“The Under-$3.00 Restaurant Stock that Could Be the Next MCD or SBUX”

By Travis Johnson, Stock Gumshoe, December 22, 2015

Yes, that’s not my headline — I borrowed it from the ad I was asked to look at, the “special presentation for fast-moving readers” from Agora Financial’s Microcap Millionaires.

The other possible headline would have been, also from the ad, “This Tiny Company Could Be The Next Household-Name Mega-Brand.” So you see, that’s not much less inflammatory.

But you get the point: Thompson Clark of Microcap Millionaires is fishing for new subscribers, and he’s using the “$3 could be a distant memory” pitch as bait. So we thought we’d try to identify the stock for you (without, you know, actually subscribing — that would be cheating, and it would also cost $2,500).

And I have to warn you: This probably isn’t going to be a 100% certain match — Clark was a little parsimonious with the clues, so our Thinkolator came up with a solid match… but maybe not the right one. Most of the time, we have 100% certainty of our teaser solutions, so it’s always a bit frustrating when we can’t get there…. but, well, sometimes perfection is elusive.

Here’s the pitch that got our readers’ attention:

“As we speak a tiny Canada-based company is rapidly becoming what could be one of the biggest wealth creation opportunities since McDonald’s or Starbucks.

“The company has only been public for a few years but already has over 300 stores spread all across Canada. But growth is just the tip of the iceberg…

“The company also has a new, hard-charging CEO and an ingenious strategy for more expansion… but the market hasn’t caught up yet.

“That’s the heart of your opportunity.”

So… “over 300 stores” … “restaurant stock” … “under $3” … “new, hard-charging CEO” … anything else for the Thinkolator?

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Well, not really… but here’s a wee bit more from the pitch that might help a little:

“By my conservative estimates, I calculate this company could easily rise from the sub-$3 level it’s at right now, to at least $7.50 a share as early as the next earnings report.

“That’s because even a reasonable multiple of predicted earnings puts the value of the company at well north of $7.00 a share… making today’s price an absolute steal, even if it doesn’t rise to the extraordinary McDonalds and Starbucks level gains just yet.”

So who is it? Well, as noted the Thinkolator does not have a 100% match… but the best answer we’ve got so far is: Second Cup Coffee (SCU.TO, SCUPF OTC in the US)

There are other possible matches for those clues, which is why we’re not 100% — Imvescor Restaurant Group (IRG in Toronto, IRGIF OTC in the US), for example, ticks most of those boxes as well, but Second Cup is a better match… and it also had a spike in volume on Friday after Clark’s reported release of this info to his subscribers, and a further climb Monday after those subscribers had a chance to digest it over the weekend.

Clark said he’d be releasing this to his subscribers during the day on Friday, and as of now the stock is up 18% since the Thursday close without any actual news… which is about what you’d expect to have happen to a microcap stock that gets picked by a newsletter. The shares also had a big spike up in trading volume right at Noon on Friday, which is when Clark said his “alert” would “go live.” Still, there are many days when only a few thousand dollars worth of SCU shares exchange hands, and some days it doesn’t trade at all, so there remains a chance that it could have been something else bumping up the shares over the last couple days. Doesn’t take much with a company this small.

The Second Cup is not a new company, it was started as a single specialty coffee store about 40 years ago, and expanded pretty rapidly in the 1980s and 1990s… 20 years ago, they were of comparable size to Starbucks (between 100-200 stores each), and they’ve been through several transitions over the past decade but have stayed fairly steady with about 300-350 stores for most of the past several years and, from what I can tell, have been fairly moribund as a no-growth or low-growth chain for years.

They’ve been bounced around to different owners, spent a few years as an income trust and as a subsidiary of Cara (CAO.TO, they franchise a bunch of different Canadian restaurants), and then again became a publicly traded corporation when they did their trust conversion back in 2011, which could fit under a liberal interpretations of “only been public for a few years.”

Now they’re the decided underdog, of course, since everyone is the underdog compared to Starbucks (there are almost 1,400 Starbucks locations just in Canada now).

They are not growing rapidly, and they are not profitable at the moment… but they are being pushed to reinvent themselves by their new(ish) CEO, Alix Box, who was interviewed by the Star about the process back in August. It’s an interesting story, trying to revamp a fairly tired chain and get your franchisees to reinvest in a big upgrade to become a higher-end coffee shop instead of competing with the high-volume Starbucks, McCafe or Tim Horton’s… and I can’t say that I have any idea how the story will play out, but I’m fairly confident that this is the stock being pitched by Thompson Clark.

I haven’t seen any analyst estimates for Second Cup earnings, nor have I seen forecasts from the company about what their earnings might be. I don’t know where Clark is getting his $7+ valuation target from, but the stock last traded in that neighborhood a little over three years ago, before they cut the dividend (they did away with the dividend entirely a year and a half ago, which also didn’t help the shares much).

The company is almost absurdly tiny, with a market cap of just $40 million (and that’s Canadian — so it’s about US$30 million), the stock is most likely very illiquid, and it certainly qualifies under Clark’s “Microcap” moniker. They’ve posted big revenue growth recently, for the first time in a long time, but that’s not necessarily good news just yet — it seems like they mostly increased revenue because they bought stores back from their franchisees (which means that they book the whole revenue from the cafe, and all the costs of the cafe, instead of just booking the high-margin royalty fees like they do for franchised stores).

The only thing that stands out to me as a reason for possible optimism is their reorganization and revamp of the stores (they’ve so far “upgraded” one store as a model for this new higher-end cafe, in Toronto, and it’s apparently doing well — they’d like to do more than half the stores over the next few years) is expected to coincide with re-franchising a lot of those corporate-owned stores and getting back to an “asset light” model where they primarily supply the coffee and other materials, manage the brand, and collect royalties instead of taking on the heavy overhead of owning, staffing, managing and operating the cafes.

According to their most recent quarterly filing they appear to be in somewhat reasonable shape on the balance sheet, with about $9 million in cash and $11 million in long-term debt… but that also is an area of concern, since they recently exceeded their debt covenants and the long-term debt matures next September (they do have an agreement with the lender, apparently, so I guess it’s not a crisis issue).

The company just last week paid off almost half of that debt, they reported, and they also shared some optimistic comments about their pace of “re-franchising” the cafes, so perhaps that’s what caught Thompson Clark’s attention — here’s what the press release said on December 15:

“The Second Cup Ltd. (SCU.TO) has repaid $5 million of term debt. The payment reduces term debt to $6 million from $11 million and over $200,000 annual reduction of net interest expense

‘Second Cup Ltd. used strong cash balances to repay $5 million of term debt,’ said Barbara Mallon, Vice President of Finance and CFO. ‘We are pleased with the progress we are gaining in refranchising cafes to high caliber franchisees, ultimately returning the company to an asset light model. Our new capital structure gives us tremendous liquidity and flexibility to support our ongoing transformation and strategic plan.'”

I do not understand the full story, to be sure, and I had never heard of the company at all until about three hours ago, but my quick reaction to browsing the filings and reading a couple articles is that they probably need to get their house in order fairly soon so they can refinance the rest of that debt at a reasonable rate. Repaying half the debt certainly ought to help, but they don’t get to use that cash balance more than once so progress has to continue.

From what I can tell, they got out of compliance with the debt covenants because they must have spent a fair amount of cash buying back stores from their franchisees, presumably because they wanted those franchisees out as part of their strategy of revamping and upgrading the brand — so I’d guess that a lot of their future rides on whether they can take that new, larger base of company-owned stores, sparkle them up, and sell or partner them with much stronger operators, and do so fairly quickly. That press release has some optimism in it, to be sure, but, well, it’s a press release — it’s supposed to convey optimism. If their refranchising works, that’s perhaps an influx of cash and maybe even a return to profits fairly quickly… but I don’t know what the odds are of it working, what the terms of their new franchising deals might be, or how strong the brand or the revamped offerings of the company will be (and whether they’ll resonate with Canadian consumers).

So that’s about as far as I can take you — sound like an appealing microcap idea to you? Let us know with a comment below.

And do keep in mind that Thompson Clark might have up to 1,000 or so subscribers, and most of my articles get more readers than that, so if the idea appeals you might find that the price is nicer someday in a few weeks when the stock isn’t getting this kind of attention.


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Chuck P
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Chuck P

What sets them “apart” from all the others????????????? In todays world you have to have something “special” or you end up being another “wantabee”.

Robert
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Robert

Thanks, as always, Travis. You’re the best. Merry Christmas!

Rusty Brown in Canada
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Rusty Brown in Canada

There’s a remarkable backstory to Second Cup that is rather well-known here in my part of the world… “When Frank O’Dea first started looking for work in Toronto after years of being a homeless panhandler, he didn’t feel like he had much to offer. “I had no cellphone, no address and the top of my resume was panhandling — not a lot of folks looking for that sort of thing,” …”But I knocked on doors until somebody said, ‘Hey, I think you’d be a good salesman.’ And that was the beginning and everything changed.” O’Dea eventually became a celebrated businessman,… Read more »

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(please do not post my name)
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(please do not post my name)

One problem: I do not trust Agora nor its subsidiary Stansberry research. I do not know about this particular author. Thompson Clark. Stansberry publishes conflicting research so they can always claim someone was right there….LOL…I really do not trust them.

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dcohn
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Stansberry I feel has a pretty good track record. They are telling people to get out of stocks in one newsletter while and their Daily Wealth guy believes there is another 18 months left in the Bull market as he calls this. I like them as they seem to be honest and I believe a lot of people that pay for their high end products which are only being sold as lifetime now do as well. I also like the Bill Bonner letter. It is odd that Agora seems to be related to many of the current publishers though. Oxford,… Read more »

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Lulu
Member
👍1298

Rusty…..There are over 14 coffee stops; equal to the amount local pubs (13) within 3 blocks of my condo. I could never understand how they all made a living and what the draw was. Two days ago I met a friend for a Christmas coffee. It just just shy of $5 with a shot of peppermint flavouring. Holy crap. Now I pay attention to these coffee places, their signature coffee cups as well and I see $$$$. Tim Hortons, Starbucks, Second Cup and about 10 other ‘non-franchise’ places to buy coffee. Even a small cinnamon bun was $4. Perhaps there… Read more »

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who noze
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neither do i

who noze
Guest

let me wish you the joys of the season its ben a real pleasure reading your articles over the years

who noze
Guest

as a matter of opinion in terms of an inversion such as pfe W//allergen wud the tax consequence be the same if allergen took over pfe

Mick
Guest
Mick

Travis, I live in Toronto and I can tell you that Tim Horton’s would be a better pick than Second Cup. They have a line-up every single day at many of their locations.

Rusty Brown in Canada
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Rusty Brown in Canada

Maybe they just have slower service, or maybe the whole process is slowed down by customers such as myself refusing to move along until they actually provide the items I ordered and had already paid for.
There! I feel better now.

John gallo
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John gallo

Tim Hortons came to our area a few years ago. It was step up from the coffee we use to have, but it is mediocre at best and not great coffee. Actually. Most people like Mc Donald’s better,if that is saying anything, Travis, thanks for great year of articles and due diligence.. I always go away learning something and now stay away from most of these grab your $ and give you reckless choices of stocks. By the way New York Times may see a turn around Down the road as stock. I touted AnVex at .17. It went to… Read more »

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Dennis
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Dennis

I live in Michigan and we have Tim Hortons everywhere. They are like gas stations. What really amazes me is that they all seem to have long lines. I do not see any closing, but I do see them opening new locations.

Lulu
Member
👍1298

Tim Hortons is reasonably priced, and the drive through is fairly fast. I think people get hooked on the fancy coffee sugars…what else cud it be to sit in aline up for ‘a coffee’?

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William
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William

McDonalds and Tim Hortons serve a similar customer base. The higher-end coffee places actually benefit from places like McDonalds serving better coffee because it exposes more people to the idea that “just a cup of coffee” can be something much more enjoyable.

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frank
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frank

A couple of decades or more ago Second Cup was big in large cities like Toronto, and unfortunately they just let Starbucks roll over them. Coffee is good, but MCD has a total turnaround in coffee quality and is a now a big competitor in that business. I like Second Cup but don’t see how they can succeed in this crowded competitive market.

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maverick Jr. III
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maverick Jr. III

I don’t run with the herd. I buy a whole can of coffee at the dollar store @ 5-6$. What does that make, like 15- 20 pots of coffee. I have never bought a starbucks or etc. and never will. I grew up with 15-25 cent coffee & refills.

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Lulu
Member
👍1298

A maverick never does run with the herd…..a friend of mine considers himself a maverick, so much so, he had it tattooed on his arm. The tattoo artist formed fancy letters and didn’t dot the eye so it actually looks like maverduck….quite funny but I must remember to refrain from laughing when I see it. A dot would fix it. My friend is one stubborn maverick.

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ohio dave
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ohio dave

Hey lulu….seems your friend is a bit of an oxymoron…he’s marching right in line with the tattoo fad which makes him just like the rest of the crowd. I predict in another 10 years that I’ll be the only adult in North America without a tattoo

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olwreckdiver
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olwreckdiver

If you want the truth about tattoos – just look at an older man or woman – their tats look like s—.

who noze
Guest

the human body is suposed to be unadorned as per certain religions