Better Buy: Kraft Heinz vs. Restaurant Brands International

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In this stock matchup, we're pairing a food industry giant against the parent company of three restaurant chains you might have heard of -- Burger King, Tim Hortons, and Popeyes Louisiana Kitchen. Kraft Heinz (NASDAQ: KHC) and Restaurant Brands International (NYSE: QSR) (RBI) have one thing in common: two long-term-focused shareholders in 3G Capital and Warren Buffett's Berkshire Hathaway.

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The folks at 3G Capital have installed their own managers at both Kraft Heinz and RBI, and they have big plans to conquer both companies' respective industries. We'll review the basic investment case for each to determine which is the better buy.

The case for Kraft Heinz

Kraft Heinz's competitive moat is derived from household name brands such as Velveeta, Kool-Aid, Jell-O, Oscar Mayer, and Maxwell House. The Kraft side of the company has fully saturated North America, with 98% household penetration, so management has been focused on investing for international growth. The Heinz side is famous for its ketchup brand, but also owns numerous international brands that make up about 60% of Heinz's annual sales.

Since Kraft Heinz was formed in 2015, there has been some good and some bad. As for the good, 3G Capital's skills of managing costs have delivered robust growth on the bottom line since the merger. The company grew adjusted earnings per share 52% in 2016, and so far in 2017 adjusted earnings are up 10% year to date. 

As for the bad, the food industry is experiencing a rough patch as consumer preferences shift away from heavily processed foods. This caused Kraft Heinz's organic net sales to grow only 0.3% in 2016. There has also been some competition from private labels as grocers try to offer customers better value.

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Despite the headwinds, about 50% of the business has maintained or grown market share recently, and management believes its emphasis on innovation and better marketing will allow the business to grow over the long term. Also, this management team is very focused on good capital allocation, so you can expect them to direct more investment toward those brands with the best returns over time. Additionally, management's long-term growth plan includes growing digital channels, where sales are up 70% year to date, and filling out its product offering in categories where it hasn't had much of a presence.

The case for Restaurant Brands International

Acquisitions have played a significant role in the growth story for RBI, and you can bet that will continue. Restaurant Brands was formed a few years ago when Burger King merged with Canadian restaurant chain Tim Hortons.

Earlier this year, RBI added a third strong brand to its restaurant portfolio with the acquisition of Popeyes Louisiana Kitchen, a smaller chain with a lot of growth potential in both the U.S. and international markets. 3G Capital accelerated Burger King's store openings after acquiring the restaurant chain in 2010 as part of its plan to help the business achieve its long-term growth potential around the world. They plan to do the same with Popeyes.

Since 3G Capital has been operating Burger King for seven years, the chain is a well-oiled machine at this point. Burger King's same-store sales growth accelerated to over 3% in both Q2 and Q3 after some softness in the first quarter this year. RBI just signed an agreement with Bridgepoint Advisors to expand Burger King's footprint in the U.K., which is one of the world's largest quick-service restaurant markets. Management sees growth potential for Burger King worldwide with both existing and new franchise partners over the long term.

RBI grew adjusted earnings per share 45% in 2016, reflecting the same cost management skills that have been working so well at Kraft Heinz. The top line didn't grow as fast, with systemwide sales growing only 5.2% for Tim Hortons and 7.8% for Burger King, but single-digit growth is all that is needed since much of the long-term return to shareholders will come from increasing margins and possibly another acquisition down the road.

Which is the better buy?

Since both companies have strong brands in their respective industries, and since both are run by the same business strategy of 3G Capital, the better buy, from my perspective, boils down to which one offers the best growth potential measured against the stock's valuation.

Kraft Heinz currently trades for a trailing price-to-earnings ratio of 22.4. Kraft is expected to grow earnings per share about 11% in 2018, with analysts currently expecting low-single-digit growth over the next five years, possibly reflecting those industry headwinds I touched on earlier. 

RBI trades for a much richer trailing P/E of 35, but is expected to grow earnings about 19% per year over the next five years. Analysts are currently expecting RBI to grow earnings 40% next year over 2017, which brings the forward P/E ratio down to 23.5. 

RBI has a lot of potential to grow Burger King around the world, and management just got their hands on Popeyes, which is mainly a regional chain at present. The market opportunity these restaurants have is consistent with analysts' optimistic expectations for the company's high-double-digit growth over the next five years.

Since RBI has greater growth potential and its forward P/E is not that much higher than Kraft's, I pick RBI as the better buy.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.