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This undated photo provided by Burger King shows a French Fry Burger. Shares in the No. 2 burger chain jumped 6 per cent on Monday, Oct. 28, 2013, after it beat third-quarter profit and sales expectations and hiked its dividend by 16 per cent.

AP

Healthier French fries, hungrier international customers and corporate cost cutting are serving up fatter profits for Burger King Worldwide Inc. and its investors.

Shares in the No. 2 burger chain jumped 6 per cent on Monday after it beat third-quarter profit and sales expectations and hiked its dividend by 16 per cent.

Burger King's stock has outpaced its main rival, McDonald's Corp., this year as it slashes spending by moving to a less capital-intensive business model in which most of its stores are owned by franchisees.

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The Miami-based company has also introduced menu items such as a French-fry burger and low-fat "Satisfries," which claim to have fewer calories than ordinary French fries.

But while some analysts are cheering Burger King's growth prospects, others worry the stock is getting too expensive.

"We don't see Burger King as attractive as most of its rivals," said Will Slabaugh, an analyst at Stephens Inc., who has a "hold" on Burger King shares and a $20 (U.S.) price target.

The shares closed up $1.14 to $20.90 on the New York Stock Exchange on Monday.

Mr. Slabaugh believes Burger King stock is starting to look overpriced at 13.5 times EBITDA, or earnings before interest, taxes, depreciation and amortization, compared with about 10 times for McDonald's, the industry leader.

"[McDonald's] is in a better position to grow earnings as they are just the bigger and more dominant player in the industry with a louder marketing voice in such a difficult consumer environment," he says.

Still, others see Burger King as the better investment bet.

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It's a top pick for Alvin Concepcion, an analyst with Citigroup Global Markets Inc., who raised his price target to $25 from $23 on Monday and has a "buy" rating on the stock but a "hold" on McDonald's.

One reason for his preference is that nearly all Burger King outlets are now owned by franchisees, rather than the company. In contrast, only about 80 per cent of McDonald's location are franchisee-owned.

Burger King's model means most capital costs are borne by franchisees.

In addition, Burger King management said on the conference call that North American same-store sales had resumed growing in October, an encouraging sign that new menu items are drawing customers.

Total sales at worldwide restaurants open at least a year increased 0.9 per cent in the third quarter. They were up 1 per cent overseas, driven by a 3.7-per-cent jump in the Asia-Pacific region.

Profit in the quarter increased to $68.2-million or 19 cents a share compared with $6.6-million or two cents per share for the same quarter last year.

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Total sales fell about 40 per cent to $275-million as Burger King booked less revenue from locations sold to franchisees. Expectations were for $264.5-million in sales.

Burger King had 13,185 franchised restaurants at the end of the third quarter, but only 74 company-owned restaurants, down from 595 a year earlier.

The shift toward franchises is part of the transformation of the company, which was taken private in 2010 by New York investment firm 3G Capital Inc., but then went public again in 2012 after merging with a company owned by activist investor William Ackman.

Today, Mr. Ackman owns about 10 per cent of Burger King shares through his Pershing Square Capital Management LP.

In a letter to shareholders in August, Mr. Ackman said Burger King was undervalued compared to other almost fully franchised competitors such as Domino's Pizza Inc. and doughnut makers Dunkin' Brands Group Inc. and Tim Hortons Inc.

"Burger King's global brand and presence are superior to those rivals," he wrote, citing in particular its net debt to EBITDA ratio.

Burger King's net debt is 3.5 times earnings, compared with about 4.6 for both Domino's and Dunkin' Brands and around 0.6 for Tim Hortons, according to data from S&P Capital IQ.

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About the Author
Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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