A Member of Pat McKeough’s Inner Circle recently asked for his advice on a Philippines-based multinational company that operates fast-food restaurants. Now with 4,353 locations worldwide, it continues its push into international markets with large Filipino populations.

That strategy should help to reduce the sizable risk associated with the company’s growth-by-acquisition strategy, says Pat. Still, those risks remain.

Q: Hi, Pat. I was just in Vietnam and am happy to say I figured out how to cross the road safely in Saigon before my holiday ended. Could you tell me if we’re able to buy shares in Jollibee Foods Corp. from Canada, and whether it would be a good idea?

Jollibee Foods Corporation, (symbol JBFCF on the Nasdaq over-the-counter market www.jollibee.com.ph), is a multinational operator of fast-food restaurants based in the Philippines. The company’s main listing is on the Philippine Stock Exchange.

Jollibee began as a chain of 7 “Jollibee Yumburger” restaurants in Manila. Forty years later, Jollibee has a total network of 4,353 restaurants worldwide.

Of this total, 3,003 of these restaurants are located in the Philippines where Jollibee holds a market share larger than all other multinational brands combined. The company operates in the Philippines under the Jollibee (1,110), Chowking (551), Greenwich Pizza (279), Red Ribbon Bakery (446), Mang Inasal (518), and Burger King (98) brands. It also has one PHO24 restaurant.

From its secure earnings base in the Philippines, Jollibee has undertaken a strategy of aggressive international expansion through developing and opening its own locations but also through licensing arrangements and acquisitions.

Much of Jollibee’s expansion has been growth of its Philippine brands into new markets, first targeting markets with sizeable Filipino communities in Asia, the Middle East, and in the U.S. There are now 37 Jollibee brand restaurants in the U.S. and four in Canada.

The company plans to open 113 Jollibee locations in the U.S. and 100 in Canada over the next five years. Jollibee attracted long lines of customers when it entered the Canadian market in 2016 with two Winnipeg locations (Winnipeg has over 70,000 Filipinos). Crowds also greeted the more-recent Ontario openings in Scarborough and Mississauga. The company aims to expand further in that province, but is also exploring stores in Edmonton, Calgary and Vancouver. Its aggressive expansion comes as international interest in Filipino food continues to rise and as Canada attracts more and more restaurants serving such food. Jollibee’s Filipino fare includes spaghetti in a sweet sauce, crispy chicken, burgers and peach mango pies.

While the company has focused on expanding the Jollibee brand, it has also opened restaurants under license with established brands. That includes operating Burger King restaurants in the Philippines and Dunkin’ Donuts in China.

Growth Stocks: International growth by acquisition includes new brands

Jollibee keeps acquiring new brands. To establish itself in the China market, it purchased Yonghe King in 2004 and Hong Zhuang Yuan in 2008. In 2012, the company acquired 50% of SuperFoods, which own Highlands Coffee and PHO24 in Vietnam and Indonesia. In 2017, Jollibee acquired a further 10% interest in SuperFoods. In 2016, it bought Mang Inasal, a barbeque restaurant chain in the Philippines, for $100 million U.S. In February 2018, Jollibee announced the acquisition of Smashburger, an American chain of fast casual restaurants selling burgers, for $100 million U.S.

Outside of the Philippines, Jollibee now operates 1,350 restaurants, including 435 in North America (Jollibee, Red Ribbon, ChowKing, and Smashburger) and 370 in China (Yonghe King, Hong Zhuang Yuan, and Dunkin’ Donuts).

In 2018 Jollibee opened 302 restaurants, 177 in the Philippines and 125 abroad, including its first restaurants in Italy, Macau, and the U.K.

Thanks to the company’s aggressive expansion, over the last five years, its revenue has steadily increased 63.9%, from 80.3 billion Philippine Pesos, or PHP ($1.5 billion U.S.), in 2013 to 131.6 billion PHP ($2.5 billion U.S.) in 2017 (2014: 90.7 billion PHP; 2015: 100.8 billion PHP; 2016: 113.8 billion PHP).

Earnings over the same period also rose 50.0% from 4.8 billion PHP ($90.9 million U.S.) in 2013 to 7.2 billion PHP ($136.4 million U.S.) in 2017.

On a per-share basis, earnings increased 48.9%, from 4.36 PHP ($0.08 U.S.) per share in 2013 to 6.49 PHP ($0.12 U.S.) in 2017.

In the three months ended September 30, 2018, Jollibee’s sales rose 21.4%, to 39.7 billion PHP ($751.9 million U.S.), from 32.7 billion PHP ($619.4 million U.S.) a year earlier. Earnings rose 14.6%, to 1.88 billion PHP ($35.6 million) from 1.64 billion PHP ($31.1 million) a year earlier. On a per-share basis, earnings increased 24.7%, from 1.842 PHP ($0.035 U.S.) per share to 1.477 PHP ($0.028 U.S.).

On September 30, 2018, Jollibee held 25.1 billion PHP ($475.5 million U.S.) in cash and had long-term debt of 21.1 billion PHP ($399.7 million).

In 2018, Jollibee declared cash dividends for an annual rate of 2.48 PHP ($0.047 U.S.) per share. That’s up 13.7% from 2017 and makes for a yield of 0.81%.

Growth by acquisition add risk—as does trying to apply one successful business model to several foreign markets, each with its own nuances and challenges. This is especially true in the restaurant industry as local tastes do not always take to menus formulated for a different culture. However, the company’s focus on markets with a sizeable Filipino community cuts its risk. Jollibee also has a strong base in the Philippines, which has a stable and steadily growing economy. That gives it the cash flow to expand without taking on a lot of debt.

Jollibee Foods is okay for aggressive investors to hold.