Fast food providers are going through a bit of a rough time at the moment. The one under the most pressure is Retail Food Group Limited (ASX: RFG). A Fairfax Media Limited (ASX: FXJ) inquiry uncovered what some franchisees described as an overwhelming assortment of fees.
The RFG share price has fallen from $7 at the end of 2016 to today’s $0.89. Does that mean it’s bad news for all fast food providers? I don’t think it does. There are other shares that could have much better futures:
Domino’s Pizza Enterprises Ltd. (ASX: DMP)
This business is the franchisor for Domino’s in Australia, New Zealand, Germany, France, Japan, Belgium and the Netherlands.
Its growth rate has considerably slowed over the past year but I think the pizza mogul business could generate a lot more growth in time because it has plans to significantly increase its store count in Europe and improve its earnings before interest, tax, depreciation and amortisation (EBITDA) margin.
Once Domino’s can start delivering pizza with automated vehicles, robots or drones it could significantly increase its profit and ‘cool factor’.
Domino’s is currently trading at 26x FY18’s estimated earnings.
Collins Foods Ltd (ASX: CKF)
Collins Foods is a large franchisee of KFC restaurants in Australia, it is expanding in Europe by making acquisitions in Germany and the Netherlands. It will also grow its Sizzler chain in Asia with franchises and it has just started opening Taco Bell chains in Australia. The one Taco Bell store has been very popular since it opened.
I think Collins has done well so far and it has several different chains it can expand with, which should lead to growing earnings over time.
Collins is trading at around 17x FY18’s estimated earnings.
Oliver’s Real Food Ltd (ASX: OLI)
The first two companies I mentioned have a lot of unhealthy food options but Oliver’s wants to disrupt this market and offer ‘real’ healthy organic food.
This appears to be resonating with consumers nicely, in its recent half-year report Oliver’s reported revenue growth of 93%, same store sales growth of 5.7% and the gross margin increased from 65.7% to 75.6%.
Oliver’s isn’t yet making a net profit after tax but it may be this time next year.
I like all three companies but I’m particularly interested in Collins and Oliver’s. Both could expand their store counts significantly over time and that should be a good boost for revenue, margins and profit.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.