Part of my investment strategy when I look for alpha is to look for small-cap stocks that are good values - and to buy meaningfully large positions. This strategy has led to investments over the last few years in Krispy Kreme (KKD), Nutrisystems, and ActivePower (ACPW) - and of course some that have not worked out that well.
My largest small-cap position today is in Noble Romans (NROM.OB), the pizza chain and maker of take-n-bake pizzas. NROM's market cap is sub $20M. The company earned $0.02 in Q1 on $1.8M of revenue. This leads to 8-10 cents per year of earnings, and a 10x-12x earnings multiple. The issue for NROM has been lack of growth.
From NROM's quarterly results:
Total revenues for the quarterly period ended March 31, 2011 were $1.802 million compared to total revenues of $1.755 million for the comparable period in 2010. Total revenue increased from $1.775 million to $1.802 million for the three-month period ended March 31, 2011 compared to the corresponding period in 2010.
I think however this tells only a partial story, and the underlying growth driver is hidden:
Of this increase, $238,222 resulted from an increase in ongoing royalties and fees from grocery store take-n-bake additions and $55,228 from an increase in ongoing royalties and fees from non-traditional franchises, other than grocery stores, as a result of same store revenue increases partially offset by four fewer locations. These increases were partially offset by a decrease in ongoing royalties and fees from traditional locations.
It is impossible to tell when these increases started kicking in, as it is hard to figure out when the take-n-bake rollouts happened during Q1. But it is a real growth driver, representing approximately 12% of revenue in Q1 and growing.
It is also hard to understand what is the total rollout potential of these locations. A hint can be found in the Q1 earnings announcement:
Since the company started offering take-n-bake pizza to grocery store chains, the company has signed agreements for 635 grocery store locations to operate the take-n-bake pizza program, 491 of which are now opened. In an attempt to accelerate the growth of Noble Roman's take-n-bake in grocery stores, the company has been focusing on signing agreements with various grocery store distributors to market the take-n-bake pizza program to the distributors' current customer base. On July 19, 2010, the company signed an agreement with a grocery store distributor headquartered in California and now has 163 take-n-bake agreements with their customers. On October 13, 2010, the company signed an agreement with a grocery store distributor in Wisconsin, however, they did not stock their warehouse until February 1, 2011. The company now has 25 take-n-bake agreements with their customers. On January 13, 2011, the company signed an agreement with a grocery store distributor headquartered in Connecticut. The company now has 61 take-n-bake agreements with their customers. On March 28, 2011, the company signed an agreement with a grocery store distributor in Oklahoma. The company now has 66 take-n-bake agreements with their customers. On March 30, 2011, the company signed an agreement with a grocery store distributor in Utah. The company now has 16 take-n-bake agreements with their customers. On April 12, 2011, the company signed an agreement with a grocery store distributor in Pennsylvania, however, they will not be stocking their warehouse until the end of May 2011.
The stock is barely followed, so I thought I would also provide interesting highlights from the NROM's investor meeting slides.
- There has been ~4X growth in new stores carrying take-n-bake in the last year 134 a year ago to 675 today.
- Margins are high ($1.21) per pizza with minimal touch
- NROM projects over $1.6MM in revenues for take-n-bake this year
I do not have a target price, but I like the underlying fundamentals of this cheap food business in this economy and the low penetration cost growth strategy around Take-n-Bake. Given the low market cap, current profitability and early stage of the new product line, I think the stock looks cheap at $1 per share.
I am including the slides from the annual shareholders meeting since almost nobody follows the stock.