The Lesser-Known Restaurateurs

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the world of publicly-traded restaurant companies, a tiny few command most of the attention of the U.S. mainstream financial media. If your company is not a big name like Starbucks or Chipotle Mexican Grill, good luck getting even a brief mention on CNBC. Despite the lack of attention, there are other, lesser-known restaurant companies out there that are quietly improving sales, expanding their businesses and making their shareholders money.

Canada’s Most Well-Known Lesser-Known

‘Lesser-known’ is a relative term. What is more anonymous in one country could very well be one of the most iconic brands in another. That is certainly the case with this restaurant operator. Although unknown in much of the United States, Tim Hortons (NYSE: THI) absolutely epitomizes fast food retail north of the U.S. border. Tim Hortons is the largest restaurant operator in Canada. The company has more restaurants in Canada than McDonald’s (NYSE: MCD) and serves more cups of coffee in Canada than Starbucks (more cups of coffee than all other fast food restaurants in Canada combined, actually). About 42% of all fast food restaurant traffic in Canada goes through Tim Hortons' nearly 3,500 Canadian restaurants (a large number for a country of only 34.5 million people).

Tim Hortons’ management team openly admits that they had not accomplished all of their goals in 2012. While last year marked the company’s 21st consecutive year of positive same-store sales growth for its Canadian and U.S. markets, Canadian same-store sales growth came in at 2.8% (below estimates) and U.S. growth came in at 4.8% (in the middle of the estimate range). For a point of comparison, over the past 10-years, same-store sales growth had averaged 5.1% in Canada, with its U.S. same-store sales eking out a slightly better 5.3%. And as one might imagine, full year earnings also came in below estimates. Although the growth was not as expected, 2012 was the first time in the 49-year history of the company that revenue passed $3 billion CAD. And continuing with the positives, Tim Hortons managed to increase its dividend 23.8% percent in 2012 and increase its share buyback program from $200 million CAD to $250 million. A below-expectations year for Tim Hortons, but not a terrible year by any means.

While management believes that they can increase their Canadian store count to 4,000 total before the market becomes over-saturated (currently there are approximately 3,436 Canadian Tim Hortons), the real growth for the company is outside of Canada and into its neighbor to the south. Tim Hortons has a growing presence in certain regions in the United States (mostly in the Northeast and Midwest, the Canadian border states). In the 11 states Tim Hortons currently operates its nearly 800 U.S. locations, the combined population is about 70 million people. That is more than double the entire population of Canada and a great growth opportunity for the company.

Growth away from North America is also beginning to take shape. In late 2011, Tim Hortons opened its first restaurants in the Middle East. At the end of 2012, there were 24 restaurants in Oman and the United Arab Emirates. There are plans to open another 20 this year, as well as a recent agreement to open 100 restaurants over the next five years in Saudi Arabia.

The Warren Buffett of Buffets

Biglari Holdings (NYSE: BH) is likely the least known company on this list, as well as the smallest with a market cap of just under $500 million. Biglari is not the name of a restaurant, but of a diversified holding company run by Sardar Biglari, who has modeled himself and his company after Warren Buffett and Berkshire Hathaway. Biglari Holdings’ business model revolves around using the excess cash generated by its subsidiaries to invest in new businesses and equity positions, such as its nearly 20% stake in restaurant operator Cracker Barrel Old Country Store (a stake valued today at about $450 million). For its wholly-owned businesses, Biglari Holdings’ cash generators and largest subsidiaries are its two restaurant companies, Western Sizzlin' and Steak 'n Shake.

Western Sizzlin' is the much smaller of the two restaurant subsidiaries. Western Sizzlin' has 89 restaurants under the names Western Sizzlin', Great American Steak & Buffet and Wood Grill Buffet. All except five of Western Sizzlin’s restaurants are franchise-operated. The much larger Steak 'n Shake currently operates a different business model. Of its 508 Steak 'n Shake restaurants, 414 are company-operated. In 2012, Western Sizzlin' generated about $2.157 million in earnings, a 12% decrease compared to 2011. Steak 'n Shake, however, generated about $45.622 million in earnings, a 10.6% increase over 2011 earnings.

Steak 'n Shake’s 10% increase came despite the company’s efforts to franchise restaurants and expand internationally. These efforts in the short term are taking away from Steak 'n Shake’s profits, but over the long term should help generate more cash for Biglari Holdings. Steak 'n Shake has recently signed franchise agreements with partners to open 171 restaurants, including the company’s very first international locations. The first of which will open in the United Arab Emirates. Steak 'n Shake is also currently hiring staff for its new European office and will soon begin to bring the American diner concept to old world restaurant patrons.

Latin America’s Golden Opportunity

In a plot straight out of Back to the Future II, imagine we are climbing into a heavily-modified DeLorean and taking a trip back in time to 1972. It was this year that McDonald’s celebrated its 2,000th restaurant opening. This was also the year that McDonald’s recorded its first billion dollars in sales. Two years later, their store count will increase to 3,000. Two years after that and they will see the grand opening of their 4,000th restaurant. In another two years’ time, say hello to restaurant number 5,000. This was the beginning of McDonald’s explosive growth, a great time to purchase a few shares of McDonald’s stock. Unfortunately none of us have a time machine, but Arcos Dorados (NYSE: ARCO) presents investors with potentially the next best thing.

Spanish for Golden Arches, the Argentina-based Arcos Dorados was formed in 2007 when it purchased McDonald’s Latin American division. The purchase included the rights to franchise and operate McDonald’s restaurants in 20 countries and territories in South America, Central America, Mexico and the Caribbean, a combined population of about 580 million people. Arcos Dorados today has a restaurant count of 1,959 McDonald’s, as well as 339 McCafé restaurants and 1,997 Dessert Centers.

The hope among Arcos Dorados investors is that the company will follow a similar growth trajectory as the McDonald’s of 1972. Although McDonald’s and Arcos Dorados have the first-mover advantage in Latin America (important for building brand loyalty) and are the clear fast food market leaders in the region, it remains to be seen if the people of Latin America will embrace the fast food concept to the extent that we have in the United States and Canada. But if they do, Arcos Dorados could potentially have thousands of restaurants' worth of growth ahead of them in one of the fastest-growing regions in the world.

Foolish Bottom Line

Given the lack of attention from the media, you might be inclined to think that the restaurant world begins and ends with only a tiny handful of companies. That is not the case, however. The publicly-traded world of restaurant companies is far more diverse for those willing to dig a little deeper.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.

Matthew Luke owns shares of Biglari Holdings. The Motley Fool recommends Chipotle Mexican Grill, Cracker Barrel Old Country Store, McDonald's, and Starbucks. The Motley Fool owns shares of Arcos Dorados, Chipotle Mexican Grill, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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