The Fast Food Monopoly Game

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At holidays after the feasting my family has a holiday tradition of playing Monopoly. Strange, I know, but there it is. I just found a company that reminds me of how my cousin plays. One year finding himself landing on income tax several times in a row and then landing on a hotel, he had to sell two premium properties just to pay the taxes. He was wayyy behind. But he kept Illinois Avenue and somehow managed to stay in the game only to sneak up from behind and wipe us all out with his red properties full of hotels.

Small, Cap, Big Ideas

It reminded me of AFC Enterprises (NASDAQ: AFCE) which owns Popeye’s Chicken & Biscuits and Popeye’s Louisiana Kitchen. Ten years ago it also owned Cinnabon, Seattle’s Best Coffee, and Church’s Chicken. Then they got embroiled (pun intended) in the Arthur Andersen accounting mess and had to sell those prime properties to settle with the IRS.

But gutsy little Popeye’s (not named after the cartoon but Popeye Doyle), has been powering its way uphill and is up 101.48% in 52 weeks. It has an impressive return on assets of 21.94% and a return on equity of 221.85%.

Its P/E is 22.80 with a forward P/E of 17.89. It considers itself a chicken quick serve restaurant (it also sells shrimp and crawfish specialties) with sides like red beans and rice, jambalaya, dirty rice, and Cajun fries.

This company is still under the radar as a turnaround story. Former Kentucky Fried Chicken executive Cheryl Bachelder learned the business there but felt constrained by the pressure of the quarterly earnings calls and wanted to work on something with a longer horizon. As the present CEO of AFC Enterprises she had her work cut out for her and has changed the image from fried chicken fast food in primarily urban low rent locations to a suburban fast food chain with an emphasis on the Louisiana and Cajun cuisine components rather than cheap fried chicken. She owns 198,786 shares.

While still a shadow of its former self pre-Arthur Andersen, Popeye’s has 1275 full time employees and 2049 restaurants in the US, Guam, Puerto Rico, the Cayman Islands and 25 other countries. Franchisees own and operate 98% of the restaurants. The market cap is 591.21 million.

The company reported Q2 earnings on August 15 and beat on top and bottom lines with EPS 23% higher at $0.27 per share than the year before at $0.22 per share. The Cajun cuisine purveyor is seeking to usurp Yum! Brands’ (NYSE: YUM) Kentucky Fried Chicken as the fried chicken of choice with an eventual 3200 locations in the US as Yum! closes more US locations to concentrate on its international business. Globally, Popeye’s enjoys 7.5% same store sales growth and is growing its market share of the chicken quick serve restaurant sector to 19%.

Kentucky Fried Chicken and privately held Chick-Fil-A are its most direct competitors. The company doesn’t have much analyst coverage, only 4 analysts. Its last analyst action was a downgrade in August from Fell & Co who took it from a buy to a hold almost exactly a year after initiating it as a buy (but it did double since then). Several big name small cap mutual funds hold it in their portfolios. It seems they like the consistent double digit EPS growth and the company’s buyback of almost $120 million of outstanding shares and paying down debt.

A September 17 Analyst and Investor Day highlighted the gradual name change to Popeye’s Louisiana Kitchen to focus consumers more on the Cajun dishes than chicken and all the restaurants will feature a new jazzy décor within three years. The company also crowed about the national advertising campaign’s success and a real estate strategy to close or sometimes move restaurants into more profitable and upscale sites, sometimes only blocks away. More than 20% of Popeye’s restaurants only opened in the last four years.

Yum! Brands, of course, is the fast food chicken giant and has experienced great success in China. Despite a market cap almost 50 times bigger and 50 times more employees than AFC Enterprises the P/E of Yum is very close to AFC Enterprises’ at 20.78. Yum does have a 2.00% yield and has pulled back from its 52 week high of $74.4. It also owns Pizza Hut and Taco Bell.

AFC Enterprises reminds me somewhat of Jack in the Box (NASDAQ: JACK) which also has a large franchisee ownership-operation and has gradually expanded from a small Western and Southwestern burger chain to 2247 Jack in The Boxes and 614 of its newest concept Qdoba Restaurants, a challenger to Chipotle Mexican Grill. More than half of these restaurants are franchises.

Jack in the Box is up some 45.95% in the last 52 weeks but has a lower return on assets of 4.52% and return on equity of 15.20% than Popeye’s. Jack in the Box has a P/E of 18.72.

 I am getting more intrigued by Popeye’s, a small cap name with big ideas and big growth. It is taking its Illinois Avenue and leveraging it up to win the Fast Food Monopoly game. It may be behind for now but not for long.

leglamp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Jack in the Box. Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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