When considering free cash flow, Brazil Fast Food Corporation (OTCPK:BOBS) generated $8.1 million in 2012, pricing the equity at 6.1% free cash flow yield based on market valuation at $149 million. It is a very attractive proposition for any value investor. The fact that the company has been targeted by an investor group at a very cheap price affirms the idea of it being attractive to any long-term investor. So it was a good thing the shareholders opposed the sale.
Quick View of Fundamentals
- Increasing net income since 2009
- Steady debt levels
- Very cheap at P/E of around 14
Will Base Foundations Be Strong Enough to Counter Threats to Future Growth?
Increased competition from other fast food giants such as Burger King (BKW) and McDonald's (NYSE:MCD) dampens the chances for easy victory regarding Brazil Fast Food's plans for expansion. But even though there are several threats to the company's future, there are also several bright points to make it worthwhile for investors. First of all, the country has excellent agricultural capacity and is able to supply quality raw materials to make it worthwhile for any major food multinational.
Just recently, from 2011 until now, we have seen several consolidation of small players into bigger entities as the Brazilian food industry starts to mature. Foreign brands from developed countries found it hard to compete with established smaller local brands because their price point is way beyond the reach of lower-income classes. It so happened there is a big base of class C and D consumers in Brazil who can't afford the prices foreign brands tried to introduce when they entered Brazil. The upper class of Brazilian society is a small base of consumers and isn't big enough to support the entrance of these first world business entities.
Only those multinationals that have long established their presence in Brazil are reaping the rewards of their patience. Smaller food companies, on the other hand, have the price advantage over the multinationals. In short, you either have to be very big or very small to have an advantage in the Brazilian food industry. Those who tried to make it in the middle got caught as they could not have the advantages of either one.
Threats to Profitability
The country is experiencing a slowdown because of weak demand for soy and iron ore exported to China. The weaker demand for the country's main economic engine will obviously dampen any revenue growth for the fast food industry.
McDonald's entry into the country via its franchisee Arcos Dorados is undesirable for investors in Brazil Fast Food at first glance, but it is actually a sign of good fortune. It also means other major business entities have taken notice of Brazil's potential in the fast food industry. The negative news regarding inflation is a minor thing in the long term. The overriding factor here is a relatively wide market space still in the process of being populated by fast food industry players.
Just getting there first is already a tremendous advantage for anybody. Investors in Brazil Fast Food definitely have done that already, with room to spare. The long-term trends of population growth and urbanization are here to stay. Both factors are favorable to the fast food industry.
Wide Market Space
Despite the weaker economic trends for Brazil in the near future as well as impending competitor presence, the scale is still in favor for investing in it. The reason is simply because Brazil is an emerging country with numerous areas and locales still unsaturated, even with ongoing expansion of big multinational brands. There is simply room for everyone at this moment.
As to what may happen in the future and who will dominate, nobody can say. The investor who establishes a position in Brazil Fast Food, however, will enjoy a relatively comfortable safety margin by virtue of being an early participant in the industry.
The market has yet to value the growing dominance of Brazil Fast Food in its home country. The company's P/E is around 14, while the EV/sales ratio is 0.6 for 2012. The EV/sales ratio basically implies you can buy the company using its own cash from sales. That is a gem for any value investor looking for misunderstood companies in the market.
In all, the situation is not perfect. But it's still suitable to enter BOBS at current levels as, after all, no clouds remain forever on any investment horizon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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