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.

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.

Veil: The Secret Wars of the CIA

I 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)

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

The Farmer

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

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?”

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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.