Louisana Kitchen Inc. Case Summary

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Continued Expansion to Drive Popeyes’ Profitability

Paul Sonkin, a famed value investor and portfolio manager of Gabelli Funds screens 52-week low lists to find the next blockbuster stock. The strategy works since the market has knee-jerk reactions on latest developments of a certain company, resulting in an artificially low stock price.

Of course, the investor needs to do some due diligence before acquiring some shares to avoid catching falling knives. Generally, the “bottom-fishing” strategy through these lists has been proven profitable venture for some investors.

Popeyes Louisana Kitchen Inc. (NASDAQ: PLKI) appeared on the 52-week low list over a couple of weeks ago. The stock reached a low of $49.99 in March. PLKI is a company that
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Management has already established their track record of achieving these goals and it would not come as surprise if they could easily meet these targets.

Valuation
Based on the price earnings ratio, it appears that PLKI is relatively expensive over its peers. However, PLKI commands better returns since equity levels would be lower since the company is asset-light based on its “franchise” model. Further, its valuation is somewhat similar to Mcdonald’s Inc. since both companies have similar business model.

At these valuation levels, the market is discounting that PLKI will post double-digit net profitability in the coming fiscal years. As such, any hint that the company would not be able to meet these expectations would result in sell-off of its shares.

Conclusion
The share price seems pricey at these levels, although investor should take into consideration that P/E multiples will compress as soon as net profitability continues to grow by around 13% to 15% a year. It is advised to gradually build the position over a period of time

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