Stock of the day: Collins Foods

(AI video summary)

This video was created on 3 December for IG audiences by ausbiz.

ASX code: CKF

Collins Foods faces challenges amid economic pressures

Collins Foods, the owner of KFC and Taco Bell in Australia, has recently drawn attention due to its decision to lower its earnings guidance by 25% for the fiscal year (FY). This adjustment is in response to a challenging consumer environment, which has also led to a reduction in its first-half (H1) dividend.

The company reported a 6.6% drop in H1 underlying earnings, with net profit after tax falling by 24%. Shareholders will receive a fully franked interim dividend of $0.11 per share, down from $0.25 in the previous half. Collins Foods anticipates consumer spending conditions and inflation to continue pressuring margins in the 2025 financial year.

Investment sentiment and market reactions

The market reacted to Collins Foods' update with a 3% drop in its share price. Analysts and investors have expressed mixed sentiments about the company's outlook.

Some investors question the attractiveness of the investment, recalling Goldman Sachs's previous endorsement over Guzman y Gomez. While some see Collins Foods as mature with limited growth, others find value in its low price and dividends.

The consensus leans towards a 'hold' suggestion amid economic uncertainty.

Sector comparisons and investor strategies

In the food and beverage sector, Collins Foods is often compared to companies like Domino's and Woolworths. Some investors prefer defensive stocks like Woolworths and Endeavour Group, while others are cautious about tight margins and inflation.

The debate continues on whether to invest in laggards with rebound potential or focus on consistent market leaders. Historically, chasing undervalued stocks has been risky, as valuation gaps often exist for a reason.