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Which shares should you buy: Collins Foods Ltd or Domino’s Pizza Enterprises Ltd?

James Mickleboro | May 29, 2017 | More on: CKF DMP

It hasn’t been a great start to the week for a couple of Australia’s leading fast food operators.
At the time of writing the Collins Foods Ltd (ASX: CKF) share price is down 2% to $5.08 and the Domino’s Pizza Enterprises Ltd. (ASX: DMP) share price has fallen 3.5% to $59.60.
What happened?

Domino’s Pizza’s shares have tumbled today following the release of a broker note from Morgans. According to the note, its analysts have downgraded Domino’s shares from an add to a hold rating and cut their price target from $82.38 to $65.62.

Although the broker expects the acquisition of Bain Capital’s 25% stake in Domino’s Japan to be accretive to earnings, it expects lower same-store sales growth and FX impacts to result in slower-than-expected earnings growth.

Whilst there was no news out of Collins Food, I suspect investors expect Collins Food to be impacted by similar headwinds.

Is this a buying opportunity?
I think it is. Whilst I think both shares could prove to be great buy and hold investments today, I would choose Collins Food ahead of Domino’s.

In many respects Collins Food reminds me of Domino’s from a few years ago. It has just started to expand its KFC operation beyond Australia and into the lucrative European market.
I believe this will provide it with significant growth opportunities over the next few years, which is yet to be reflected in its share price.

At present Collins Food’s shares are changing hands at just under 14x trailing earnings and provide a trailing fully franked 3.1% dividend. Domino’s shares on the other hand trade at 45x trailing earnings and provide a fully franked 1.5% dividend.

Whilst I think both shares are likely to outperform the market in the long-term, my money is on Collins Food providing the greater gains.