US restaurant industry – Valuation (Educational)
This second session of the company valuation series is about comparable valuations. For this purpose, we have chosen the restaurant industry in the United States, as it has seen a significant decline in recent months due to the inflation rebound, high interest rates and lower purchasing power. (Restaurants is a cyclical industry)
To begin, we will explain the process as if this were the first time we are looking at the industry, starting from scratch.
Assuming no Bloomberg/Refinitiv… the first thing we can do is going to Finviz and use the screener to select all the U.S. restaurant companies. We write their names into an Excel spreadsheet and go through each one, noting the data we want (detailed later) from their 10K and 10Q reports. While it’s possible to copy and paste this information from sources like TIKR, Finviz… , we prefer to do it ourselves from the original source (each company) to understand any adjustments they may have made and to be sure the information is 100% correct
This process also gives us an initial idea of the company based on how they report their data, such as grouping certain items to make them less visible, providing more or less detail, and other factors.
Within these companies, initially, we will differentiate them based on their market capitalization. However, as we review the company reports and data, we will see that there are various business models within the industry. The most basic differentiation is whether a company operates its own restaurants (Operator) , is a franchisor of them, or is a franchisee of other restaurants.
Comparable analysis can be used to quickly compare a company to others in the industry. We believe that it is special useful when looking at a new industry / sector from zero (the case in this exercise) to form a first impression of the companies within an industry. We carry out the analysis in three steps:
Gathering financial information about the companies in the industry, including metrics such as Sales, EBITDA, Debt, SG&A expenses, leases, cash, EV, Capex, growth rates, margins, and various ratios (e.g., Sales-to-Market Cap, EV-to-EBITDA, etc.) and analysing it to be able to 1) understand the industry in detail 2) identify special situations, turnarounds, apparently undervalued companies,… 3) preselect around half of them to continue the analysis. For all of them, we use information from multiple years to understand their growth and evolution. As well as the evolution of their restaurants, debt, number of shares and other factors over the years.
Once we have preselected companies, we conduct a more detailed analysis of industry-specific KPIs. This is where we examine their strategies regarding company-owned or franchised restaurants, the types of restaurants they have, EBITDA per restaurant, return on investment at the restaurant level, same-store sales growth,…
After completing the second phase of analysis, we further differentiate companies based on their business models (operators and franchisors) and choose a few of them to perform the DCF analysis. For this, we need to thoroughly read their latest 10K and quarterly reports (10Q) and not just focus on financial statements and specific keyword searches as we did in steps 1 and 2.
After this brief introduction, we proceed to the step-by-step analysis of the entire restaurant industry in the US, explaining why we dismissed some companies and providing detailed commentary on everything we find important. From our perspective, it’s an engaging process for those who want to learn how to conduct these analyses and for professionals, as the results are the same as those we would share with a family office with whom we work.