The Collins Foods Ltd (ASX: CKF) share price has grown by 405% over the last five years, is it a buy today?
Collins Foods is a large franchisee of KFC restaurants across several Australian states as well as Germany and the Netherlands.
Here is my bull and bear case for the Collins Foods share price:
Bull case
The business is still growing its outlet numbers at an impressive rate. In its recently-revealed full-year results management stated that over the next five years it's expected to add eight to nine Australian stores per year and eight to ten European stores per year. This planned growth should be a good boost to earnings.
In those results it was revealed that underlying net profit after tax increased by 14.1%, revenue increased by 10.3% and underlying earnings before interest, tax, depreciation and amortisation increased by 8.9%.
Collins doesn't just rely on KFC stores to grow earnings. It also has a growing network of 'Sizzler' stores in Asia. The format is working well there and could provide a sizeable chunk of earnings in time.
Bear case
Fast food is not a brilliant industry. It's quite easy for someone to set up an independent store or a competing chain store. Collins Foods does not have the greatest economic moat, even with the iconic KFC brand behind it.
McDonald's has really stepped up its game by linking with UberEats and creating the MyMaccas app. Domino's Pizza Enterprises Ltd (ASX: DMP) is always coming out with a new invention to get pizza to hungry people quicker. Collins Foods will have to ensure it isn't left behind in the technology race.
A lot of Collins Foods' expansion has been funded by debt. The total (pro forma) borrowings after the acquisition of the latest KFCs will be $287.4 million. A debt pile can be a problem but the rising interest rates could be a big problem in the near-term. It's a good thing that Collins has a low dividend payout ratio of 47.6%.
Foolish takeaway
Collins is a simple business to understand and it's growing on several continents.
I think Collins is trading quite cheaply at 20x FY17's earnings with a grossed-up dividend yield of 4.14%. I think it's worth a place in most portfolios and could be a medium-term winner.
