Collins Foods Ltd (ASX: CKF) shares look like a bargain, and too tasty to miss. The S&P/ASX 200 Index (ASX: XJO) share has gone through a decline, but it could be a great time to buy.
For readers who don't know, this business is a franchisee of KFC outlets in both Australia and Europe. It also has a small Taco Bell network in Australia which it's looking to grow over time.
The Collins Foods share price is down by 33% over the past 12 months. In other words, it has lost a third of its value.
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What's going wrong for the ASX 200 share?
Collins Foods fell throughout 2022 as the business saw investor attention decline amid rising inflation and higher interest rates.
At the end of November 2022, the company's share price plunged 24% after delivering its FY23 half-year result. Investors didn't like what they heard.
In the first six months of FY23, revenue rose 15% to $614.3 million. However, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) only rose 0.5% to $95.4 million and underlying net profit after tax (NPAT) dropped 14.2% to $24.8 million.
The ASX 200 share decided to maintain its interim dividend at 12 cents per share.
Collins Foods noted there was significant cost inflation and wage increases in Australia and Europe. Taco Bell openings have been paused and it said that eight restaurants were underperforming. Taco Bell same store sales fell 7.8%.
However, Collins Foods is now going to work with Yum! (owner of the Taco Bell brand) to regain traction in sales before recommencing the rollout and scaling the brand.
Why I think the Collins Foods share price is a bargain
Management said it's confident about the future prospects of Taco Bell "given its value position within the fastest growing quick service restaurant segment".
Trading in the first six weeks of the FY23 second half was promising, with KFC stores' same sales growth of 5.6% in Australia and 14.8% in Europe.
The company is expecting to open nine to 12 new KFC outlets in Australia in FY23.
In the Netherlands, it's aiming to reach a long-term target of up to 130 net new KFC restaurants by 2031. This could be an earnings driver.
The ASX 200 share also continues to look for acquisition opportunities in Australia and Europe.
Collins Foods thinks same-store sales growth for Taco Bell will return in FY23.
All of these elements together make me think that FY24 will be more positive, particularly as inflation (hopefully) reduces.
According to Commsec, Collins Foods is currently trading at 20 times FY23's estimated earnings. It's expected to grow its earnings per share (EPS) by 44% to FY25, which would enable the dividend to grow to 32 cents per share. This would be a grossed-up dividend yield of 5.5%.
I think Collins Foods has plenty of earnings growth in store over the next five years, which can help share price growth and pave the way for a return to good dividends, and higher payouts.
