Does This Company Still Have the Secret Sauce?

Does This Company Still Have the Secret Sauce?

AFC Enterprises , which owns the Popeye's Louisiana Kitchen quick- serve chain, once an undiscovered gem, has now soared 66% over the last year.

Love that chicken!
It's not surprising, as the National Chicken Council reports Americans are the most chicken-loving in the world, eating 83.6 pounds per capita annually -- and we love it best fried.

AFC Enterprises has grown its Popeye's and Popeye's Louisiana Kitchen restaurants so now competes with the big boys like Yum! Brands. Yum! Brands as a global chicken restaurant.

It doesn't hurt that CEO Cheryl Bachelder learned the trade as a former Yum! Brands executive. The company is mostly franchisee-run and utilizes many of the same tricks as Yum! Brands like special menu items. So far it's paid off as revenues have grown by 16.3% this last year.

The company's secret sauce is Cajun cooking and fried chicken and it has served AFC Enterprises well, returning 326.9% in share price appreciation since 2008.

On August 20, the company reported strong second-quarter results with an increase of 30% to diluted EPS from $0.27 to $0.35. It also grew free cash flow from $18.2 million in the year-ago period to $21.8 million and now boasts 13 straight quarters of positive comparable-same-store sales. The company also raised guidance to between 3.5% and 4.5% global same-store sales growth.

How high is up
This strength has also led the company to announce more store openings than previously planned. It now expects to debut between 170 and 195 locations in fiscal 2013 with 60 of them international, adding onto the current total of 2,153 restaurants.

The company has been remodeling its stores from Popeye's to Popeye's Louisiana Kitchen with close to 80% to be finished in 2014. In an interview on CNBC for Mad Money, CEO Cheryl Bachelder added those remodeled stores get an almost immediate 3%-to-4% rise in comps.

When asked about international growth, Bachelder answered,"How high is up?," speaking of the limitless possibilities overseas; Popeye's is located in 26 countries and 44 US states.

A chicken-wing upstart
But with success comes competition. McDonald's is debuting its own Mighty Wings nationally, chicken wings seasoned similarly to Popeye's New Orleans style with cayenne and chili pepper. The huge quantity of wings that McDonald's will need likely driving up prices from $1.44 a pound most recently will of course, affect the entire space including Yum! Brands, AFCE, and chicken focused Buffalo Wild Wings

Burger Business, a trade publication, noted that McDonald's previous test of the wings in Atlanta (AFC Enterprises headquarters) was very popular with consumers and could provide stiff competition. Could McDonald's have AFCE in its sights with these New Orleans style offerings at its 14,000 US restaurants?

Sterne Agee analyst Lynn Collier told The Huffington Post keeping Mighty Wings on the menu beyond November would depend upon chicken wings staying cheap as the company moves away from higher-priced beef offerings.

McDonald's certainly needs something to bring up same-store sales. US same- store sales in July were up 1.6%, credited to its Monopoly promotion and breakfast menu. Last January, Jack Russo, analyst for Edward Jones, speculated the new wings could bring in dinner business for McDonald's,typically a weaker time of day accounting for 20% of sales, according to Bloomberg Business Week.

A food blogger for Serious Eats was seriously in love with the Mighty Wings and said they were "perhaps on par with what the big chicken shacks are cranking out." He noted it took 10 minutes for an order of 18 wings.

Many McDonald's orders are drive through, so there is merit when he wrote, "They need to speed up the process so I can be back home with the grub before kickoff." The nationwide roll-out on September 9 better show McDonald's more prepared than in test-market Atlanta.

Flour plus batter = profits
AFC Enterprises has a sweet operating margin of 28.7% and quarterly EPS growth (year-over-year) of 28.8%. But the run in share price is making it a little rich, with a price to sales of 5.1 and a trailing earnings multiple of 34x.

Meanwhile at McDonald's the stock is virtually flat, up only 5% over the last year. Unsurprising when quarterly earnings growth is an anemic 3.7%. To be fair, McDonald's operating margin at 30.8% is higher than AFC Enterprises and the trailing earnings multiple lower at 17.3.

What must Yum! Brands think of these wings on its own turf? Yum! Brands offers wings not only at its KFC locations but also at Pizza Hut. Yum! Brands has 39,000 locations globally in 125 countries and over 80% of Yum! restaurants, including Taco Bells, are franchised.

Yum! Brands reported a similar lackluster US sales rise of 1% in its July 10 earnings release. Yum! has now reported three consecutive disappointing quarters, taking the quarterly EPS growth rate down to -15.1% year-over-year.

Hoping to boost US sales, the company debuted a new menu item at Taco Bell, the fiery Doritos loco taco, and boneless wings at KFC.

Yum! Brands has a lower operating margin than these other two at 15.7% and a lower yield than McDonald's at 1.8%.

Gentleman, to your fryers!
Will the Mighty Wings take share from both AFC Enterprises and Yum!? It just may but Popeye's customers are quite loyal and the restaurants offer Cajun style sides unavailable at these fast-food giants. AFC Enterprises has better growth prospects but a lot of that potential has been reflected in the share price.

McDonald's may see rising comps from Mighty Wings and improve its dinner sales. For the income focused, it's dividend aristocrat title is attractive as well, and it is more conservatively valued that AFC Enterprises.

As for Yum! Brands, it could see the most market share taken away. I would be careful with any position in Yum!, especially if McDonald's drives up the wings' commodity costs and causes domestic weakness

But of course if you really want to get rich you need to think international, and that's where McDonald's and Yum! Brands have a leg up. That's one reason we named them as winners in The Motley Fool's free report "3 American Companies Set to Dominate the World". Click here to get your free copy and uncover the third company before it's gone.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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.

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