MTY Food Group Just Doubled In Size With Latest Acquisition

It has been a while since I’ve written anything on Seeking Alpha. The acquisition of Kahala Brands by MTY Food Group (MTY) got me out of my writing break. This is an interesting acquisition since it doubles the size of MTY and it also establish a base in the U.S., a market that MTY wanted to penetrate for a long time.

This article is free for 30 days on Seeking Alpha. Below is a preview and if you want to read the whole article you must go Seeking Alpha since they own the rights to the article.

Reposted from Seeking Alpha
By Brian Langis

Summary

  • MTY effectively double in size with the latest acquisition of Kalaha Brands.
  • MTY finally has a solid platform to grow in the U.S.
  • The acquisition is not without risk. Kalaha has been shrinking and contains a lot dull brands.
  • The article also focus on the latest AGM and the USA strategy.

TSX: MTY

U.S.: OTC:MTYFF

MTY Food Group Inc. is primarily traded on the Toronto Stock Exchange under the sticker MTY.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.32 Price of 1 USD in CAD as of July 26, 2016.

This is a follow up on MTY Food Group Inc., a company that I have provided research on in the past. Feel free to read the in-depth research to have a better understanding of this update and MTY.

MTY Food Group Inc. – A Restaurant Stock For The Wallet, published in December 2013. MTY Food Group Inc. – Another Restaurant Stock For Your Portfolio, published in September 2015.

MTY Food Group is a Canadian company that operates a collection of brands. MTY is a franchisor and operator of 2,688 restaurants (pre-Kahala Brands acquisition), operating mainly in Canada and in 14 other countries around the world. Among MTY’s 40 banners are Thai Express, Jugo Juice, and Mucho Burrito. This is a big year for MTY. In 2015 MTY pass the $1 billion system wide sales threshold for the first time. But the even bigger news is the acquisition of Kahala Brands Ltd. ( OTCPK:KAHL). The deal is transformative and will effectively double the size of MTY.

On May 24 2016, MTY announced a deal valued at more than US$300million to acquire Arizona-based Kahala Brands and its approximately 2,800 locations in 25 countries. The purchase of Kahala Brands is by far its largest purchase to date. The Kahala’s portfolio of brands includes 18 names such as TacoTime, Cold Stone Creamery, Pinkberry and Blimpie among others. I will get into the details of this game changing acquisition for MTY below. Before I get into the acquisition, I also wanted to go over a few other things such as the AGM, the U.S. strategy and the case for investing in MTY.

What’s makes MTY an interesting investment?

MTY has a great business model. When you buy MTY, you’re not investing in the restaurants directly. Rather, you’re buying into a royalty stream based on a percentage of the restaurants’ sales and much more. For each plate that is sold MTY earns royalties. MTY simply collects royalties and has very low capital expenditures and financial risk. The math is simple; more franchises => more sales =>more royalties. Because of this successful recipe, MTY receives recurring revenues. Over time MTY builds a war chest and puts that money to work through acquisitions.

MTY is a serial acquirer and a compounder of shareholder value. When we talk about compounders, we are typically talking about companies that can earn a ROE that is consistently higher than its cost of equity. Companies that achieve returns on equity greater than their cost of equity are adding value for the investor, and this is reflected in steadily rising share prices. MTY’s franchise business had very high returns on invested capital with the ability to reinvest incremental capital at similar high rates. MTY had 15 years of 20%+ ROE! If you like this kind of company I would recommend that you read this interesting article, MTY Food Group – A Case Study of a 100-Bagger by Chip Maloney at MicroCapClub. According to the author, $1 invested in MTY stock in 2003 would go on to be worth $100 by 2013, so much more today at the current trading price of ~$44. The chart below shows MTY’s share price over the last ten years.

Full article here.

Price and Value

Price is what you pay, value is what you get. – Warren Buffett

“Nowadays people know the price of everything and the value of nothing.” – Oscar Wilde

Price and value are two different thing and for you visual folks out there there’s a drawing at the bottom. As you probably already know by looking at your portfolio, the price of a stock mysteriously jumps up and down even where they are no news. A company that I follow, NAPEC (NPC.to) has seen its stock price go from $1.15 to $0.67 and back to $1.25 without any meaningful news.  Has its earnings moved that much? No. Did the company had major setbacks? Nope. Did cash disappear and came back? No. Just investors/traders moving in and out of the market. The stock you bought at $0.67 is the same company you are buying at $1.25. During that time period, the intrinsic value of NAPEC didn’t change that much, in fact it actually improved. Business at NAPEC is steady and getting better. But a chart of its stock price will give you motion sickness. It’s sounds crazy and yet its reality. The reality is that prices swing far above and far below what would have been a reasonable assessment of the intrinsic value of a business. I read a stat somewhere that the average stock price moves 80% from its 52-weeks high and low range. Do you really think its cash flow fluctuate near the same degree as its stock price? Of course not.

Some people claim that the stock market is efficient and thus, a company’s price and value are the same (they teach you that in school). From my experience, price and value are two distinct measure and they diverge wildly. While the intrinsic value of a business is admittedly a somewhat imprecise estimate that depends on assumptions, it nevertheless stays within a much narrower range than the common stock price investors are asked to pay on any given day.

Price vs Value
Photo credits: Euclidean Technologies

What Google Learned From Its Quest to Build the Perfect Team

What Google Learned From Its Quest to Build the Perfect Team is very interesting article from then NYT Magazine. This is a long-from article that can take some time to read but is worth it.  As the title suggest, the article looks into what makes a team better or worse. The conventional wisdom of assembling your brightest most talented people together doesn’t necessary translate into higher results. We have some countless of examples, like in professional sport, where a team full of superstars can’t get the job done. With the right elements, a team of average talent can have superior results.

How does a team work? Were the best teams made up of people with similar interests? Or did it matter more whether everyone was motivated by the same kinds of rewards? How often did teammates socialize outside the office? Did they have the same hobbies? Were their educational backgrounds similar? Was it better for all teammates to be outgoing or for all of them to be shy? The article digs into that.

This is a very long article, so I’m going to summarize parts of it. Below are cut and past of different segments of the article.
Continue reading “What Google Learned From Its Quest to Build the Perfect Team”

Veil: The Secret Wars of the CIA

VeilI just finished Veil: The Secret Wars of the CIA, 1981-1987 by Bob Woodward. I respect Bob Woodward. I think he’s one of the best investigative journalist out there. His body of work is impressive and he has been working for the Washington Post since 1971. Woodward with Carl Bernstein did much of the  news reporting on the Watergate scandal that led to numerous government investigations and the eventual resignation of President Richard Nixon. You can read about the Watergate scandal in All the President’s Men by Woodward and Bernstein.

Why did I read this book? It wasn’t on my list of things to read and I felt like I needed something “light” for the summer. I also have this box of spy books that was given to me that I want to get through. Well this book is anything but light. It’s a very detailed well researched book. It’s a good book but I think you need to be a little crazy to put yourself through it. You must love history and lots of tiny details about everything. It’s insane the level of research Woodward puts himself through. Using hundreds of inside sources and secret documents, Woodward has pieced together an unparalleled account of the CIA, its Director, and the United States government.

As the title suggest, it’s a book about the CIA during President Reagan’s years.  The book covers the the directorship of William J. Casey from 1981-1987. The 70s was a tough time for the CIA. The agency was plagued with scandals and the massive intelligence failure of Iran. The CIA failed to foresaw the overthrow of the Shah who was supported by the U.S. This also resulted in the Iran hostage crisis. When Reagan/Casey took over, morale was low and the agency was a mess. Casey was an Office of Strategic Services (OSS) veteran— the predecessor to the CIA. He wanted to reform the CIA and he wanted the agency to get its respect back. Casey saw himself as an old OSS operator and had a sentimental about intelligence work.

The book is mostly about the covert wars that the U.S. conducted during the Reagan years. The U.S. was afraid of another Vietnam disaster so it was very careful on how it conducted its foreign policy. The book is 50% Nicaragua, 25% Libya, and the rest is Iran and other countries. Somehow, the Soviet-Union and Cuba is tied in all of this. One thing I didn’t realized is how insane Muammar Gaddafi was. I knew he was a bad guy but he definitely had some loose screws in his head. He supported terrorism activity and several violent organization. His personal behavior and personality fueled was not one of a reasonable man or leader. Nobody liked the guy and he was very unpredictable. The U.S. bombed Libya in 1986 but never got Gaddafi out of power. Nicaragua was the main topic of the book. The leftist Sandinista overthrew the Somoza dynasty in 1979. The U.S. didn’t want a model leftist state to exist so he backed the Contras. The CIA was afraid that the revolutionary fires could sweep north, especially to Mexico were the social conditions for breeding socialism was in place.

There’s a lot to debate on what is the role of the CIA? Is it just a intelligence gathering agency for the President or does it take a more hand-off approach with operations? The CIA did intelligence, but is it supposed to kill people also? During Casey’s tenure, the CIA to directly and covertly influence the internal and foreign affairs of countries relevant to American policy. It acted as a shadow secretary of state. With money, secrets, and direct access to the President you have a lot of power. Under Casey, the CIA had become a tool bent on forcing its view on the world.

It’s possible that the CIA’s influence was too great. The CIA apparatus had been used as a policy-planning service for Casey and finally  it had become an implementing agency through its own operations or through the White House. This is how you got the Iran-Contra affair scandal. The whole thing is huge complicated mess. The U.S. selling arms to their arch enemy Iran (a couple years after the hostage crisis) and funneling the profits to the Contras. The details of that scandal is beyond this post. Six people were charged but were later pardon by President Bush.  One of them, Olivier North, became a on-air personality for Fox News.

If you really wanted to know what’s was going on behind the scene during the Reagan administration, this book will fulfill that request. The Reagan administration displayed a certain image in public, an image that people are still attached too today. However the behind the scene stuff is the exact opposite of that image the administration cultivated. I understand why. There are so many factors and people involved in the decision making process that it’s an absolute mess. Good book but not your relaxing summer reading.

Pudong District (Shanghai, China)

Pudong District

Image taken from the Aristotle Capital Management 2Q16 Commentary – The Essence

Above we present two views from the same vantage point overlooking the Pudong District in the city of Shanghai – one from 1985 and one from today. The city itself is the home of the world’s newest (and some say grandest) Disneyland. Depicted in the picture is Pudong – literally “The East Bank of the Huangpu River” sitting across from Shanghai’s Old City. The area was originally farmland and only slowly developed, with warehouses and wharves near the shore administered by the districts of Puxi on the west bank. Today, in the bottom picture, note the district packed with skyscrapers, including the iconic Oriental Pearl TV Tower, seen on the left.

Pudong, while today the most populous district in Shanghai with more than five million inhabitants (one-quarter of the population of Shanghai), is still one of its fastest growing. By some accounts, largely due to immigration from other parts of China, Pudong’s population is growing more than 10% annually.

While we consider most domestically domiciled Chinese companies as not yet fully proven through cycles or tested in times of adversity, we believe this could change. We also believe that many Chinese companies are destined to become global players, either now or soon, competing around the world. For these reasons, and as part of our long-term process, we shall keep a watchful eye on the country and its growing number of employee-owned enterprises.

This reminds me a lot of a similar picture that showed Cuba and Singapore at different point in time. The picture is pretty self explanatory. A pure case study of capitalist versus central planning. I wrote a post about it last year here: A Tale Of Two Economies: Singapore And Cuba
cuba-vs-singapore

The Farmer

The story below is taken from Aristotle Capital Management – The Essence

The Farmer

A man and his wife owned a small farm in Nebraska. The IRS, upon reviewing their business tax returns, claimed the man was not paying proper wages to his employees and they, in turn, were not paying their fair share of taxes. The IRS sent a representative out to interview the farmer.

“I need a list of your employees and how much you pay them,” demanded the agent.

“Well,” replied the farmer, “I employ only a few people, so may I simply tell you?” The agent nodded his head.

“OK. There’s my farmhand who’s been with me for three years. I pay him $450 a week plus free room and board.

There’s the cook/housekeeper. She has been here for 18 months, and I pay her $375 per week plus free room and board.

Then there’s the half-wit. He works about 18-20 hours every day and does about 90% of all the chores around here. His pay varies but he typically makes about $10 per week, pays his own room and board, and I buy him either a few beers or two glasses of whisky every Saturday night. He also sleeps with my wife on occasion – I don’t mind.”

The agent quickly says, “That’s the guy I want to talk to … the half-wit.”

“That would be me.” replied the farmer. “How may I help you?”


The morale of the story is the farmer referred to himself as the “half-wit” of his operation as he does 90% of the work for less than 10% of the pay. The investment lesson is that he owns his own business and is therefore motivated to be the most productive person on his team.

30th

There are your Toronto Maple Leafs.Toronto Maple Leafs standing

Taxes and Stamkos

*Update: 35 minutes after posting its reported that Steven Stamkos resigned with the Tampa Bay Lightnings.

I written two pieces in the past on professional athletes and money, The Montreal Tax and Broke Athletes.

My brother, Hugh, sent me this great article from TSN on the possibility on Steven Stamkos signing with the Toronto Maple Leafs. You need to listen to Bob McKenzie’s analysis of the situation, he’s one of the best. Toronto fans are getting all excited since he’s a kid from the Toronto area (Markham) and signing this elite player would change the faith of the franchise. That’s the team that finished last and the proof of their last Stanley Cup conquest are black and white pictures.

Steven Stamkos is the biggest NHL free agent to hit the market in years. Mr. Stamkos is likely to command one of the highest salary in the NHL. While there are many factors that go into this decision we don’t exactly know what exactly is driving Stamkos’ decision. It’s actually pretty hard to read. If it was purely money, he would have resign with the Tampa Bay Lightnings. If it was team success, he would have also resigned with the Tampa Bay Lightnings since the team is one of the best in the league. From what I heard, and that again are purely rumors, he was offered the same contract than Patrick Kane and Jonathan Toews. I believe the contracts are worth $10.5 million each per season for eight years. Another theory is that he’s waiting to see what the others team are offering to have TB match the terms. This is the first time and maybe the last time (big money years anyway) that Stamkos gets to be an unrestricted free agent and test the market.

Talking about dollars, we love to speculate on how much money one player makes but one area we often overlook is after tax dollar that is left. We don’t talk about it because it’s not sexy and complicated but taxes play a huge role in the decision a player has to make when it comes to picking a city. The Canadian cities are clearly at a disadvantaged when it comes to attracting top talent. Let’s face it, $10 million in Toronto is not same as $10 million in Tampa Bay. According to the article, if he was paid $10 million (U.S.) a season by the Maple Leafs, he’d only take home about $3.8 million annually, compared to about $5 million if he re-signed with Tampa Bay according to estimates provided to TSN by the Gavin Management Group. These amounts also include deductions for agent fees and an 18% escrow.  Florida also doesn’t have a state income tax while Canadian teams need to offer more money to compensate for the high taxes. And with a salary cap environment that plays against you.

The Tampa Bay Times did an analysis on how an $8.5M Lightning contract keeping Steven Stamkos in Tampa is better than $10.5M to leave (see table below). The article states that if Stamkos takes $8.5 million with the Lightning, it would net almost the same annually as $10 million in New York, presuming he’d be a New York City resident. He’d net roughly $500,000 less annually than $10 million deals in St. Louis or Detroit, due to city and state taxes, but take in more money over the length of his contract. In Toronto, Stamkos’ hometown, there’s a proposed 53.53 percent federal/provincial tax if he’s a Canadian resident. So even if the Maple Leafs offer $10 million annually, Stamkos would net $7 million less total over the length of the deal compared one at $8.5 million annually in Tampa Bay, partly thanks to an eighth year.

One money advantage that Toronto offers is more endorsement opportunities. But then again you lose a lot of that revenues to taxes of course. If Stamkos wants to play the hometown hero, then Toronto is the place but he will be giving up a lot of money. If he’s after money, he should stay in the sunshine state.

Source: Tampa Bay Times
Source: Tampa Bay Times

Another Opinion on Brexit

Brexit cartoon

Now that the Brexit vote has shocked the world, anybody with a social media account is now an expert in geopolitics. I guess that makes me one too. We were all under the impression that the United-Kingdom was staying inside the European-Union (EU). Before the vote the market and the British pound was up, a sign of confidence even though the polls were pretty close. We know what happened next. The “Leave” vote won and the wheels came off. Calm turned to chaos and $3 trillion of market value evaporated.

Global markets around the world got blindsided and panic took control. There are lot of uncertainties in the markets and markets hate incertitude. We love to know what to expect tomorrow and now nobody does. The uncertainties derive from the fact we have no idea what Brexit means. There are no answers to the cost, penalties, terms and benefits. The only thing that is certain is that nobody has a plan for what comes next.

Now you have the uncertainties. Uncertainties affect business confidence. Less confidence means less investment, and less investments means fewer jobs. Business decisions will be delayed. It’s possible that the U.K. falls in a mini-recession. There’s talk about moving fast to settle the exit and issues. In this case, fast means a couple years.

The vote was a national catastrophic error of judgement. A lot of folks who have voted for Brexit already regret it. Worse, the “Leave” campaign was being carried under false promises. Many proponents for Brexit have already backpedaled on their promises, notably Boris Johnson who might be the next Prime Minister. Remember that thing about stopping immigration? Well there’s still going to be immigration. And remember that “Leave” campaign bus painted with the audacious claim “We send the E.U. £350 million a week, let’s fund our N.H.S. instead,” a reference to the country’s healthcare service.  Well that was just a slogan and has been removed from the campaign website after the election. One Brexiteer politician said that it was only an inspiration. The leader of the UKIP party, Nigel Farage, the face of the Brexit movement, said that the pledge to fund the NHS was a mistake. The two biggest arguments for leaving have been boiled down. “A lot of things were said in advance of this referendum that we might want to think about again,” Liam Fox, a former cabinet minister, told the BBC. The victory can be attributed to a campaign of misinformation and even deception. The leaders of the Brexit campaign are now trying to manage down expectations.

350 million pounds NHS
That was a lie.

For many the vote was a referendum on immigration. It’s a very emotional and important issue. Many Brits wants sovereignty over the issue. The free movement of people inside the EU is one of the 4 tenets of the EU. The other three are the free movement of goods and services, and capital. Boris Johnson already said he promised that Britain would maintain free trade and free movement deals with Europe. So even though he’s for leaving, he’s 75% in agreement with the EU principles.

No matter how twisted this is, we need to respect the result of the vote. It should be noted that the vote is non-binding. That means the UK doesn’t have to exit the EU. For Britain to formally exit the EU, they need to trigger the EU’s Article 50, the law that would start the process of the country’s political divorce from the EU. Once it’s triggered, they have two years to exit.  David Cameron, who is leaving soon, will not trigger Article 50. It will be up to the next Prime-Minister and parliament to make that decision. I personally think the UK will have a 2nd referendum once they know the cost, terms, and penalties of leaving.

I’m in the camp that everything will be all right. Even with a lot of tough talk coming from the EU camp that wants to penalize the UK, I think they will find a common ground that is satisfying for everyone. The UK is linked to the EU no matter what. The most important thing is that all the leaders work together to provide as much stability and certainty as possible. We need to let the dust settle and start thinking rational. In the end, I wouldn’t be surprised once the political games are over that the UK stays in the EU.

Berkshire Hathaway Decentralized Organizational Chart

Berkshire Hathaway is the 4th largest company in the U.S. measured in revenues. BRK is the master of decentralization. There’s only 24 people working at head office. BRK delegates everything down to its CEOs and managers. BRK’s role is to allocate capital. This is the management model to follow for the 21st century.

Berkshire Hathaway Organizational Chart

Chart via Larry Cunningham’s Twitter account: