Lately I’ve been sleuthing for rational capital management. Impressed by FortuNet’s cash distribution (FNET), disappointed by Moody’s (NYSE:MCO) stagnant buyback plan, and annoyed by KSW’s passivity (NASDAQ:KSW), it is clear to me that rational management can be found in unlikely places, and that even the most virtuous can settle into vice (which in this case is sloth—sitting lazily on shareholders’ cash).
Reader Sam highlighted Rocky Mountain Chocolate Factory (NASDAQ:RMCF)—a franchiser and confectionary manufacturer with 334 stores (as of 2/29/08)—as an interesting wide moat business whose current market price resembles what Warren Buffett paid for See’s Candies, on a number of important metrics. And a quick glance at the recent 10-Ks and Qs depicts a management who has a habit of returning excess cash to shareholders—via dividends and share repurchases. In fact, on its $5.64 share price (as of 4/22/08), RMCF offers a 10 cent quarterly dividend, bringing the stock’s yield to over 7%.
Though the share repurchases seem to have stopped since February 2008 (filings reveal no share repurchases from March 2008-November 2008), management was an aggressive purchaser in better times. And their 10-K reveals their record:
...between January 9, 2008 and February 8, 2008, the Company repurchased 391,600 shares at an average price of $11.94. Between August 15, 2007 and August 28, 2007, the Company repurchased 16,000 shares at an average price of $15.96 per share. Between March 1, 2007 and May 15, 2007 the Company repurchased 76,335 shares at an average price of $13.12 per share. Between May 1, 2006 and February 28, 2007 the Company repurchased 253,141 shares at an average price of $12.94 per share. Between March 24, 2006 and April 28, 2006 the Company repurchased 74,249 shares at an average price of $14.90 per share. Between October 7, 2005 and February 3, 2006 the Company repurchased 185,429 Company shares at an average price of $14.6 3 per share. Between April 18 and April 20, 2005, the Company repurchased 18,529 Company shares at an average price of $13.28 per share.
All told, that amounts to over 1 million repurchased shares in a three year period, or about 14% of outstanding shares.
Over that same period, RMCF also paid out significant quarterly dividends. Combined with its share repurchases, shareholders basically saw 100% of RMCF’s FCF returned to them. Perhaps shareholders should rename them the Rocky Mountain Cash Factory. In fact, it would be hard to ask for much more as an owner; one would only wish that the school that teaches such value creation would open its enrollment to a few more students.
Perhaps in future posts, we’ll look more carefully at RMCF’s financials, and do a comparison with Buffett’s purchase of See’s Candies. But trading less than 9x FCF, and with a management that has demonstrated sound capital management, it certainly warrants that closer look.