Fool’s “Next Great Canadian Superbrand” Revealed

What's the "hidden brand" with the "incredible growth story" being pitched by Motley Fool Canada?

By Travis Johnson, Stock Gumshoe, June 27, 2017

I’ve got a soft spot in my heart (or maybe my head, depends who you ask) for the Motley Fool’s old “Superbrand” ads — one of the very first teaser pitches I covered when I started this website in the Spring of 2007 was the Gardner brothers’ teaser for the “New American Superbrand”.

That ad was at least a few months old even back then, and the pitch was for Whole Foods (WFM, though it was WFMI back then)… a stock that they kept recommending with similar ads for years (2008, 2009 and 2013, for example). Turned out OK for them heading into Amazon’s $42 takeover bid for that “superbrand” grocer, unless you happen to be one of the folks who bought when it was loved at $40 instead of when it was feared at $20.

But anyway, that’s why my ears perked up when I heard the Motley Fool folks peddling a “superbrand” stock again… so what is it this time?

This time it’s not Dave and Tom Gardner, it’s their scions to the north at Motley Fool Canada, with the letter signed by Iain Butler and pitching us to sign up for Stock Advisor Canada and they’re pitching “The next great Canadian Superbrand.” Here’s how the ad gets us interested…

“Chances are, you’ve never heard of this stock. And we think that’s a distinct advantage for you…

“With over 5,600 locations, spread across 27 different countries, and with over a billion dollars in sales, you’d think this “Next Canadian Superbrand” would already be a household name.

“And considering this company generates over 70% of its revenue in Canada, you’d think the name of this company would be on the tip of every Canadian’s tongue… if not already in their brokerage accounts!

“Yet nobody is walking around talking about this company or its extensive suite of ‘brands.'”

They say that this brand is “hidden in plain sight”, and has already risen 170% in five years… including a 50% rise since they first recommended it to their subscribers.

So what else are we told that helps us to narrow down the list of candidates? Here are some clues…

“… the new ‘HIDDEN BRAND’ made the decision NOT to follow an industry practice of operating all of its stores itself….

“Instead, it’s aggressively buying businesses that it likes — and then franchising the opportunities to other businessmen. Then, it uses its expertise and its historical knowledge to help those businessmen succeed in exchange for a steady stream of royalty payments. The company is capital-light because of this model and harvests cash – tons and tons of cash….

“… gross margins at this company have gone from 73% in 2008… to over 82% in 2016.

“In essence – the new ‘HIDDEN BRAND’ is using – in tandem – two of the secrets that built Wal-Mart and Starbucks… serve your customers what they want, and make it convenient… and you can charge a price that will make shareholders happy. And with gross margins that high, and with the economies of scale that this company has – it’s not hard to see why it’s been one of the most successful companies in Canada (by share appreciation) in the last decade alone…”

And apparently this company is constantly growing…

“… this company made THREE strategic acquisitions thus far in 2017 alone….”

So who is it?

This is, sez the Thinkolator, Canadian quick-service restaurant conglomerate MTY Food Group (MTY in Toronto, MTYFF OTC in the US).

The Canadian Fools have liked this one for a long time — it was one of the first stocks teased by Stock Advisor Canada when that service was just a baby, back in 2014. I even said some nice things about the stock at the time, though I never ended up buying shares — it was pretty flat for a couple years following that teaser campaign, but took off in the Spring of 2016 and made a pretty quick run from $30 to $50 a share, dipping back down a bit in the past few months to 45.

So what does it look like now? Well, back in 2014 MTY was really just a Canadian company, very reliant on a handful of mostly asian-themed quick service restaurants and mall food court-type brands that were doing well but didn’t necessarily have a lot of brand power and their presence outside of Canada was fairly limited (though they had some success in the US, and pockets of strength in the Middle East). More recently, they’ve been expanding aggressively into the U.S., particularly through the acquisition last Summer of Kahala Brands, and that’s really what got the shares climbing a year ago.

Kahala gives them a real presence in the US, including US management and a foothold for investing more aggressively in growth on this side of the border for their Canadian brands like Country Style donuts and Extreme Pita… along with new Kahala brands for MTY to grow like Cold Stone Creamery, Pinkberry and, after another acquisition last Fall, Baja Fresh.

So the growth story seems a bit reinvigorated by this acquisition, and the hope is that MTY can keep its disciplined expansion going in the US by adding lots more franchise partners and building up the store count aggressively without risking a lot of capital. The stock has not been soaring in recent months, perhaps because the last quarterly report was a little bit hairy and included some foreign exchange losses and a fall in same-store sales, which they blame entirely on softness in the Alberta and Saskatchewan markets.

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