The S&P/ASX 200 Index (ASX: CKF) stock Collins Foods Ltd (ASX: CKF) is on my buy list this month. I love jumping on beaten-up opportunities and I think the KFC and Taco Bell operator looks like a bargain.
As we can see on the chart below, the Collins Foods share price has dropped around 18% since 9 January 2024.
There are three main reasons I'm thinking about jumping on this stock, when Motley Fool's trading rules allow me to, following the publication of this article.
Cheaper valuation
The lower price we can pay for a good business, the better value we're getting and the larger margin of safety it gives.
It's still the same business, whether the share price is 20% higher or 20% lower. The ASX 200 stock is more than 20% cheaper than where it was in 2021, but its KFC (and Taco Bell) outlet footprint is larger now than a couple of years ago.
Its financials are showing much better performance compared to a year ago when inflation was causing major difficulties with costs and customer demand. In the FY24 first-half result, it grew continuing operations revenue by 14.3% and the underlying net profit after tax (NPAT) increased by 28.7% to $31.2 million. Double-digit profit growth for this sort of business is good, in my opinion.
The ASX 200 stock is projected to make earnings per share (EPS) of 51 cents in FY24, which would put it at 20x FY24's estimated earnings.
Compelling growth prospects
I don't know what will happen with inflation in the medium term, but the worst of the increases seems to be over. To me, this means the company's cost outlook is improving.
In my mind, there will be two things that will help Collins Foods grow in the future.
First, it can keep growing the number of KFC outlets in Australia and Europe, as well as the number of Taco Bells in Australia. Thanks to economies of scale, growing its footprint can increase revenue and hopefully boost profit margins.
Collins Foods is expecting to open between nine to 12 new KFC restaurants in Australia in FY24, as well as another three in the Netherlands in the second half of FY24. It has reached 27 Taco Bells in Australia.
Secondly, I'm hoping the ASX 200 stock can grow its same-store sales – meaning its existing stores make more revenue than the prior year – which would also support profit growth. The growing population in Australia and Europe could help increase demand for each individual existing outlet.
The projection on Commsec suggests it could grow EPS by almost 50% between FY24 and FY26 to 76 cents. That would put the Collins share price at 13x FY26's estimated earnings, which looks very cheap to me.
Solid dividend yield
I'm impressed by the company's dividend growth track record, with annual increases every year since 2014.
The last two dividends amount to a grossed-up dividend yield of 3.85%. The profit growth to FY26 could spur big increases in the dividend. In FY26, the annual payout could be 40.5 cents per share, which would be a grossed-up dividend yield of 5.7%.
I think the dividend growth can provide a rewarding 'real' return on ownership of the business while waiting for the market to recognise the growth potential of this ASX 200 stock.
