Industry roll-ups often look good on paper. Rapid acquisitions that are earnings-per-share accretive can boost profits and enable capital raisings to buy more business.

Better still, earnings that were bought on private-sector valuation multiples (many industry roll-up plays buy smaller privately-owned firms) are suddenly valued on listed-company multiples, supercharging the roll-up’s valuation.

Some roll-ups try to grow too quickly. That is probably true of Retail Food Group, which has been hammered in the media this year after franchisee complaints. In the quest for growth, management of roll-ups, generally, can buy the wrong businesses or pay too much for them.

Industry roll-ups headlined the casualties’ list from this year’s interim profit-reporting season – an overlooked trend. Retail Food Group was thumped and so was IPH, an acquirer of intellectual property services firms.

Another high-flier, BWX, was belted as its earnings disappointed, perhaps unfairly so. The fast-growing cosmetics firm has been busy buying US skin, hair and body-care brands.

These companies are too diverse to draw definitive conclusions about industry roll-ups. But in a twitchy market that slaughters high-priced disappointments, roll-ups are easy targets to sell.

Not all roll-ups, of course, disappoint. Some have conservative growth strategies and benefit from acquisition. Even some bad roll-ups were terrific opportunities for active investors or traders on the way up as they gobbled up private businesses that were eager to sell when there were fewer buyers.

Long-term portfolio investors should take care with industry roll-ups. Growth through rapid acquisition of privately owned businesses does not last forever.

Here are three industry roll-ups to consider. Each has been under share price pressure this year, to a varying degree, and could remain so this year amid tough retail conditions. But each also has good long-term prospects and is approaching value territory after recent price falls.

1. MotorCycle Holdings (MTO)

The market could not get enough of the MotorCycle dealership when it listed on ASX through a $46-million float in April 2016 at $2 a share and peaked at $5.22 in November 2017. Investors loved its potential to grow through acquisition in the fragmented MotorCycle dealer market.

Share price gains quickly reversed when MotorCycle Holdings reported an interim profit result in February below market expectation and cited challenging market conditions. Like other auto retailers, MotorCycle Holdings faces weakening consumer demand for its product.

MotorCycle Holdings expects “subdued trading conditions” but still guided for growth in revenue and earnings this financial year, as recent acquisitions, notably its purchase of Cassons, come on line. The share price could remain under pressure this year, but value is returning.

MotorCycle Holdings has 28 dealerships, seven accessory stores and plenty of scope to acquire more and lift its 9.3% share of new MotorCycle sales. The MotorCycle industry has not had anywhere near the same level of consolidation as car dealerships, giving MotorCycle Holdings a valuable first-mover advantage to snap up smaller dealerships.

At $3.69, MotorCycle Holdings trades on a trailing price-earning (PE) ratio of about 15 times, which is not excessive for a company that is still reporting record growth in tough market conditions and can continue to grow by acquisitions.

Just a few months ago brokers were tipping MotorCycle Holdings to trade above $5 within 12 months. The outlook has since weakened but not by enough to justify the extent or speed of price falls.

Chart 1: MotorCycle Holdings (MTO)

Source: ASX

2. Greencross (GXL)

The veterinary business was an obvious contender for rationalisation and Greencross, an early industry roll-up play, led the way, becoming a fabled “ten bagger” at one point, when its share price soared tenfold to $10.78 in 2014. Greencross could do no wrong.

But the stock lost favour after management changes, the acquisition of the Petbarn retail chain and more recently because of concerns of online competition in pet products from Amazon.

Greencross has fallen from a 52-week high of $7.14 to $5.34, despite an interim result that was broadly in line with market expectation, in challenging retail conditions.

Prospective investors in Greencross need a long-term approach. The stock could continue to underperform this year amid sluggish retail sales growth, Amazon fears (overdone in my view) and as the co-location of its vet clinics and Petbarns weighs on profit margins.

But Greencross has attractive long-term tailwinds. As in other developed markets, Australians are spending more each year on pet health, insurance, and other services and products. The “humanisation of pets” trend has a long way to run as pet lovers pamper their pooches.

The integration of vet clinics and Petbarns is a smart move. Providing in-house vet services at Petbarns, and turning them into the “Bunnings of the pet industry”, creates a different consumer experience. Also, there are still plenty of vet clinics to acquire, albeit at higher prices, as more competition enters that market.

Macquarie has a $6 share price target for Greencross, and Morningstar’s fair value is $6.50. That suggests a sufficient margin of safety to consider Greencross at the current $5.34.

Investors looking for purer exposure to the vet-clinic consolidation theme should consider National Veterinary Care, another solid small-cap, industry roll-up in this space.

Chart 2: Greencross (GXL)

Source: ASX

3. Collins Food (CKF)

Investors could be forgiven for avoiding fast-food roll-ups at all costs. Retail Food Group is a recent disaster and Domino’s Pizza Enterprises, a former market darling, has slumped from its price high. Both companies have made big bets on acquisitions in recent years.

Collins Food is more conservative by comparison. It owns 223 KFC stores in Australia, 15 in Germany and 18 in The Netherlands. Collins Food also has 14 company-owned Sizzler stores in Australia and 73 franchised Sizzler outlets in Asia.

The European KFC acquisitions take Collins Foods into markets that have fewer fried-chicken outlets per capita compared to the United States. I like that Collins is focusing on its core strength in KFC and thinking globally through smaller, lower-risk bets.

The 33 European stores give Collins a good base to expand in those markets and nearby countries. Collins can grow organically and by acquisition in Europe. Collins has also been busy buying KFC outlets from Yum! Brands in South Australia and Western Australia.

I like KFC’s growth outlook. The chain is delivering reasonable growth in tough market conditions and continues to be a market leader in menu innovation. There’s potential for KFC to sell more product through smartphone Apps and home-delivery services.

In the longer term, population growth, increasing obesity, more people eating out or buying takeaway, and continued growth in chicken consumption, are solid trends for Collins Food.

An average share price target of $6.38, based on the consensus of six broking firms, suggests Collins Food is undervalued at the current $5.38. Broker targets range from $5.50 to $6.74.

The high target looks too bullish, but Collins Food can continue to grow by adding to its KFC stable in Australia, expanding overseas, improving the struggling Sizzler chain and attempting to build a local Taco Bell franchise (it has one store in Queensland).

Taco Bell, a popular franchise overseas, has failed twice in Australia, stretching back to the early 1980s. But this market’s greater acceptance of Tex-Mex cuisine, reflected in good growth from franchises such as Salsas Fresh Mex, Mad Mex and Guzman y Gomez, suggests Taco Bell has better prospects this time around. But it would be a tiny part of Collins’ earnings.

Chart 3: Collins Food (CKF)

Source: ASX

• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis at April 11, 2018

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.