Fried Chicken Is the Exception
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The average person might not realize it, but fried chicken actually has some legit health benefits. These include regulating cholesterol (vitamin B3 niacin), maintaining an optimal immune system (high quality protein), reducing arthritis (high selenium content), reducing heart disease (vitamin B6), keeping bones healthy (calcium and phosphorus), regulating blood pressure (potassium), and maintaining body tissues (riboflavin). Personally, I think a stock involved in producing and selling fried chicken is even healthier for your portfolio.
AFC Enterprises (Popeyes)
Popeyes has been slowly growing under the radar while more popular mainstream fast food restaurants occupy the financial news spotlight. However, AFC Enterprises (NASDAQ: AFCE) has been taking Popeyes to new heights since acquiring the 40 year old company in 1993. In the past 5 years, the price has gone up over 140% and the company has steadily increased their franchised restaurants from 1324 in 2003 to over 1600 today in the United States alone. Additionally, the stock has beaten estimates 3 straight quarters and the company enjoys 9.89% revenue quarterly year-over-year growth.
In an economy where commodity prices and raw food costs are rising, Popeyes has actually been able to increase profit margins year-over-year from 15.73% to 17.74%. Popeyes has been able to increase menu prices and still grow as a company. In fact, according to their latest earnings release, average profits are 20% higher for franchisees despite commodity inflation of 1.5%. As for recession proof stocks, this is one of them. The last quarter Popeyes saw an EPS loss was the last quarter of 2005!
Unlike other forms of fast food, fried chicken is fried chicken. There are no unknown sauces or ingredients and no pink slime to worry about. Recently, Popeyes has expanded their menu to include a more diverse seafood offering to complement their chicken as well as beginning to re-image the restaurants domestically. Their goal is to have approximately one-third of the restaurants completed by the end of 2012.
Making wise decisions are what makes Popeyes worthy of a spot on your watch list. In their earnings report, they discuss the 180 second standard. In a world where time is money, I find this detail and acknowledgment of its importance to the company overall in the report itself impressive. Popeyes is also proactive in their approach to maintain locations that are profitable and to close those that are not. This real-time adjusting of stores explains how Popeyes has been growing, slowly but steadily, in recent memory.
Is it BKC, BKW, or just BK? Burger King Worldwide (NYSE: BKW) went public again in June of this year and has gone up over 14% already. After following the BKC version of this company before it was bought by 3G Capital in 2010 and taken private for $24/share or a 46% premium, I wonder if it is just SSDD (same ‘sandwich’ different day). The BKC version as a stock was stagnant for much of the time it was public and missed the appreciation of their rival McDonald’s. So, when 3G Capital sold 29% for $1.4 billion in cash to Justice Holdings LTD (UK based company) on April 3 after supposedly restructuring the company’s menu and products, I was a little suspicious that any change had even occurred.
The entire Burger King story the past few years made little sense to me. The delisting of its stock (BKC) originally was to restructure the business and try to close the gap to its competitors without having to service the needs of shareholders – like profits and positive news. Now they are public again and the financial results are worse. Revenues in the US dropped from $364 million to $246 million in the three months ended September 30 year-over-year. Total revenue in the same period overall dropped from $608 million to $451 million. Additionally, net income declined from $38.8 million to $6.6 million.
Unlike Popeyes, Burger King’s net profit margins have declined greatly year-over- year from 4.08% in 2011 to 1.46% now. I don’t think it is a difference in commodity prices or the logistics. I believe it is the fact that you can buy a hamburger – and a good one at that – pretty much anywhere these days. Burger King is stuck living in the past and haven’t realized that there are way too many options for consumers to choose from. Thus, customers are not willing to pay up for Burger King like that are with Popeyes.
I’ve always said you can’t spell ‘yummy’ without ‘yum’. Actually, I never said that but you can’t deny what Yum! Brands (NYSE: YUM) has been able to do as a stock the past 10 years - the share price has gone up over 545% with dividends reinvested. Featuring KFC, Pizza Hut, and Taco Bell, YUM has something for all taste buds.
YUM is truly a global powerhouse in the fast food industry. Like Popeyes, they have seen their net profit margin go up year-over-year from 10.57% to 13.39%. They have four distinct operating segments that include a China Division that covers China and an India Division that includes India, Bangladesh, Mauritius, Nepal, and Sri Lanka. The third YRI Division covers all other international operations. The fourth is a dedicated US Division. Having these separate entities is why I think YUM has been so successful the past decade. Instead of just expanding and trying to scatter stores everywhere without any knowledge of the culture or without making concessions to the local tastes, having separate divisions allows each to produce products that ‘fit’.
The segment that is growing the most and is the largest (over double that of the US Division) is the China Division with year-over-year revenues going from $1.6 billion to $1.988 billion as of quarter ended September 8, 2012. This growth in China is one of the major reasons why YUM increased their ownership of Little Sheep to 93%. Little Sheep is a China based company specializing in operating hot pot restaurants, condiment processing, and meat processing. With over 300 locations in China, this increase in ownership should further increase YUM’s bottom lines for years to come.
It should be no surprise that David C. Novak, the CEO of YUM won CEO of the Year in 2012. He is credited for the growth of the company and its share price, the expansion globally, and for maintaining double-digit annual EPS growth. As YUM expands further into India, I wouldn’t be surprised if they pick up a local powerhouse food chain or supplier there in the near future.
Fast food menus really come down to what customers can cook at home relatively quickly and easy versus what they cannot. I dare you to try to find any tasty fried chicken in the frozen section of your grocery store - or any section not within the 'hot foods' takeout area. It doesn't take a genius to figure out how to turn frozen or cold burger patties into a tasty sandwich. Furthermore, healthy fried chicken is not an oxymoron. Chicken in itself is a very high protein, low fat, very low carb source of food. When fried correctly, the moisture inside the chicken boils and pushes to the surface and into the surrounding oil. The barrier that is created minimizes oil absorption which leaves the crispy, tasty, outer crust. This allows you to take off the skin and keep the rest of the tasty goodness of the chicken if you desire to do so. Lastly, if your doctor still doubts the healthiness of fried chicken overall, just remind him or her of the info presented at the top of this article.
mikecart1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Burger King Worldwide. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!