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I am a passionate accredited finance professional and individual investor. And a smart alec.
  • MTY ... My Favorite Food Group 0 comments
    Jun 24, 2010 10:33 AM | about stocks: XOM, BDX, MCD, BKC, WEN, QSR, YUM
    Ratios and Grievances
    I have to air out a major pet peeve of mine. Have you ever noticed how, when referring to a number as a ratio, people have the habit of writing the number, then a colon, then a 1 after it??? As in 10:1, or the particularly annoying10.00:1. You see this alot in banking with respect to a company’s debt covenants. Banks will say a company is to maintain a working capital ratio of “1.20:1” … or, even worse, they’ll actually write the phrase “1.20 to 1”.
     
    For those of you that don’t see the problem here, let me explain something to you: the use of “:1” is completely unnecessary and entirely redundant. THAT’S WHAT A FREAKING NUMBER IS! An amount in relation to “1”. Any number ever used in the history of the universe whether positive or negative, rational or irrational, real or imaginary, from the smallest decimal to a googolplex, is a ratio of “1”. The use of “:1” has NO meaning. You don’t have to write it down! I know the number is a ratio of 1! I learned it in the 2nd grade!
     
    So stop trying to look smart or smugly professional by writing this garbage. You end up looking silly and pissing me off. Just write the number (say, 1.20), save yourself some embarrassment, and let me get on with my life.
     
    Suicide Watch Aside: This grievance does not apply to zero or ∞, which play by their own rules … though, if I ever saw someone write 0:1 or ∞:1, I would likely be frustrated to the point of suicide. Armed with that knowledge, I’m sure people will make such usage commonplace. :)
     
    Get In My Belly!
    I love eating. For me, there are few pleasures greater than stuffing myself with untold amounts of undercooked animal meat, low-fat milk products, frozen vegetables, and artificial flavors. And I love going back for seconds. And often thirds. And for that, cooks and mothers alike adore me.
     
    Let me be clear: I don’t love tasting food. I don’t have the subtle pallet of a sommelier or master chef. I don’t savor each morsel and bask in the flavorful sensations as they ripple across my tongue. At times, I’m not certain I have any taste buds at all. And I could really care less how the food is arranged on my plate. When I cook for myself at home, I invariably mix all my side dishes together into an unsightly grayish brown slop.
     
    I love eating food. I love mashing it together. I love chewing it. I love swallowing it. I love the feeling of my belly expanding to accommodate it. And, most of all, I love the carnal satisfaction of licking a plate clean, dominating yet another mass of plants and animals well below me on the food chain.
     
    Lacking taste buds has its advantages. I can eat any combination of bland foods that most people wouldn’t dare try to choke down. See the oats, protein powder and plain yogurt combination I routinely devour for breakfast. It bears a striking resemblance to the gruel eaten by the crew of the Nebuchadnezzar in The Matrix. In my home growing up, I was known as the “human garbage disposal unit”. I’m a scavenger. Leave your food idling on your plate for too long and I’ll stare you down from across the table with malicious intent of a UFC fighter.
     
    Thankfully, I have an ungodly fast metabolism and an obsession with hard exercise that has kept me from exploding at the waistline. Pray my obsession with hard exercise outlasts my obsession with eating or I may end up on a future season of The Biggest Loser.
     
    Shirt, Shoes, and Limited Service
    As it turns out, I’m not the only human being that likes to eat. Save for a very small percentage of us with troubling eating disorders, we all love to eat. And even more importantly, we all need to eat … you know, to survive. Sounds like an industry I’d like to invest in.
     
    And while the vast majority of us like eating food, only a small percentage of us have the time or inclination to actually cook the stuff. And an equally small percentage of us like to wait for it. So emerges the fast food industry, or the “quick-service” or “limited-service” industry as the industry euphemistically refers to itself, hoping to avoid all the negative connotations associated with the phrase “fast food”. I will use “fast food” as much as possible, just to spite them.
     
    Fast food has been around in some form or another since Roman times when small shops used to sell bread dipped in wine for quick morning nourishment (if you’ve ever been to Italy, you aren’t surprised wine was a breakfast drink). The first modern fast food restaurants in North America were known as Automats, which were actually coin-operated dispensers similar to the vending machines we still use today. A&W and White Castle are considered the first successful fast food burger joints, originating in 1918 to 1921. McDonald’s, arriving in the early 1940s, took the concept to new heights.
     
    Growth of fast food in the US has been impressive with sales increasing from just $6 billion in 1970 to $110 billion in 2000, good for a nominal 10% CAGR. In Canada, fast food, referred to here as Limited-Service, registered a little less than $19 billion in sales in 2008. By the end of 2009, there were a total of 31,911 fast food restaurants of which 36% (or 11,488) were branded chains.
     
     
    Limited-Service
     
    Full-Service
    ($ mil)
    Growth
    Operating Margin
    Market Share
     
    Growth
    Operating Margin
    Market Share
    2008
    7.5%
    5.6%
    40.9%
     
    5.7%
    3.2%
    44.2%
    2007
    5.5%
    5.2%
    40.4%
     
    5.5%
    2.9%
    44.4%
    2006
    7.1%
    5.6%
    40.3%
     
    4.5%
    3.1%
    44.3%
    2005
    3.3%
    4.9%
    39.6%
     
    4.9%
    3.1%
    44.5%
    2004
    6.0%
    4.7%
    39.8%
     
    7.1%
    2.7%
    44.1%
    2003
    1.6%
    3.9%
    39.8%
     
    -3.8%
    2.5%
    43.6%
    2002
     
    4.8%
     
     
     
    4.4%
    45.0%
     
    You can see that fast food restaurants in Canada experienced solid growth in the last decade and actually managed to take market share away from their full-service counterparts. You should also note that fast food commands a healthier profit margin thanks to its smaller store fronts, cookie-cutter food items, and lower staff requirements.
     
    The average Canadian household spends 23.1% of its total food dollaron food service, compared to 41.9% for U.S. households. It would seem there is plenty more room to grow, although we do tend to be more conservative eaters than our super-sized cousins down south.
     
    All the above info can be found at STATSCAN .gc.ca or CRFA.ca.
     
    Random, Lengthy, Non-Sexist Aside: It’s funny how business trends emerge from seemingly entirely unrelated phenomenon. It’s clear now that a good portion of the impressive growth in fast food over the past 40 years has resulted from the Women’s Liberation movement. The stay-at-home wives of the early 1900s did all the cooking. They bought the groceries, they prepared the dinners, and they packed the lunches of their husbands and children. And they did so without the need for any profit margin. What kind of restaurant could compete with that? (The first Automats actually used the slogan “Less Work For Mother”).
     
    But as Mom moved into the workforce, she had less time to prepare food. Instead, she opted to give her kids $5 for lunch at the nearby A&W and made a quick stop at Taco Bell on her way to the soccer game. And her husband? Time for that lazy bum to fend for himself.
     
    And this trend has evolved in the younger generations. Women were once trained in the home economics at an early age. Now, and you can take my word on this, they know less than nothing about cooking and care about as much. As men in my fellow cohort know all too well, most women in the 21st century know less about cooking than men do. Cook for a man? Please.
     
    MTY … My Favorite Food Group
    Enter Sandman. Then enter MTY Food Group.
     
    MTY is a Canadian restaurant franchisor headquartered in Montreal, Quebec. They own the franchise rights to 25 different restaurant concepts or banners, some of which are well known (see Country Style and Taco Time), some of which are more obscure (see Thai Express). With the acquisition of Country Style in 2009, MTY expanded to 1,570 stores across Canada with geographical diversification as per below.
     
    Location
     
    Ontario
    50%
    Quebec
    28%
    Prairies
    12%
    Beautiful British Columbia
    5%
    Maritimes
    2%
    International
    3%
     
    The brands are even more diverse. There are traditional hamburger joints in O’Burger (which are actually a little swankier than most) and Franx Supreme. There are coffee shops in Country Style and Caferama. There is Asian fair in Thai Express, Tiki-Ming, Koya, and Kim Chi. There is new-age health food at Cultures and Veggierama. For those with a sweet spot, there is La Cremiere, TCBY Canada, and well-known Yogen Fruz (as Warren Buffet discovered with See’s Candies and Coca-Cola, you can charge a serious margin if you load your products with sugar). If you are simply looking to get prohibitively fat, there’s Taco Time, a favorite of mine. My standard order is 4 hard tacos and 2 mexi-fries when I’m trying to bulk up. People must assume my wife and kids are in the bathroom.
     
    Of course, location of these stores is also important. MTY stashes their fast food restaurants in the usual high traffic areas in commercial downtowns, residential areas, strip malls, and regional centers. The next table gives you an idea of MTY’s market penetration in key regional centers in Canada.
     
    Mall
    MTY Restaurants
    Total Fast Food Restaurants
    Eaton Centre – Toronto
    3
    31
    Metrotown – Vancouver
    3
    16
    Chinook Mall – Calgary
    3
    18
    Eaton Centre - Montreal
    12
    29
     
    It may not look impressive, but MTY is 10% to 20% of the market in most of those centres, more than any other single franchisor. In Montreal, MTY’s stronghold (or “forteresse” if you will), MTY dominates space in the downtown Eaton Centre and the market in general.
     
    The Good, the Bad, and the Tech Bubble
    MTY had an interesting beginning. In its first incarnation, it was known as Insu Innovations Group Inc. And never before or since has there been a better contrast of good business and bad business all in one company. Insu Innovations had three operating arms: restaurant franchising, parking lot operating, and … info tech. Because those are all clearly related, right? In 1997, the last data point I could find, Insu derived 80% of its revenue from restaurant franchising, 10% from parking lots, and 10% from info tech. 
     
    Caught up in the mania of broadband networking, data storage, online retail and the unimaginable growth they all promised, management chose to plough the steady stream of earnings from the franchising business into R&D for the info tech business. They even sold off their parking lot division to get in on the action. By 2000, franchising accounted for 40% of revenues and info tech bulged to 60%. Unfortunately, flushing the franchise earnings down the toilet likely would have been more effective. The info tech side bled losses all 4 years and the company wallowed in obscurity and, worse, a big, fat negative equity box. Oh, the tech bubble.
     
    Two years later, after the collapse of the tech bubble, the info tech arm of the company was dissolved and an incredible thing happened. At the end of 2002, MTY’s share price was $0.29. As of 11Jun2010, it was $10.70 (MTY just moved from the TSX-Venture to the TSX, so you won’t be able to find their historical price info easily. You’ll just have to trust me). That’s a 57% CAGR. Oh, to have known about MTY then.
     
    How was this accomplished? Well, instead of depositing the earnings stream in the garbage dump (meaning the info tech division), MTY used it to acquire more franchise brands and outlets. In 2000, MTY had 147 outlets spread among 10 different banners. In 2010, they had 1,570 stores spread among 24 banners, the bulk of the increase coming from acquisitions.
     
    (And best of all, MTY hasn’t issued shares for a single acquisition)
     
    Stanley Ma, the franchise Michelangelo
    (Stanley Ma is the Chairman of MTY, btw, and has been since at least 2000. Actually, the board and top executives have remained virtually unchanged since 2000, another thing MTY has going for it).
     
    ($ mil)
    2009
    2008
    2007
    2006
    2005
    2004
    2003
    2002
    Net income
    12,262
    9,912
    9,167
    5,796
    4,254
    2,906
    1,269
    956
    EPS
    0.64
    0.52
    0.48
    0.31
    0.25
    0.18
    0.08
    0.06
    EPS growth, YOY
    24%
    8%
    55%
    26%
    37%
    117%
    37%
     
    8-Year CAGR
    40%
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    Profit Margin
    24%
    29%
    30%
    26%
    23%
    19%
    11%
    10%
    D/E
    24%
    22%
    33%
    27%
    29%
    64%
    29%
    63%
    ROE
    20%
    20%
    23%
    20%
    22%
    27%
    16%
    17%
     
     
     
     
     
     
     
     
     
    System Sales
    393,100
    253,600
    219,900
    160,400
    119,700
     
     
     
    Stores
    1,570
    1,023
    825
    784
    527
     
     
     
    Same Store Sales Growth
    -1.82%
    1.70%
    3.30%
    4.80%
    4.00%
     
     
     
    REVPSS
    13%
    14%
    14%
    14%
    16%
     
     
     
    REVPSS = Revenue per $ of System Sales
     
    That table is to investing what the Sistine Chapel is to art. Ok, not quite, but if you were scoring MTY on one of those customer satisfaction surveys, you could tick “excellent” under all the relevant categories: High profit margin, high ROE, low D/E, high EPS growth, low capex, high free cash flow, etc, etc, etc.
     
    And so once again we see that you don’t have to develop cutting edge consumer gadgets like iPads or develop innovative new wonder drugs like Viagra to grow like … (well, I’ve already mentioned Viagra once in this sentence so I’ll leave it at that). All you have to do is run a business that kicks out significant free cash flow and use that cash to make sensible acquisitions.
     
    MTY also smartened up a bit operationally. You can see that in the improvement in MTY’s profit margin, which resulted from a number of things:
    a)      Spreading its administrative expenses over more revenues. You don’t have to add too much to your back office when you buy franchise rights. You just start collecting cheques.
    b)      Reducing the percentage of its revenue that was derived from company-owned stores. In 2003, this was 41%. In 2009, this was 18%. This increases margins in two ways: 1) MTY earns a better margin on the royalties than it does operating the restaurant, and 2) MTY gets initial franchise fees when the company-owned stores are franchised (straight to the bottom line!).
    c)       Lowering its debt.
     
    And what kind of multiple does such a solid company with an 8-year, 40% CAGR command in today’s market? At its 18Jun2010 closing price of $10.80, MTY traded at a forward PE of just 14 times.
     
                                                                                                                             
    Will MTY cook the competition? Or will it be fried in a vat of its own oil? Will our fearless blogger actually find the motivation to complete the report? Find out next week. Same blog time, same  … dear God, why am I ending with the old Batman gimmick again!?!?


    Disclosure: I hold a position in MTY. No other positions in any stocks mentioned.
    Stocks: XOM, BDX, MCD, BKC, WEN, QSR, YUM
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