MTY Food Group: There's Still Value in Food

04/05/2019 5:00 am EST

Focus: GLOBAL

Peter Mantas

CIO, Logos LP

With the market having it's best year since 1998, we thought it might be useful to take a look at a few picks that investors might be interested in given this rising market, suggests value investor Peter Mantas of Logos LP.

Although value is becoming more and more difficult to find (the S&P 500 is near fair value at current levels considering a slowdown in earnings) there are pockets within the market that are worth looking into.

One name that we think will outperform is MTY Food Group (Toronto: MTY),  a large North American franchisor that operates over 35 brands with 5500 locations in both the US, Canada and abroad.

MTY Food is a serial acquirer and is known to buy franchise brands at severe discounts (usually due to distress or poor management) and turn them around.

For example, they recently made an offer for Gigi's cupcakes, a 100 location cupcake franchise in the US, for $2 million as it was facing creditor protection.

MTY's playbook is simple in theory but difficult to execute: they enhance the acquired brand's operations via product innovations, cost controls, and promotional management efforts while utilizing MTY's supply chain for further efficiencies downstream.

MTY Food Group will then use this newly revived brand to expand the franchise into geographic locations that they calculated will see the highest probability of success, and they prefer to do this through master franchise agreements internationally.

Previously, MTY was mostly in food court malls and offices (think Thai Express in downtown Toronto) but has recently acquired brands in the casual dining sector (Casa Grecque, Baton Rouge, Scores, Mikes etc.) which operate in more suburban locations. 

MTY is reasonably valued at 15x cash flow, 18x forward PE, 2.4 price to book (these metrics are all well below industry medians) and has very high ROIC (TTM +14% with ROE +20%). The company has grown its dividend this past quarter by 10% and we expect further acquisitions going forward.

The stock recently sold off due to a miss on same store sales but we see this as a buying opportunity as the long term story on this stock is still very much intact. We have a 2-year price target of $85 on the stock.

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