million to $602 million, driven by strong EBITDA growth in the company’s Burger King segment.

What’s the outlook for Restaurant Brands International moving forward?

Strong growth in both its Popeyes and Burger King segments have somewhat sheltered poor results from Tim Hortons. But there is no question the company will need to take steps to fuel growth, as Tim Hortons currently makes up nearly 20% of the company’s overall sales.

The company hit oversold levels for the first time since the Tim Hortons – Burger King merger in 2014, yet the company still trades at a premium. Forward price to earnings sit at nearly 30, and the company is trading at almost 12 times book value.

It was no doubt a strong quarter in terms of overall growth for the company, but with valuations high, I’d expect more growth if I was a current shareholder. That being said, we can expect the company to trade at somewhat of a premium, as it currently offers a nice dividend of 2.96%. Although its payout ratio is high hovering in the low 80’s, RBI’s dividend is well covered by free cash flows, using up only 47%.

Being a Canadian, I’ve witnessed the company trying extensive amounts of new products at Tim Hortons, all to no avail. I sold my shares of QSR a year or two after the merger, as I didn’t like the way the company was headed with its biggest asset here in Canada, and it’s clearly hurting them in the long term.