dimanche 16 février 2020

How to react with MTY Food Group?

Last friday, MTY Food Group delayed it's planned fourth quarter results after some whistleblower's complaint.

We don't have any more details about the complaint. However, the market didn't like this delay at all: the stock lost more than 8%.

So, what should you do, if you own the stock?

The answer is: I don't know. LOL. It depends on what's the exact reason why there's a delay.

Such delayed results happen very rarely. We don't really see that kind of stuff with great companies. I think I've seen that with Nobilis Health (which was a promising stock a few years ago but is now a crappy penny stock).

So, I believe that it doesn't smell good. But I may be wrong.

Here's how I would react, given three options:

1- If I didn't own the stock, I'd probably buy a small position (2-3% of my portfolio);
2- If I had a big position, I'd probably sell a good percentage of it;
3- If I had a small or medium position, I'd probably wait and see.

When there's smoke, there's usually a fire. But maybe this is an exception. Anyway, whatever everybody says about a specific company, we should never trust entirely any CEO. Even if he looks like a quiet gentleman with a very reasonable income.

12 commentaires:

  1. I own MTY. I'm going to give them the benefit of the doubt for now. Their business model is quite straightforward. They earn royalties on franchisee sales. There is not a lot that you can change to royalty numbers even with smoke and mirrors. Some might dispute how goodwill is calculated or other stuff, but for the time being, I'll wait and see. Their denial was quite forceful, which is reassuring. They have to put this behind them very clearly... best way to do that is to be transparent, in my view.

  2. I'm selling. Too much uncertainty and a forceful denial means nothing.

  3. MTY forgot two years to calculate gift cards from one of their US chains and because of that, they had to restated reports for a few quarters. The stock dropped but recovered fairly quickly because this accounting mistake did not affect the cashflow.

  4. I am inexperienced so I do not know what I am doing...

    I am fully invested at the moment and have less than 5k cash reserve and almost no surplus income coming in at the moment. My current priority is to try to grow my cash reserve over the coming months, unless there will be a very compelling opportunity.

    I am fairly happy holding my current investments as long as their earning will not deteriorate. I paid a fair price for most of them (given the available information) and am hoping they will grow their profitability over time, which should eventually reflect in the price. If earnings keep growing but prices will fall, I would not be very happy, but it would be a good opportunity to reposition my portfolio.

    MTY is about 6.8% of my portfolio. If MTY drops below my cost base of just under $52.20/share (about 1.4% below current price), I might consider buying more to average down (hopefully not catching another falling knife just like on lassonde, valeant, concordia, highligner foods, home capital group, oil companies, etc. before).

    MTY is trading at around 13.05 EV/EBITDA, 15.75 P/FE and 13.23 P/CF versus 5-year rolling average of 14.70, 19.47, and 15.81, respectively. It is a little bit cheaper than my portfolio as a whole on earnings but a little bit more expensive on cash flow. I would not call it a screaming buy (IF there is no major increase in earnings from the recent acquisitions, which most of us are probably anticipating especially after the dividend increase news).

    I will consider buying more below my cost base and probably will start to average down if MTY's metrics will be better than my portfolio average - I might even consider selling other holdings to buy MTY at this point. However, MTY's ROE and ROIC have not been all that exemplary over the past few years. TTM ROE is just 11.56 and ROIC is just 7.98. To provide a good buying opportunity, it would need to trade at a very compelling price, which is difficult to achieve compared to HCG, EQB, or LNR which I also own and are still trading at bargain dog house multiples.

    I was also hoping to build a bigger position in ATD.B and some other stocks in the medium term future. They still seem to be more attractive on several metrics than MTY at the moment (in my uneducated opinion). I am also a little underweight in DOL, which has also dropped quite a bit recently (my current cost base is about 4.4% below current price).

    My next paycheque is on the 29th. If MTY, DOL, ATD, CCL, or HCG will continue dropping in price, I will probably buy more of whichever one will be the most attractive and tighten my belt for yet another month. If they will not drop by a lot, I will just add it to my cash reserve.

    1. Oh and I forgot to mention, regarding the "IF" statement... according to the pro-forma Pappa Murphy investor presentation (https://mtygroup.com/wp-content/uploads/2019/04/2019.04.10-Investor-Presentation-MTY-Food-Group-VFinal.pdf), the EBITDA should be in excess of 164M from last spring. This would mean about 12.4% EBITDA growth and would co-incide with the 12% dividend increase from earlier this year. This also does not include extra EBITDA from acquisitions of 70% Tortoise Group [Turtle's Jack's Muskoka Grill, COOP Wicked Chicken, Frat's Cucina - unknown EBITDA but network sales 61M+], Allô! Mon Coco (system sales of 57M+), Yuzu Sushi (system sales of 40M+). This still does not make a screaming buy compared to the rest of my portfolio (given MTY's deteriorating ROE) but a projected less than 11.6 EV/EBITDA is more attractive than many other stocks out there (although for e.g. Lassonde which also experienced deteriorating ROE and margin similarly to MTY is still at 8.7 EV/EBITDA, excluding the recent SunRype etc. acquisitions).

      My optimistic portfolio growth target is 1% per month or about 12.7% per year (and it currently has projected underlying earnings growth of around 16% for 2020). A fairly stable and resilient business which would trade at 7.87 P/CF (1/0.127=7.87) with a potential for at least some future growth would thus be interesting baseline holding for me. If it is more expensive, the stock needs to make up the difference in a stable and predictable future growth. I have not analyzed my portfolio using a 12.7% hurdle rate, but as I am learning more about investing, I would like to do so and actually see if the companies are able to provide sufficient returns to justify their price and place in the portfolio.

      On an unrelated note, what are people's thoughts on Dollarama and Lassonde price drops?

  5. Forceful denial means nothing, and is even a warning sign to me. The alternative would be a thoughtful, measured response that offered some details about the nature of the problem. I am not invested in MTY and I won't be buying this dip!

  6. As of today, I am officially back underwater on MTY. I am also almost underwater on DOL. Big drops in other holdings as well... with lots of shorts piling into the names.

    MTY should report the double-checked results before the end of February, which should be the regulatory deadline. I should also be getting my meagre paycheque at the end of the month so I will decide what to do then because I have no liquidity until then.

    My portfolio is down over 6.5% since January. This is more than I have managed to earn and save this calendar year. Last two weeks have been very frustrating to watch - since my portfolio was down a lot almost every day while the index was reaching new highs. Hopefully, you guys are doing better than me.

    1. After today, the contender for the most dropped stock seems to be CCL.B. Unless MTY has a similar collapse in coming days, my money will probably be going into CCL next week. CCL is trading at same levels it was at start of 2016... more than 4 years ago and I just bought more of it in January. The portfolio as a whole is down another 2.3% today.

    2. MTY is up 9% today. I will not be buying more of it.

      I will either buy more CCL or DOL to average down and rebalance some of the recent losses (from 3.5-3.8% portfolio weight to 4-5%). Today my portfolio is down another 2.5% and in aggregate down just over 10% since January.

      As of now my holdings are the following

      Ticker ; Portfolio Weight ; Unrealized Returns
      HCG ; 14% ; 78%
      EQB ; 13% ; 62%
      CSU ; 8% ; 161%
      MTY ; 7% ; 4%
      ENGH ; 6% ; 57%
      ECN ; 6% ; 42%
      NFI ; 5% ; 0%
      ATD.B ; 5% ; 6%
      CTZ ; 4% ; 0%
      LAS.A ; 4% ; -24%
      DOL ; 4% ; -2%
      LNR ; 4% ; -28%
      CCL.B ; 4% ; -2%
      GIB.A ; 3% ; 68%
      CNR ; 3% ; 25%
      WPK ; 3% ; 3%
      SJ ; 2% ; -12%
      BAM.A ; 2% ; 120%
      RCH ; 1% ; 29%
      ALA ; 1% ; -27%
      BHC ; 1% ; -60%
      CMG ; 1% ; -32%
      CEU ; 1% ; -57%
      BDI ; 0% ; -71%
      BBU.UN ; 0% ; 132%
      CPH ; 0% ; -94%

      Good luck everyone!

    3. ($)o($): What's the size of your portfolio? It seems you own way too many stocks. You should concentrate much more.

    4. Dear Master Penetrator,
      Thank you for your question and suggestion. My portfolio is quite small compared to most of your readers. It is primarily in TFSA and briefly reached the six figure mark few weeks back but is back down (hopefully not for long).

      My portfolio is less than 1/5 of my medium term target (hence I do not want to trim HCG/EQB quite yet). More importantly, my portfolio represents 13x my annual savings rate (disposable cash flow), meaning I can only add about 7.5% extra per year by saving money (now even less since I lost 2 of my part time jobs in the fall)... until I will graduate and will be able to get a proper full-time job with steady income.

      I started to concentrate my holdings last year. I am slowly adding to core "higher ROE" holdings, gradually trying to add to whichever seems to have most attractive cash flow and is lagging behind the rest whenever I have some extra cash. Some like CSU, seem to be expensive and I am just hoping they will continue to grow on their own. I try to balance expensive and cheap stocks since I am afraid of bigger crash and hoping the cheaper stocks should not fall down as much (I got burned really bad on the expensive health care stocks in 2015-16... my RRSP lost more than 2/3 of value at one point).

      I am still hesitant to sell the legacy holdings (essentially the bottom 1/3-1/2 of portfolio), since I have big losses in them and the market as a whole seems to be quite expensive. For e.g. LNR is trading at something like TTM EV/EBITDA of 4 while CSU is 47 so if I could buyout the entire company for 100k, owning LNR would earn me 25k while CSU just 2k. That is a big difference for potential down-side if the market were to collapse. I am still young, but even so CSU has really big shoes it will need to grow into while LNR seems to be priced like a bloated road-kill carcass. I can get 2.45% risk free on savings account from EQ Bank which is not that attractive compared to 25% from LNR (plus potential to improve profitability with improving market and a double whammy of capital appreciation through higher multiples if earning will start to grow) but quite appealing compared to 2% from CSU. I can also lend money to my friend's business at 7% per year (although this I consider super risky, iliquid, and I do not want to mix friends/family with money out of principle). LNR is mediocre business run by super greedy and entitled brat while CSU is an exceptional company run by almost a mythical investing druid, but it is not just what we are buying but also at what price. I made many investment mistakes and now I am afraid to fix some of them since I do not want to make another mistake.

      What allocation and how many holdings would you have if you had a hypothetical 100k portfolio which you were hoping to grow to about 500k in next 10 years?

      Have a nice evening!

  7. Never saw the allure to MTY. Mediocre business, although im sorry for your current situation. DPZ Dominos Pizza is far and away best franchise model. Have owned for a while. Huge ROIC strong growth fantastic innovation and culture.