Meritage: A Fast-Food Favorite

05/25/2017 2:54 am EST


Ryan Irvine


We're finding a number of attractive small-cap stocks in the U.S. right now and one I would like to bring to your attention is Meritage Hospitality Group (MHGU), notes Ryan Irvine, contributing editor to Internet Wealth Builder.

Meritage operates approximately 185 Wendy's restaurants across seven states within the quick-service restaurant (QSR) industry and five casual dining restaurants under the banners Twisted Rooster, Crooked Goose, and Freighters in the state of Michigan. 

What we like about Meritage is that it is a simple to understand business with an excellent track record of achieving growth targets and an aggressive but fully achievable growth plan.

Meritage's strategy is to further consolidate the existing network of Wendy's franchises in North America through acquisitions and to improve sales and profitability of acquired restaurants through integration into its IT platform and restaurant remodeling.

The company has already made substantial progress on its current five-year plan, which commenced at the start of the year. Meritage began 2017 with 175 restaurants and a target of expanding to up to 400 restaurants by the end of 2021.

Since Jan. 1, the company has acquired eight Wendy's restaurants and has an additional 57 Wendy's in four Mid-Atlantic states under definitive agreement to be acquired during the second quarter of 2017.

The company has a market cap of $128.3 million. About 65% of the stock is held by management, so the interests of the company and the shareholders is closely aligned.

The company expects to update its 2017 financial targets following the completion of the upcoming restaurant acquisitions, which are anticipated to accelerate the five-year growth plan.

Meritage reported approximately $1.02 in diluted earnings per share (before one-time expenses) over the previous 12 months, which equates to price-to-earnings valuation of 14.6 times.

Looking forward, the company is targeting revenue growth of $90 million from recently announced acquisitions, which equates to a 37% increase over reported revenue in the previous 12 months.

Considering the strong growth potential, we believe that Meritage offers attractive value for investors looking to hold the stock for at least one to three years.

Meritage reported very solid preliminary financial results for the first quarter of 2017 with 15% growth in sales and a 245% increase in earnings. Considering the strong fundamentals underpinning the business, we believe that Meritage offers attractive value.

In terms of the limited share count, we recommend that readers place limit orders below $15 and be patient. We are looking to hold the stock for three to five years and we expect liquidity to improve over that time.

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