Investors could get indigestion at the thought of buying fast-food stocks. Retail Food Group, owner of pizza, donut and coffee chains, is a recent disaster. And Domino’s Pizza Enterprises, a former market darling, has slumped from its peak.
Restaurant Brands and Collins Foods have been my preferred fast-food stocks for several years. I wrote favourably about Restaurant Brands for The Bull in September 2016 at NZ$5.50. The New Zealand company has since rallied to NZ$7.07 and it dual-listed on ASX last year.
After more than tripling from 2015 to 2017, Collins Foods has broadly traded sideways as the market processes its price gains and overseas expansion strategy. I like its outlook.
Restaurant Brands, Collins Foods and the Australian fast-food sector generally are benefiting from trends that will intensify in the next five years.
The first is Australian households spending more on restaurant and takeaway food. The average Australian spends $80 a week dining out, from $69 in 2009-2010, Australian Bureau of Statistics data shows. Millennials (adults under 34) spend $100 a week on dining out.
Australia is following eating trends in the US. For the first time, Americans in 2017 spent more on eating out than on food prepared and consumed at home. In 1950, Americans spent three quarters of their food outlay on home-cooked meals; by 2017, that fell to below half.
Food bought away from home, as a proportion of total household food spending in the US, has doubled over the past five decades. It’s hard to image food bought away from home continuing to increase its slight lead over food prepared at home over the coming decade.
Remarkably, almost half of all US meals are consumed alone and more people are consuming food “on demand” (within an hour of purchase). Sadly, the days of families planning the weekly grocery shop and eating together each night are fading – at least in western economies where time-poor consumers are eating differently.
Snacking is another powerful trend for fast-food companies. About 94 per cent of Americans snack at least once a day and Millennials are likelier than any generation to snack four times a day, Forbes reported in 2017. Millennials are turning dominant meal occasions, such as lunch, into multiple snacking occasions. That’s good news for the fast-food industry.
Technology is another driver. Witness the staggering growth in online food ordering and delivering through Uber Eats, MenuLog and others. Advances in technology and delivery platforms have made it easy to order meals via a smartphone App and have it at your door within the hour. Home delivery opens a whole new market for giant fast-food operators.
These trends are not new. But it’s amazing how the sharemarket underestimates the power and duration of megatrends that are fuelled by social, demographic, economic or technological change.
Equally surprising is how investors overlook personal experience with trends. We see people dining out more and ordering takeaways, and a generation of younger people who eat out far more than their predecessors (the smashed avocado on toast brigade!). We see more Uber drivers picking up food in restaurants and on the streets and delivering it to homes. The transformation in eating patterns is happening before our eyes.
This trend has a long way to run. As Australia becomes more urbanised due to rampant population growth, traffic congestion will worsen, people will become more time poor and the option of ordering food online rather than cooking it will have greater appeal.
Of course, care is needed in extrapolating megatrends to stocks and using top-down analysis as the sole basis for investment decisions. Or overlooking roadblocks to industry growth; the move towards healthier fast food works against Restaurant Brands and Collins Food, owners of fried-chicken chains, but helps chains with lower fat/sugar menus.
Restaurant Brands still looks okay value after recent price gains. The company owns 97 KFC stores in New Zealand and 47 in Australia, 34 Pizza Huts in NZ, 23 Starbucks, 19 Carl Jr’s (a hamburger chain) and 37 Taco Bells and 45 Pizza Huts in Hawaii.
Restaurant Brands this week delivered a strong FY18 result. Total sales of NZ$740 million were up 49 per cent on FY17 and after-tax net profit of NZ$40.4 million was up 32 per cent.
A final dividend of 18 cents a share trounced market forecasts, and suggested the board is confident on Restaurant Brands’ outlook, cash flow and ability to maintain a sharply higher dividend. The full-year dividend rose 23 per cent on the previous year.
The core KFC business showed solid like-for-like sales growth – a result that bodes well for Collins Foods, another larger owner of KFC stores.
Restaurant Brands has plenty of work ahead to lift the performance of its Pizza Hut stores in Hawaii – one of the few soft spots in the latest result – and refurbish its Taco Bell stores there. But I like its strategy to expand conservatively beyond Trans-Tasman markets.
An average share-price target of NZ$7.24, based on the consensus of four broking firms (too small to rely on) implies Restaurant Brands is almost fully valued at NZ$7.05 and offers an insufficient margin of safety at the current price. Macquarie’s target is NZ$7.75.
I’ll stick with the bulls on this one. A share-price pullback or consolidation in the next few weeks would not surprise after the glow of Restaurant Brands’ latest result fades and as small-cap fund managers inevitably take profits. That could present a buying opportunity in one of the better-run fast-food food companies.
Longer term, growth in social media (which provides lower-cost marketing channels for food companies), online ordering and home delivery and eating trends are tailwinds for Restaurant Brands. And a way to innovate well-established fast-food brands and eating experiences.
Chart 1: Restaurant BrandsSource: ASX
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at April 18, 2018.