Popeyes Louisiana Kitchen Keeps Hitting New Highs -- Time to Sell or Buy?


Source:  Wikimedia Commons

It is not that often that a credible restaurant company provides as much detailed guidance to the extent that Popeyes Louisiana Kitchen (NASDAQ: PLKI  ) has. This makes it much easier to make a calculated guess on long-term value, and help you determine if it's a buy or a sell, particularly when measured against Yum! Brands (NYSE: YUM  ) , the company that owns KFC.

What's so special about fried chicken?
Just like hamburgers, the concept itself is vastly widespread. It's the way it's prepared and the recipe that makes all the difference. Yum! Brands boasts that KFC uses "an Original Recipe of 11 herbs and spices." The marketing effectiveness of that phrase alone is quite valuable; but the value is hard to pin a number on.

For Cheryl Bachelder, CEO of Popeyes, it's a much easier task. She recently stated in a press release, "Popeyes is already known for the best food in the industry." She then put the company's money where her mouth is, and shelled out $43 million to the recipe founder's family just for the now-permanent right to the recipes, instead of licensing them. That's a lot of money for chicken seasoning!

Source: Wikimedia Commons.

Market opportunity
In the U.S., Yum! Brands reports there are around 4,500 KFCs, down from more than 5,000 from a few years ago. It would seem, at least for now, that Yum! Brands feels it has tapped out of the potential market. Popeyes, meanwhile, has only around 1,600 locations.

Seventy percent of Popeyes' locations are concentrated within just 10 states. Despite this concentration, the average Popeyes generates 30% more in per-unit sales -- and climbing -- than the average Yum! Brands-owned KFC. This suggests there is still wide open opportunity for Popeyes, and possibly at the expense of Yum! Brands.

In fact, with the last earnings report, Bachelder stated about the new Popeyes that are popping up: "These new units are averaging volumes higher than the system average, and are delivering record franchisee profitability. These unit economics are fueling the growth of the brand." It sounds like the brand is feeding on itself, and is possibly opening more opportunities rather than anything resembling the saturation that Yum! Brands may be feeling a bit domestically.

Long-term guidance
First, for 2014, Popeyes is currently guiding for adjusted earnings per share of between $1.58 and $1.63. Let's use $1.60 in the middle for easier math. The $1.60 can be the base for guessing where earnings may be heading.

Next, Popeyes guided for the next five years to have same-store sales between 1% and 3%, along with unit growth of 4% and 6%. While both of these seem to be a bit on the conservative side, considering, for example, 4.5% same-store sales growth last quarter, conservative is good. It just means that the longer-term potential within and beyond five years might be even better, especially because total units in five years will still be a fraction of that of Yum! Brands' KFC.

Even easier, Popeyes also guided for earnings per diluted-share growth of between 13% and 15% over the next five years. Using the middle number of 14%, that puts this year's $1.60 guidance at $3.08 per share in five years. Next, take another peak at Yum! Brands.

Source: Wikimedia Commons

Well, is the valuation too crispy or not?
Based on the current share price of around $82.00 for Yum! Brands at the time of this writing, and analyst estimates of $3.69 for the year ending December 2014, Yum! Brands P/E is around 22. If Popeyes successfully earns $3.08 per share, and trades at a similar P/E as Yum! Brands now trades, then Popeyes would be at around $68, or around 50% higher than the current share price.

I'll spare you the math, but it's roughly an 8.5% compounded annual return during the next five years. Not terrible, but nothing to write home about, either, especially for a restaurant stock that is potentially vulnerable to economic, execution, and competitive risks. However, 8.5% isn't bad as a base if you're confident that there's much more upside beyond the midpoint of management's guidance.

Popeyes already raised guidance for this year alone, so it's quite possible that the company is sandbagging, too, what it really expects long term. Conclusion: For Fools who can shoulder the wait and take on some speculation, I think there's a good chance of above-average returns during the next five, 10, and more years.

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