Spice Up Your Portfolio with this Cajun Style Franchise

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

Maybe Jim Cramer should have listened to me when I wrote about AFC Enterprises (NASDAQ: AFCE), the owner of Popeye's Louisiana Kitchen and Popeye's Chicken & Biscuits quick serve restaurant chains, in October when it was in the mid-$20s. He recommended the stock this week, and it closed at a 52 week high of $33.66 on March 8.

As I wrote in October, this company had a very challenged past and had to sell off some of its prime assets (Cinnabon, Seattle's Best Coffee, and Church's Chicken) after it was embroiled in the Arthur Andersen accounting scandal and had to pay off its tax obligations. It's taken almost ten years to bring the company out of that mess, with only the one asset left to play their hand.

The company was founded in 1972 in New Orleans and features spicy New Orleans specialties like the Cajun fried chicken and shrimp, jambalaya, red beans and rice, etc. In the US the restaurants are mostly clustered in the Southeast. Their food is tasty but my homemade jambalaya bets theirs by a country mile.

Give Me A Ten Bagger With Cajun Fries

Yet with only one asset left to its name, AFC is this close to being a ten bagger from its low during the recession around four dollars. There has been increasing interest in this name, with institutions buying heavily, according to Investors Business Daily. Although this is only a small indicator, it is running across the scrawl on CNBC on a fairly regular basis. In addition, trading volume has been heavier, with AFC trading more than twice the usual volume on March 8. While individually these may seem to be trivial, put together they're painting a pretty picture of higher prices to come. You can see on the chart almost to the day when Cramer touted the stock.

<img src="http://media.ycharts.com/charts/c5c0873c1159c508edeef3d526de2577.png" />

YUM data by YCharts

It's less than 10% away from the analyst median price target of $36.00 but that's only from four brokers. Analysts expect a 15% five year EPS growth rate. AFC reported full year results for 2012 on Feb. 27, and the results were as hot and spicy as expected, with adjusted EPS up to $1.24, a 25% improvement over $0.99 in 2011. Free cash flow rose 20% to $36.8 million, and the company opened a net total of 66 stores after subtracting the 75 they closed. They also announced they had bought back 144,000 common shares throughout the year, with another $51 million authorized for more buybacks.

Of interest is that they are refurbishing 60% of their domestic restaurants to their Popeye's Louisiana Kitchen concept, and are expanding by a reasonable 6% per year. They guided that next year the pace of expansion would stay slightly under that 6%, with 185 new openings planned for 2013. Currently they number 2,104 restaurants in the US and 26 foreign countries.

They also guided that commodity costs would be essentially flat for 2013 and still expect a double digit rise in EPS for 2013 at anywhere from 10%-14%. These numbers also cap off three consecutive years of same store sales increases.

Too Hot To Handle

Even with great numbers and planned expansion, both domestically and internationally, this franchiser and operator is trading at a silver and tablecloth P/E of 27.15 and a forward P/E of 20.28, with a PEG of 1.56 signaling some stretched valuation. The stock has more than doubled this past year.

An operating margin at 28.69% and a return on equity of 126.69% are impressive. Their expanded advertising seems to be working with these numbers they've been reporting. For the last five years they've been using the cash they generate to pay down debt and buy back shares.

But should they buy back shares at this level? Should you? As a highly franchised concept it reminds me a great deal of Jack In The Box (NASDAQ: JACK); not a close competitor, but still in the quick serve sector and still vying for investors' quick serve dollars. Closer competitors are privately held Chick-Fil-A and Yum! Brands' (NYSE: YUM) Kentucky Fried Chicken division. AFC is now number two behind Yum! as a leading quick serve chicken concept globally.

Is Competition Heating Up?

Like Jack in the Box, AFC is mainly a franchiser and operator, with over 90% of the company-operated stores located in Tennessee and Louisiana. Jack in the Box, another quick serve restaurant chain, owns or operates 2,255 Jack in the Box restaurants and 636 of their QDoba Mexican Grills, a challenger to Chipotle. Unlike AFC it is purely a domestic company.

Jack in the Box is also trading at 52 week highs and has a 22.51 P/E and a PEG of 1.62. Jack in the Box reported on Feb. 27, and Q1 2013 earnings were better than expected, with adjusted earnings of $0.54 per share from $0.27 in the same quarter a year ago. Notably, QDoba Mexican Grill numbers were slightly down, but the Jack in the Box same store numbers were up.

One big difference between the two is that AFC guided higher for 2013, and Jack guided flat to lower. In particular, it guided lower for QDoba sales, which is not encouraging at all.

Then there's Yum! Brands, which owns Pizza Hut, Taco Bell, Wing Stop, and Kentucky Fried Chicken. The global fast food leader has had a rough few months with chicken sourcing problems in China, the most important market for KFC. Interestingly, AFC is moving aggressively into Asia with 55% of their international Popeye's locations in Korea.

Yum! is trading at a 20.04 P/E with a 2.10% yield. The stock is gradually recovering from the hit it took when the Chinese chicken furor first came out. This name has the highest PEG at 1.87, and analysts give it a median price target of $67.00, though it's trading slightly above that.

The Final Takeaway

Of these three companies, AFC Enterprises is still looking good with reasonable expansion plans, good numbers, a successful ad campaign, and institutional support. Yum! is trading close to its price target and seems fairly valued here. As for Jack, the QDoba numbers are worrying, and I'd stay away.

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