The S&P/ASX 200 Index (ASX: XJO) stock Collins Foods Ltd (ASX: CKF) has experienced significant pain in the last 12 months. It hit a 52-week low of $7.13 on Friday and is down more than 40% in the past year.
This company is a major KFC franchisee operator in Australia and Europe, where it has a presence in Germany and the Netherlands. It also has a relatively small Taco Bell network in Australia.
It's understandable why the Collins Foods share price has fallen so much — revenue growth has slowed, and cost inflation has increased, making it difficult for the ASX 200 stock to grow (or even maintain) its net profit.
The FY25 half-year result saw some of this pain in action. Revenue only grew by 1.2% to $703 million, underlying operating profit (EBITDA) dropped 6.6% to $102.7 million, and underlying net profit after tax (NPAT) declined 23.8% to $23.7 million.
As we can see, the Collins Foods share price has gone back further than the net profit did. Let's look at why this could be a buying opportunity.
Growing network
Collins Foods is working on expanding its reach in Europe and Australia. In the short term, adding more outlets increases the company's cost base, including depreciation and amortisation.
However, the new stores may not perform as strongly today (amid challenging economic conditions) as they could in a year or two. But in the longer term, I think the bigger network will help grow revenue and unlock additional scale benefits.
Improving picture
When the broker UBS saw the HY25 result, it noted that the ASX 200 stock beat the top end of the FY25 first-half's margin guidance range, which management put down to profitable value and innovation offerings, according to UBS.
The broker wondered whether there could be a repeat of beating guidance for the upcoming full-year result.
UBS also noted that like-for-like sales for the remaining 19 weeks of the second half of FY25 had an easier comparable period in FY24, while the first seven weeks of the second half of FY25 had a stronger comparable period.
The broker also pointed out that food inflation is slowing, perhaps even entering deflation, creating less challenging cost headwinds. This dynamic could accelerate into FY26.
UBS also noted that after the new CEO has reviewed the company's operations, it could experience a positive catalyst, particularly once the company holds a strategy day to outline plans.
Collins Foods share price valuation
The company is trading at a cheap price/earnings (P/E) ratio, particularly if earnings bounce in FY26, looking at UBS' forecasts.
Collins Foods is valued at just 13x FY26's estimated earnings. If the business can get back to profit growth, this could be a very opportunistic time to buy.
