Popeyes Louisiana Kitchen: Promising Shareholders Higher Returns

| About: Popeyes Louisiana (PLKI)

Summary

Popeyes delivered revenue growth of 11% during its latest quarter. Earnings grew by 10.5%.

The restaurant industry is undergoing massive expansion.

Adding more restaurants is a feasible choice in the current environment.

The company is undervalued by 12%.

Popeyes Louisiana Kitchen's (NASDAQ:PLKI) operates and franchises quick-service restaurants under the trade names Popeyes Chicken & Biscuits and Popeyes Louisiana Kitchen. The company's share value has gone up by 38% in a year. These gains have been backed by strong operational performance. With the service, retail and employment levels expected to stay at their highest since the Great Recession, investors are likely to see this trend continue ahead.

In this article, I will evaluate Popeyes' financial strength by reviewing its performance in the latest quarter. Later, I will discuss factors that will highlight the future potential of the organization.

Third Quarter

Popeyes reported its third-quarter result last month. The company achieved revenue growth of 11% as the top-line figure came to $55 million. The year-over-year increase was driven by comparable-store sales growth of 7.3%, which came due to a combination of menu innovation and effective media advertising that helped in attracting more customers.

Popeyes' revenue growth isn't something new. The company's domestic same-store sales have outpaced the chicken-QSR segment for 26 consecutive quarters and overall QSR for 12 consecutive quarters. This has led the Popeyes market share in the domestic chicken-QSR segment to grow to 23.7% from 21.2% in 2013.

Consistent revenue growth over the past three years indicates that Popeyes' internal efforts are behind the profitable running, and the company isn't entirely dependent on the macro conditions for delivering strong performance. This makes Popeyes a relatively safe stock in a period where the economy contracts, because the company will be able to sustain modest growth rates at that time.

A decline in food and beverage costs led by favorable chicken prices helped the operating profit of company-operated restaurants grow by 10.7% to $19.6 million during the period. G&A expenses also rose by 5% to $17.1 million due to investments in franchise support services, but fell as a percentage of sales.

The net result was adjusted earnings of 42 cents per share, which were 10.5% higher than the year-ago period and beat the analysts' estimate by 2 cents. In sum, the quarter was another period where top and bottom line continued to grow for Popeye. The trend is expected to sustain owing to the reasons discussed below.

Market Expansion

The global restaurant industry is undergoing massive expansion. The industry is forecasted to grow at a CAGR of 7.2% over the next two years to $3,482 billion. The reason behind this growth is that food demand is rising in line with the global population. The increasing urbanization and a general exodus from rural areas to urban areas are causing a change in the eating habits. With more people working in office environments and the number of households with parents in the workforce growing, time to prepare food at home is getting limited. Therefore, consumers under time constraints are opting to eat outside in cafes and restaurants.

The market growth will benefit Popeyes more than peers because the company has approximately 20% of its restaurants located abroad, which positions it to extract the share of market growth that won't be available to rivals concentrated in the US market.

More Restaurants

In addition, the company will be opening new restaurants for securing a higher market share during the period. The company has already started this expansion as 60 new restaurants were opened during the latest quarter.

Adding new restaurants is a feasible choice right now because the market growth will ensure that comparable-store sale increases in line. The rate of growth may even outpace competitors because the system-wide remodeling of all the restaurants should be completed in 2015. The fresh setup and a new pipeline of products are already helping Popeyes generate higher revenue where the changes have been implemented. At present, nearly 80% of the domestic system has converted to the new Popeyes' image. With the remaining base expected to convert next year, investors should see an upsurge in revenue that is extracted from the newly converted restaurants.

Conclusion

A growing market, store expansion, and remodeling of existing stores have led the analysts to believe that Popeyes will be able to deliver an earnings figure of $1.92 per share in 2015, which will provide year-over-year growth of 17% to the investors. The estimate leads 6 brokers to hold a high target price estimate of $60 for the company's stock. The target indicates that Popeyes is undervalued by 12.4%. Therefore, the company holds a buy rating.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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