Treasure Chest: The Fast Food Conundrum

This story features COLLINS FOODS LIMITED, and other companies. For more info SHARE ANALYSIS: CKF

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s story is on Collins Foods. Is fast food defensive?

Whose Idea Is It?

Citi

The subject:

Collins Foods ((CKF))

More info:

Collins Foods operates the KFC franchise in Australia, Germany and the Netherlands, plus Taco Bell in Australia.

Back in January, Morgan Stanley initiated coverage of Collins Foods with an Outperform rating. The broker likes the fast food restaurants operator for its defensive qualities amidst a challenging outlook for consumer spending.

In late March, Ord Minnett warned the rally in discretionary retail stocks underway at the time was largely being driven by interest rate cut expectations, which the broker believed were too optimistic amidst ongoing inflation.

On that basis, Ord Minnett believed “trading down” by consumers will insulate the performance of Collins Foods, one of the “two cheapest names under coverage”, along with fast food peer Domino's Pizza ((DMP)).

The question, however, is whether consumers, particularly at the lower income end, will “trade down” to cheaper fast food options, or just reduce their fast food intake altogether. While food inflation has been rife in supermarkets, home cooking can still be a cheaper option than a bucket of fried chicken.

Citi is one broker who is not buying the “defensive” story with regard fast food. In early March, Citi downgraded Collins Foods to Sell from Neutral.

The broker pointed out Inghams Group ((ING)), which is one of Collins Foods' four chicken suppliers, had recently revealed a decline in poultry volumes sold in the quick service restaurant (QSR) channel in Australia.

At its first half result release (Collins Foods has a May year-end), management indicated a proportion of its customer base (“blue collar”) may reduce order frequency or “drop out of the category”.

Other data points were suggesting to the broker softer trading in Australia driven by higher cost of living pressures, while other cost pressures also remain elevated.

This morning Citi has reiterated that Sell rating, taking “comfort” from March quarter earnings results and commentary from Restaurant Brands and McDonalds.

Restaurant Brands New Zealand ((RBD)) operates the New Zealand outlets of KFC and Pizza Hut together with some KFC restaurants in Australia and California. The company’s latest sales update revealed a further deterioration in Australian sales, citing cost of living pressures which have impacted discretionary spending.

McDonald’s March quarter result also revealed “flat-to-declining” QSR industry foot traffic in Australia, and Germany. That said, McDonalds increased its QSR market share in Germany. If Big Macs have gained share over KFC, that also be bad news for Collins Foods.

More broadly, McDonald’s flagged broad-based consumer pressures globally.

Collins Foods will report second half earnings on June 25, which is when other brokers covering the stock will likely next provide updates.

Citi has a $10.00 target on the stock, while Morgan Stanley initiated with $14.20 (in January) and Ord Minnett retained a $14.40 target (in March).

It is interesting to note on Wall Street, fast food “restaurants” are part of the consumer staples sector, while on the ASX they are consumer discretionary.

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