dimanche 20 octobre 2019

MTY Food: One of the best at a bargain price

Here we go again: MTY is at it's lowest price over the last 52 weeks.

Why? Because even if sales grew a lot in the last quarter, income didn't grow that much. Rising costs don't appeal to investors. But, after a 250 million dollars acquisition (Papa Murphy's in april), I don't think any rational person would have thought that everything would be wonderful after 6 months.

To tell the truth, I don't have a clue if that acquisiton was a good one. We never really know how things will turn in the short term. The growth of Papa Murphy's wasn't spectacular. Actually, if I remember well, it what a negative growth. MTY seems to be aiming at some kind of rationalization there.

MTY achievemenents is pretty good: EPS have doubled between 2014 and 2018. However, we never know if the trend will continue forever. But, that's the same for every company out there. Anyway, you better bet on companies that achieved something great than speculate on a company that never did anything good.

Everybody is praising MTY managerial practices. For instance, low compensation for managers and humble headquarters.Will Eric Lefebvre (the new CEO) will be as frugal as Stanley Ma? I can't be sure. But, at least, he's been in the company over the last 10 years, so he probably agrees with the culture. So, I give him the benefit of the doubt, even if I don't believe in him like I believe in God.

Actually, I don't believe in god.

Whatever the situation looks like, we should never own a position equivalent to 10% or more of a portfolio. But, to me, MTY is a rare case where a position could reach the maximum level. It was a great company 8-10 years ago and still is, in my opinion.

Well, my experience with Dollar Tree tells me that a permanent stock can become an indesirable stock overnight. But, worst case scenario for me is that MTY could stall for many quarters. I don't see it going much lower than it's current level though. At 15 times next year's earnings, it's a pretty good price for such a high grower. Many stocks with very low growth rates are selling for more than that.

There's not that much occasions out there with great companies. For me, two current occasions are Ulta Beauty and MTY Food Group. 

5 commentaires:

  1. ENFIN DE RETOUR ! je m'ennuyais hehe

  2. Thanks Penetrator! Great company at a good price ( like 12-13x FCF). Papa Murphy's EBITDA weak quarter is Q3 and Q4 is the strongest of the year.

    This quarter EBITDA growth was an 8%, j espere une croissance d au moins 20% next quarter pour arriver vers 125-130 m$ EBITDA et autour du 100-105 m$ FCF.

    A mon avis le fair price de MTY c est de 70-80$CAD.

    Voici une tres bonne video en espagnol de MTY Food fait par un fonds de mon pays.

  3. I do not know about MTY... it was a good company but will it continue to be a good company? I have held it for a few years now as an overweight core holding and am about break-even on it. I might add to it in my TFSA in early January if it is still trading at reasonable price.

    I have some concerns: over the past 10 years, MTY's operating margin has dropped by 34%, ROIC has dropped by 63%, leverage has increased by 105%, many of their non-North American franchises are failing rather than growing etc. (and this is 2009 we are comparing). The earnings per share might be bigger now, but I would reckon the quality has steadily become worse. I couldn't find specific targets, but the annual circular suggests that management compensation incentives are based primarily on growth of EBITDA and cash flow and not on maintaining/improving earnings quality. I got burned on similar stories in the past. Mis-aligned incentives lead to lot of value destruction. My hands still have deep cuts from the falling knives.

    I know MTY has gotten much bigger over the past few years, expanded to US, and has to try to do M&A at time of rock bottom interest rates, but I am a bit worried whether the management has not lowered its standards/hurdle rates too much... which might permanently impair its long-term profitability. MTY is after all consolidating mostly unknown, declining, cigar-butt franchises from which the existing owners/shareholders want to run away and it always needs to be running on a never-ending treadmill of acquisition to offset the organic attrition. They bought Papa Murphy's at 8.5 EV/EBITDA knowing that it has been struggling for years and that dozens of restaurants are being shut down as we speak... meaning that there will need to be very large synergies or some new secret turnaround strategy in order to achieve MTY's previous historical ROIC payback on acquisitions of 5-6 years. I would like to know more about the incentives and management long term vision before buying more shares.

    Dear Penetrator, I believe that you have mentioned that you exited Lassonde earlier this year. It also shares a story of declining quality of earnings similar to MTY (30% decline in operating margin, 43% decline in ROIC, but only 6% increase in leverage over past 10 years). I was wondering why your opinions diverge on MTY and LAS? I have held Lassonde for a couple of years with a double-digit loss. Van Berkom disclosed this summer building up a 10% stake in LAS. I am considering topping off my half position in LAS in early January but have not looked into it in detail yet.

    Good luck everyone!