Fast Food Trends to Help You Make Money
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are always new food trends coming along and this year, three flavors are big hits: anything pretzel, salted caramel, or chicken and waffles (that counts as one flavor).
Quick serve restaurant chains are cooking up these trendy flavors to some success. Wendy's (NASDAQ: WEN) has its runaway hit, the pretzel bacon cheeseburger, AFC Enterprises (NASDAQ: AFCE) its chicken waffle tenders, and Dunkin' Brands Group (NASDAQ: DNKN) a pretzel roast beef sandwich, caramel coffees, and salted caramel ice cream at its Baskin-Robbins stores.
Comforting chicken and waffles
The most intriguing is AFC Enterprises, owner of Popeye's Louisiana Kitchen and Popeye's Chicken & Biscuits quick serve restaurant chains. The restaurants feature spicy New Orleans specialties like Cajun fried chicken and shrimp, jambalaya, red beans and rice, etc.
Its newest gimmick is a soul food phenomenon, fried chicken and waffles with maple syrup. The Popeye's iteration is chicken tenders fried in a waffle batter and served with a honey maple dipping sauce. Reaction has been good for the chicken and so-so for the sauce.
It is refurbishing 60% of domestic restaurants to Popeye's Louisiana Kitchen concept, and has been expanding by a reasonable 6% per year with 185 new openings planned in 2013. Currently, it has 2,119 restaurants in the U.S. and 28 foreign countries.
This company had a challenged past having to sell off its prime assets (Cinnabon, Seattle's Best Coffee, and Church's Chicken) to pay off tax obligations after the Arthur Andersen accounting scandal.
AFC is a great turnaround story parlaying the remaining asset, Popeye's, into number two behind Yum! Brands as a leading quick serve chicken concept. AFC CEO Cheryl Bachelder learned the business as a KFC executive. She has changed Popeye's from fried chicken fast food in primarily urban low rent locations to a suburban quick serve chain with more emphasis on Cajun cuisine. She owns 209,984 shares.
AFC is mainly a franchiser, with over 98% of the stores franchisee-run. Its expanded advertising seems to be working with the numbers it has been reporting. For the last five years, it has been using the cash generated to pay down debt and buy back shares. Last year, it bought back 144,000 common shares, with another $51 million authorized remaining.
It has a market cap of only $904 million but is trading close to 52 week highs, up 66% this last year. The trailing P/E is extended from a low of only 22.80 last October. It isn't the undiscovered gem it once was, but it is still undercovered with only four analysts giving two Strong Buys, one Buy, and one Hold with expectations of double digit growth of 17%.
On pullbacks, this franchise model with an impressive operating margin of 28.33% and a return on equity of over 100% is something to start taking tender sized bites in.
Wendy's pretzel bacon cheeseburger and waffle cone Frostys are playing these flavor trends. On a CNBC interview, CEO Emil Brolick noted the new cheeseburger is a limited time only product but "...not a one hit wonder. Looking out the next year our product pipeline is rich and full."
The company's press release gushes, "This pub-style cheeseburger gained critical acclaim in test markets earlier this year, outperforming any other promotional hamburger in recent Wendy’s history."
The company's stock itself is sizzling, trading near 52 week highs, up 63%. Wendy's also offers a 2.70% yield at a too hot to touch trailing P/E of 200.81. That explains a 13.90% short interest. The forward P/E is still a high 27.52.
Wendy's franchises and operates 6,544 restaurants in the U.S. and 27 countries and is approaching an 85% franchisee run rate. The company raised the yield this year 25% (100% last year) and has in place a $100 million share repurchase plan through the year end.
Wendy's is in the midst of major revamping (flat screen TVs, cozier seating, fireplaces) at most of its restaurants, expected to complete by 2015. Closings during remodeling and expenses may ding the bottom-line.
On July 23, it announced Q2 results beating expectations with a 60% improvement of adjusted EPS year over year and margin expansion taking shares up over 12%. The company also doubled previous guidance for EPS growth this coming year based on selling 425 of its restaurants to franchisees, expecting increased margin expansion with lowered costs and increased rental and royalty fees. Goldman Sachs liked the sale, upgrading the stock from sell to neutral.
Slowly growing margin expansion was cited in June by Wells Fargo for its Market Perform rating, although it noted EV/EBITDA is better than competitors'. Price to sales at 1.16 and price to book at 1.48 aren't bad.
America runs on pretzels and caramel
Dunkin' is also running limited time only availability of its new Pretzel roll roast beef sandwich. That same pretzel roll is available to top any other sandwich as well. The company is featuring three new caramel flavors for iced coffee: coconut, almond, and caramel turtle. Baskin-Robbins keeps the caramel theme going with Flavor of the Month, Oreo nutty salted caramel.
Dunkin' has 10,500 restaurants in 31 countries and reported sales for 2012 of $6.9 billion. Dunkin' also owns 7,000 Baskin-Robbins ice cream stores in over 50 countries, making Baskin-Robbins the world's largest specialty ice cream chain. Of note, both divisions are almost 100% franchisee operated.
Like these other two, Dunkin' is cozying up the joints. Franchisees get three decor options, giving customers a more inviting space to dawdle. This is another quick serve trend gaining traction.
Dunkin has a market cap of $4.73 billion. It is trading at a 37.38 trailing P/E with a 1.70% yield. The stock is up 45% over 52 weeks and its price/book is high at 13.33. However, operating margin at 42.73% is impressive and analysts expect 16.04% five year EPS growth.
That growth is certainly doable after Q2 results of 420 basis points adjusted operating income margin expansion to 50%, a 24% increase of adjusted EPS to $0.41, and comp store sales improvement of 4%. The company has been buying back shares aggressively with 400,000 shares in Q2 alone and $33 million remaining.
Trends with traction
Besides on these flavor trends, you probably noticed trends to higher franchisee percentages, share buybacks, and renovations. These three companies are all trading near highs, but are innovating, renovating, and repurchasing. Maybe it's time to bite off a little yourself.
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