The Best Way to Invest in Chicken

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Finding under-the-radar companies that offer significant growth potential is a good way to maximize your investment potential. That said, it's time to take a close look at Popeye's Louisiana Kitchen (NASDAQ: PLKI  )  and see why it offers a significant growth opportunity.

High demand
Popeye's has quietly delivered five consecutive years of comps (same-store sales) growth. This is difficult to achieve in today's highly competitive environment, especially one which includes a hesitant consumer. In fiscal-year 2013, Popeye's comps improved 3.6% over those of fiscal-year 2012.

Popeye's is also in high demand internationally. In fact, it has quietly delivered seven consecutive years of international comps growth. In fiscal-year 2013, Popeye's international comps improved 4.7% over those of fiscal-year 2012.

If for some reason those numbers don't impress you, then consider that the average first-year sales of freestanding locations opened in 2012 were approximately 50% higher than the average first-year sales of freestanding locations in 2007.

Looking ahead, Popeye's aims to add a net 100-130 new locations (75 internationally) in 2014. All of the new restaurant locations will have a new kitchen image. Currently, approximately 60% of Popeye's locations use the new kitchen image, which has digital menu boards. These locations' sales on average are 3%-4% higher than those of traditional locations. As simple as it sounds, this should lead to stronger sales at new locations than at traditional locations.

Popeye's isn't just looking for top-line improvements.

An eye on the bottom line
Companies that show strong top-line growth are always attractive to many investors. However, it's rare to find a company that delivers strong top-line growth while also performing well on the bottom line. Popeye's has shown bottom-line growth of 89.44% over the past five years. It has managed to keep expenses in check on a consistent basis. Consider the chart below, which includes other players in the chicken market: Wendy's (NASDAQ: WEN  ) and Yum! Brands (NYSE: YUM  ) .

PLKI Revenue (TTM) Chart

PLKI Revenue (TTM) data by YCharts

You might not think of Wendy's as a restaurant that focuses primarily on chicken, but it has 17 chicken-based menu items and 12 burger-related menu items. Wendy's is wise to the fact that chicken is in higher demand than beef because it's more affordable for the company's target customer. Chicken items on the Wendy's menu include the Asiago Ranch Chicken Club, Spicy Chicken Sandwich, Homestyle Chicken Fillet, Spicy Chicken Go Wrap, and Chicken Nuggets.

Yum! Brands owns KFC. However, when you invest in Yum! Brands, you're also investing in Taco Bell and Pizza Hut. Regardless of this, Popeye's is the only restaurant brand of the three that has consistently seen its top line outpace its SG&A expenses over the past year. That's often the sign of effective management.

While Wendy's is still in the process of a brand transformation and it is likely to see future success, it's trading at 85 times earnings which makes it more expensive and riskier than Popeye's, which is trading at 29 times earnings. Yum! Brands is trading at 32 times earnings. While Yum! Brands is a highly diversified company as well as the fastest-growing international quick-service brand, it's not growing faster than Popeye's at the moment. 

That said, Yum! Brands might be more attractive for dividend investors since it offers a dividend yield of 2%. Popeye's is in a high-growth stage. Therefore, it reinvests its capital in its business instead of returning it to shareholders. Wendy's falls somewhere in the middle -- still growing but also returning capital to shareholders. It currently yields 2.10%.

The Foolish takeaway
Popeye's has seen consistent high demand for years. Combine that with geographical expansion and you're likely to have a winner. It's also trading at an attractive valuation in comparison with its peers. That said, if you prefer safety, then you would likely be better off with the more-diversified Yum! Brands. Please do your own research prior to making any investment decisions. 

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