There are certain points in some companies' operating lifespans that present investors with an opportunity for supernormal gains. The classic case is in biotech, taking a position before a successful FDA approval. Another classic is in the mining industry, taking a position before a successful drilling operation. One much less industry-specific point, but still as potentially rewarding, is taking a position just before a company nets its first profit. Recording a profit for the first time is a big deal for any company. Doing so is a vindication of a company's strategy that, in many cases, investors have speculated over during the pre-profit quarters. Indeed, reporting a first profit is more than a vindication for investors - it's a vindication of the company's very existence, that it is serving a real need in the economy. This only happens about 25% of the time, as 3 out of 4 companies fail before booking any profits.
Investing in a company before it sees any profit is risky, but there are some signs one can look for to limit that risk and still reap the gains. Among the most important are shrinking losses coupled with rapid expansion, both in capital and personnel. One company doing just this that could be on the verge of reporting its very first profit in the next quarter or two is Chanticleer Holdings (HOTR). Chanticleer is an owner/operator of a number of international Hooters restaurants. Analysis of Chanticleer has been pretty detailed in the past and has focused on its capital expansion of late, and so rather than repeat what has already been addressed, this article will focus on something slightly different: personnel expansion. The talent acquisition Chanticleer has recently embarked on could complement its large capital expansion over the past few months and move it into profitability. Doubling the size of a company is usually not a good move without acquiring the personnel that can manage such a large growth spurt.
On October 29, Chanticleer announced the appointment of Richard Adams as Chief Operating Officer of its newly acquired subsidiary, American Roadside Burgers. Prior to his appointment, Adams served as Regional Vice President at the quick-serve chicken restaurant chain Bojangles Restaurants Inc., a 38-year old private company. In this role he oversaw the operations of more than 550 US-based locations, and three international locations. His resume also includes regional vice president for CKE Restaurants and an area VP role leading 100 Burger Kings in Louisiana.
So what does Mr. Adams bring to the table at Chanticleer? As mentioned, the company has recently acquired the relatively small-scale quick serve burger chain, American Roadside Burgers comprising five locations. The assumption is that while Chanticleer focuses on Hooters internationally, it is looking initially to expand its domestic offerings in the US. Adams' experience should serve to facilitate this expansion, which in turn should serve to improve Chanticleer's bottom line. In addition to domestic growth, while at Bojangles, Adams oversaw the opening of restaurants in Mexico, Honduras and China. With Chanticleer CEO Mike Pruitt stating that he eventually plans to take the American Roadside Burgers brand international, in the same fashion as he has that of Hooters, this experience will likely play a vital role in doing so.
Earlier this month, in an announcement that straddled the American Roadside Burgers acquisition announcement, the company also reported the appointment of Thomas Lewison as a board member and strategic advisor to Chanticleer. Mr. Lewison already serves as a director of American Roadside Burgers and, as with Mr. Adams, brings a huge amount of industry-specific experience to the table. He is a franchisee of 23 Qdoba Mexican Grill restaurants, the second largest Mexican restaurant chain behind Chipotle, and a co-owner of 20/20 Restaurant Group, a consulting service for the restaurant industry. He is well known at Bojangles where he was COO during the company's record setting sales year in 2006 of half a billion dollars, after which the owners cashed out handsomely in 2007 and sold a controlling interest to a private equity firm.
Bridging the gap
One of the things recent articles covering Chanticleer have been focusing on is the steps that the company is taking to "bridge the gap" between its current position and profitability. Though Pruitt has pinned the profitability number at 10-12 locations, he has not yet commented on the financial ramifications of the company's latest acquisitions, and American Roadside Burger's financials have so far been kept out of the public domain. This will all change of course, when Chanticleer releases its latest earnings on December 16. The five American Roadside Burger locations, coupled with the acquisition of the $4M revenue a year Hooters Nottingham in the UK, should improve Chanticleer's bottom line, and in doing so will likely draw investors' attention towards the company. In any case, Tuesday, December 17th will be a big day for HOTR investors.
Technical analysis for HOTR boils down to this: The stock has been trading in a $4.20 - $5.30 range for 3 months. If earnings on December 17 are impressive, HOTR could break out to around $7 or more. If they are not, the range will probably break down to the pre-July breakout of around $2.50. This is essentially your risk/return on Chanticleer. If you want in for the move, a position by early December is advisable.
For those not yet familiar with the company, here is a quick run-down of its financials to date. During the three months ended June 30, Chanticleer reported a little over $1.6M revenues, approximately $2.3M operating expenses, and a net loss just over $700,000, or $0.19 a share. Operating loss has shrunk 25% since Q3 2012 with net loss shrinking slightly as well but holding basically steady. Close to $3M in cash (this does not include recent financings that have not been incorporated into its balance sheet yet) and $641K in debt on its balance sheet and retained losses of $10.7M, but these numbers will all change dramatically come December. Exactly how they will change is the big question, because if they don't change for the better in a very obvious way, Chanticleer will be in real danger.
One of the most appealing things about Chanticleer stock is the company's potential for growth. It currently has five locations in South Africa, which it expects to grow to 20 if all goes well. Pruitt's numbers are arguably overly optimistic and should be taken with a grain of salt, but he sees a potential for 40 locations in Brazil, 15 in Europe and 15 in Australia. While this vast expansion is unlikely to take place any time soon, Pruitt has stated that this is his grand vision for the Chanticleer driven international Hooters brand over the next 15-20 years. With a potential 75+ Hooters locations in the pipeline, the pending internationalization of American Roadside Burgers, and only 2-3 more locations required to reach profitability, Chanticleer could be a great long term holding for investors looking to get in at this early stage in its development.
A quick note on risk
It is worth mentioning that Chanticleer is a micro-cap stock, with a tiny market capitalization of around $20M. The company has taken a considerable step towards success in the past year, and the market has recognized this in its share price, but this is no indication of future performance. It is not yet making a profit and, as many investors who have allocated capital to in the micro-cap space will accede, might never do so. This is precisely why December will be such a crucial month and will likely permanently reprice HOTR in one of two directions.
While Chanticleer might not offer the short-term profit potential of the development stage biotech I mentioned in this article's introduction, its stock has had a great year so far and as 2014 approaches could have an even better one if the company can report profitability. The risk is rooted in management's execution of its growth strategy, and the company's ability to keep a lid on operating costs while it grows its revenue. So far, Mr. Pruitt looks to have done a good job, and the involvement of the two newly announced industry experts will play a vital role in keeping Chanticleer's rapid but sustainable growth strategy on track.