Executive Summary
Popeyes Louisiana Kitchen (PLKI)
Presented May 5, 2015
Kevin Farshchi, Drew Szilagyi, Tom Van Spankeren
Recommendation to add to company watch list
Company Overview
Popeyes Louisiana Kitchen (PLKI) is a franchise-model quick service restaurant (QSR) with
impressive same store sales and exceptional returns. The company operates in two main
business segments of franchised and company-operated restaurants, with a total of 2,379
stores both domestically and internationally.
Industry
Quick service restaurants continue to increase in popularity both in the United Stats and
abroad, with consumers increasingly valuing the experience of a restaurant in addition to
the quality of its menu items. The macroeconomic forces affecting Popeyes include
consumer confidence, total food expenditures, and disposable income. Expenditures on
food as a percentage of total expenditures has been steadily increasing, and most
importantly, percentage of food expenditures outside the home has increased at an even
higher rate. We expect the decreasing trend in preference for beef to provide a steady
increase in the pounds of poultry consumed per capita globally.
Economic Moat
The company is gaining market share in the CQSR industry, increasing margins, and
growing same store sales higher than any major competitor. As the second largest QSR in
chicken after KFC, the company is continuing to gain market share from competitors, from
20.8% in 2013 to 23.2% in 2014. It is currently trading at a P/E ratio of 37x, which is
significantly higher than its peers. The company has been focusing primarly on growing not
only the number of stores, but the quality of those stores, with reimaging of stores planned
to reach 80% by 2015. The main catalyst of the company is how well they know and cater
to customers, they are consistently introducing new products as well as promotional
pricing. Our team is convinced on the growth story of this firm.
Valuation and Recommendation
Technical analysis shows us a 200 moving average of around $40 with a new support level
at $55. The 20 day reversed under the 50 day moving average as well – a bearish signal.
Our discounted cash flow valuation provides a negative rate of return based on our own in
depth projection and management guidance. The comparables valuation gave us a $50
implied share price and the DCF implied share price is a very low $32.14. The company
experienced abnormally high realized returns over the past 12 months and a high ROE.
Although we do not feel these growth rates are sustainable, we still believe that the cost of
capital for this firm will be higher. We used a step function WACC plus a business risk
premium of 1% to discount future free cash flows. A position at the current market price of
$54.64 per share of PLKI is unwarranted given the fundamentals. We believe in the growth
story and continued success of Popeyes on increasing same store sales and growing top
and bottom line, however, we recommend to not purchasing shares at this time.