This morning the high flying Famous Brands came out with a trading update leading up to its results for the 6 months ended 31 August 2012.
"Accordingly, shareholders are advised that the Group expects to report headline earnings per share (HEPS) and earnings per share (EPS) (calculated on an IFRS basis) of between 147 cents per share and 152 cents per share. This is an improvement on the prior year comparable HEPS and EPS of between 18% and 22%.
On a diluted basis, the Group expects to report diluted HEPS and diluted EPS of between 143 cents per share and 148 cents per share, an improvement of between 19% and 23%."
Now there is no doubt that this is a good company but is it a good investment at current prices? The stock has been a fantastic performer coming all the way from R13 in October 2008 to R72.50 today. Let's take the middle of the range diluted expectation of 146c and we can see that the stock looks expensive. Last year the company made 242c for the full year, 115c of that in the first half. The second half is usually better than the first because it includes the festive season. On that basis let's say they make 310c for the year. That means that the stock trades on a 23 forward PE.
As an investor is it worth paying 23 years worth of current earnings? According to Google Finance Yum! Brands, the $30bn global fast food franchiser with brands such as KFC and Pizza Hut trades on a PE of 21. McDonalds trades on a PE of 17. But Famous Brands is certainly growing faster than these two giants who also look quite expensive.
I have always maintained that I like the industry. It falls within our aspirational consumer theme as more and more people can afford the small luxury of fast food. The dynamics of the family set up also supports this model. As more women enter the jobs market you will find that demand for quick easy food will increase. I also like the Famous Brands franchise business model as they roll out their well known Brands to franchisees and take a fat stake of the profits.
On this basis as well as their potential to carry on opening stores here in SA and up into Africa I would still add to this stock. We will wait for the full report to get into more details about the business.