Usually when you hear “little-known Canadian stock” you think, “hey, that’s probably some miner lying about their assay samples out of a storefront office in Vancouver” … but this one’s a little different.
To start with, it’s not a mining stock, and has nothing to do with gold or tar sands or pipelines or any of the stuff most investors think about with regards to Canadian investments (though yes, there are plenty of big mainstream Canadian companies, that are global competitors in other businesses). This is a pick from the folks at Motley Fool Canada, and it’s some kind of restaurant company.
No, it’s not Tim Horton’s (THI) — that would be too convenient after yesterday’s look at Dunkin’ Donuts. But DNKN was pitched as Ian Wyatt’s “Top Stock for March 2014” … so maybe we can set up a little cage match between that pick and whatever one turns out to be teased here by Motley Fool Canada.
What’s Motley Fool Canada, you say? Well, like some of the other big newsletter publishers, notably Agora (with their Fleet Street Publications in London and South Africa, and Port Philip Publishing in Australia), the Fool is reaching out its tentacles around the globe. They have semi-independent websites in most of the large English-language countries, including fairly new ones in Australia and Canada and a longstanding partnership in the UK, and in recent years they’ve started to launch premium newsletters in those countries as well, sometimes staffed by folks who sound familiar from their time writing for the Fool here in the US (the latest one seems to be Motley Fool Singapore, which has just a couple writers and no premium newsletters yet). The letters borrow their marketing chops from the American mothership, with local twists — Motley Fool Canada’s stuff so far seems almost identical in structure and tone to the US Motley Fool teaser ad letters, though Australia and the UK seem to be a little more restrained … teaser pitches must get more regulatory scrutiny (or different scrutiny, at least) in those countries.
The letter they’re pitching today is Stock Advisor Canada, which presumably is expected to follow in the footsteps of David and Tom Gardner’s flagship Stock Advisor newsletter, which has been around for about a dozen years and which we’ve probably covered more than any other single newsletter here at Stock Gumshoe.
(Stock Gumshoe, in case you’re wondering, has just had its seventh birthday… it’s OK, no one else sent a card, either — and the first article I wrote about the Fool was published exactly seven years ago today. Incidentally, of the 15 or 20 stocks I pulled out of the Thinkolator in those first two weeks there have been four that disappeared completely or went bankrupt and several others that are down 90%+ in seven years. Whole Foods Market (WFM), that first Stock Advisor teaser pick I covered, has more than doubled since then — so it’s one of the better ones from those early months, but is well short of the 2,400% gain in Netflix from when the Fool brothers started teasing that rocket a few months later.)
But I’ve gone off the track a bit — what was it we were looking for? Oh, yes, that super secret Canadian stock being teased by Iain Butler for Stock Advisor Canada … let’s jump right into the clues now:
“In just a moment, I’ll discuss what I believe is one of the best opportunities for Canadian investors this year — a rapidly expanding franchise company with the potential to make you a small fortune.
“The Canadian company I’m talking about has outperformed Starbucks by more than 10 times over the past decade! It’s already seen the value of its stock skyrocket from 65 cents a share in 2004… to $5 a share in 2008… to a high of $32 today – an eye-popping 4,800% gain in less than 10 years…
“The company I’m talking about is cashing in on the craze for “Quick Service Restaurants” (QSR) here in Canada—the franchise trend that has already built a $21.7 billion industry just in Canada alone.”
So that gives us a few ideas, but it’s not specific enough for a real answer … yet.
Back we go into the ad, digging for more clues:
“In each decade, North America consumers have latched onto a fast-food craze and made early investors rich as Midas.
“And each time, investors who spotted these trends and took decisive action made a killing….
“Now, a new trend is gripping the QSR industry: The development of quality ethnic restaurants selling delicious Chinese, Japanese, Italian, Jamaican, Indian, and other types of cuisine.
“Each of these new chains are growing into colossal, multi-million dollar micro industries, with early adopters invariably grabbing the biggest gains….
“Not every stock will take off. But smart QSR executives—like the ones that run the company that I’m talking about—could have years of sustained growth ahead of them….
“The company franchises… and, in a few cases, operates, myriad quick-service restaurant brands in nontraditional locations throughout Canada: food courts, shopping malls, gas stations, convenience stores, movie theatres, or amusement parks.
“It franchises more than 2,500 niche restaurants (under a total of some 26 “banners”) with annual revenues of $100 million. The company has grown both through developing original concepts—often “ethnic” cuisines such as Chinese, Japanese, Korean, and Indian—and through acquisition of chains/brands over time.”
So this is primarily a franchising company, which is generally a good thing if you’re looking for rapid growth without much capital required (though operating controls sometimes become an issue, which is why management and franchisee conformity ends up being very important) … here’s a bit more from the ad:
“Each week/month, the legion of franchised stores (over 2,500 strong) all send their royalty cheques to the company’s headquarters.
“In addition, this rapidly growing conglomerate collects franchise fees from new operators, sells goods and services to franchisees, owns a food processing business that sells to distributors/retailers, and runs a small distribution center business predominantly selling to a couple of the franchisees.”
Then we get to Butler’s future forecast, which is where we’re supposed to start drooling:
“I believe there are still worlds to conquer for this company within Canada and that we could see 4,000 domestic stores in the next decade (requiring only 5% annual store growth) from a combination of concept build-out and additional acquisitions.
“This growth will add considerably to the firm’s bottom line given the high-margin model under which it operates, thus leading to the sizeable gains that we foresee. Thanks to its unique model, it’s already up 4,800% in the past decade alone.
“This return could pale in comparison to the next 10 years, especially if this firm becomes the target of a buyout….”
So … that should be enough, right? I am, frankly, relieved that regulations do not require me to post the answer in both English and French, but I can tell you that the Thinkolator/Thinkolateur answered quite quickly and firmly … this is MTY Group (MTY in Toronto, MTYFF on the pink sheets — there is almost no trading on the pink sheets for this one).
MTY Group is still a small cap stock, with a market capitalization near $600 million, but they’ve been around for decades as CEO Stanley Ma steadily built an under-the-radar empire of food court brands, starting from a base of a few asian-themed restaurants in Quebec led by Tiki Ming and expanding both geographically (still mostly in Atlantic Canada, where the people are) and thematically, with now 26 brands focused on Italian, Chinese, Vietnamese, Thai, Korean, Tex-Mex, Greek, and Indian food as well as coffeeshops, bakeries, and sub, hot dog and frozen yogurt shops. It’s a little hard to get y our head around so many brands spread among so few locations — many of the brands, both those they’ve bought during decades of roll-up acquisition, have only 15-20 locations (about a dozen of their brands were developed in house, the rest were acquisitions of either companies or master franchise agreements for Canada).
I like the model, it’s very appealing to have centralized management and distribution for lots of different brands, and they do have their own food processing plant and distribution company in Quebec that can serve at least the core of the company. It’s also very much mall-reliant, and is also pretty expensive, the shares in the low-$30s are within 10-20% of analyst targets, and they just did their largest acquisition, of Extreme Pita, last year for about $45 million, a significant tentpole because it gives them the entree into the US market that they’ve apparently long coveted. So they still have their eye on growth, and it’s still really about continuing to expand the depth and the breadth of their network to keep royalty fees rolling in — these are small stores, on average. If you divide the revenue for the network by the number of stores you’ll see that each location brings in an average of less than $300,000 a year in revenue. Not gross profit or operating income, but actual sales, so these are (as anyone who has ever run a mall kiosk or food court shop knows) stores that operate on thin margins and with heavy competition.
If you’d like to learn a bit more about the company the 2013 Annual Report is here — what you’ll see is that it’s a nice, high margin business because it’s reliant on franchise fees and royalties, the franchise fees roll in with a gross margin of about 50% (meaning, for each dollar of fees and royalties from franchisees the parent spend about 50 cents on promotion or maintaining the restaurant network), but the few company owned stores, the distribution company and the food processing either lose money or generate single-digit profit margins. So growing the network is the name of the game.
Will they keep it up? Well, I had never heard of the company before today but it looks like it’s one of the more respected small cap stocks in Canada and they’ve certainly had a good run over the last decade with the stock rising by some 8,000% since the early 2000s — it’s priced for growth, but it has been growing despite often weak same store sales numbers, so you can make the call for yourself about whether the price is right. Let us know what you think with a comment below.