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Collins Foods share price jumps for second day after top broker upgraded the stock

The Collins Foods Ltd (ASX: CFK) extended its strong share price run for a second day after Morgans upgraded the stock following good results from its overseas peers.

The CKF share price jumped 0.8% to $7.19 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index clawed back losses to close flat.

The Collins Foods share price gains today are in addition to the circa 4% rally yesterday as investors got excited with the recent results from US-listed Yum! Brands, Inc. and New Zealand-listed Restaurant Brands New Zealand Limited.

Earnings surprise

“Yum! Brands (YUM) and Restaurant Brands (RBD) have recently reported positive quarterly sales prints for their KFC Australia operations. RBD’s 4Q sales showed +6.9% SSS [same store sales] in their KFC Australia (NSW) operations. This was a meaningful acceleration from the +2.4% printed in the prior quarter (Sep-Dec),” said Morgans.

“Yum! recently reported its 4Q18 (Oct-Dec) sales, which showed that total KFC Australia 4Q sales growth was 6%. This sales growth is total (not SSS) and is partially backwards-looking however is a helpful read through for CKF given they represent c30% of KFC Australia’s store footprint.”

What all these add up to is the potential for Collins Foods to deliver a better than expected SSS performance for its fried chicken fast food operations in the second half of this financial year. Collins Foods is a KFC franchisee while Yum! is the franchisor.

If Collins Foods can deliver growth anywhere close to Yum! and RBD, it would stand in contrast to the outlook given by the ASX-listed company when it reported its 1HFY19 results. Management said 2HFY19 SSS growth in its KFC business was “slightly under 2%”.

Collins Foods has followed Domino’s Pizza Enterprises Ltd.’s (ASX: DMP) lead in expanding into Europe.

Upsize me please

Morgans thinks there’s a meaningful medium-term growth opportunity for Collins Foods in Europe, although I think it’s too early to make that call given the mixed results of ASX companies expanding overseas.

However, the stock looks cheap even if its European business is valued at cost, according to Morgans, which has upgraded its recommendation on Collins Foods to “add” from “hold” as it increased its price target to $7.78 from $6.90 per share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Collins Foods Limited and Domino's Pizza Enterprises Limited. 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.

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