Major Causes of Failed Acquisitions and How to Avoid Them

This sheet of paper was provided at of the Ben Graham Centre’s 2017 Value Investing Conference that I attended last week. Tony Fell, the retired Chairman of RBC Capital Markets & Former CEO, used it during his speech. He was with RBC Capital Markets and its predecessor for 48 years. We often hear and see that M&A is not as successful as it should. We hear that’s it’s the culture or this or that for the main cause of failure. The list below is brief and useful. Here are the major causes of failed acquisitions and how to avoid them. I particularly like point #3 and #12.

  1. Start off by reminding yourself that fully 2/3 of acquisitions do not work out and actually destroy shareholder value. The odds are two-thirds stacked against you from the get go.
  2. Always remember – the best deal you do in your career is often the one you don’t do.
  3. Always remember the buyer needs a thousand eyes – the seller only needs one.
  4. Beware so-called major transformational mergers or acquisitions – they usually blow up and many have been catastrophic.
  5. In any takeover usually best to be the seller and get a good premium.
  6. Synergies are often significantly over-estimated and take longer to achieve than forecast.
  7. Beware of the auction process – and don’t bid against yourself
  8. Hold your ego in check, don’t get caught up in the euphoria of an acquisition and pay too much. When you pay too much, your returns may be terrible and your may be faced with substantial write-offs.
  9. Beware poor, or incomplete acquisition due diligence. Nothing worse than major operational or financial surprises after you buy a company.
  10. Calculate earnings accretion or dilution based on constant leverage ratio. Accretion due to increased leverage is not accretion.
  11. Beware of potential clashes in corporate culture of two merging companies.
  12. Remember that the vision of the acquisition is great but execution is where it’s at. It’s one thing to acquire a company, it’s quite another to integrate it into your own business and run it. Vision without execution is hallucination.
  13. No acquisition is make or break. There is always another train.
  14. On any acquisition don’t increase leverage beyond a very prudent level. Finance with equity.
  15. Beware international acquisitions. Foreign markets are often more competitive than Canadian markets with lower margins. Don’t expand beyond your ability to manage tightly.
  16. Notwithstanding the above perhaps 10%-20% of acquisitions are outstanding successes.
  17. Good Luck.

Major Causes of Failed Acquisitions And How To Avoid Them

Altria Group Inc. – One Of The Best-Performing Stocks Ever

This is my latest piece on multi-baggers. Altria Group, also referred to as Philip Morris, has been one of best performing stock ever in the last 100 years. Tobacco itself was the best performing industry from 1900 to 2000. It wasn’t oil, technology, or IT. No it was tobacco. Here’s an industry that didn’t require any innovation or massive technology breakthrough. It’s just tobacco and it has crushed any other industry. Thanks in part to its addictive nature.

Shares of Philip Morris were publicly available from 1919 but data is hard to come by. Most public website, such as Yahoo! Finance, has data going back to the 1970s. I spoke with investor relations but they couldn’t help either. So I had to calculate my performance from 1970. That’s reasonable holding period. It also represent a working lifetime.

The cost of one share on November 23, 1970 would have been $46.12. Since then there have been many splits. My one share would have turned into 96 shares. There was a 2 for 1 split in 1974, 1979, and 1986, a 4 for 1 split in 1989, a 3 for 1 split in 1997.

It’s possible there were splits before the 1970s but the data are extremely difficult to come by. My single $46.12 share would have turned into 96 shares worth $6,145.92. This represents a 57466% change, or a 574.6-bagger in Peter Lynch’s parlance. A $1,000 investment (2081.30 shares split adjusted) would have been worth $575,666.84. The yearly dividend payment would have been 5,077$, five time my original investment. Investing in Atria may not have been the most ethical choice but it would have been a financially sound decision, and more.

The full article is on Seeking Alpha and is free to read. They have the rights to it so I can’t post the full piece. One of the best part are the comments. I love reading stories on how certain people have been holding to certain shares for more than 30 years and saw their investment compounded many fold. One commentator said that his shares of Altria has been in the family for almost 100 years!

Altria Group Inc. – One Of The Best-Performing Stocks Ever

By Brian Langis


  • The full corporate story of Philip Morris is complex but the outstanding performance of its stock makes it worth looking into.
  • Investing in Atria may not have been the most ethical choice but it would have been a financially sound decision.
  • How much your investment in Philip Morris Companies would be worth today is very complicated due to the number of spinoffs, mergers, splits, and IPOs.
  • One share of Philip Morris in 1970 is equal to 96 shares today!
  • $1,000 invested in 1970 would give you $5,077 in dividend payment today!

Marlboro Man, Hollywood California. Source: Arthur Grace, photographer.

I’m a big fan of history and business. I’ve been researching multibaggers and along the way, I’ve decided to write some articles. So far, the feedback has been amazing. Here are my first two articles in the multibagger series.

The best part about writing these articles are the comments. I love reading people’s stories. In my previous article, one commentator suggested I write an article on Philip Morris Companies Inc., better known as Altria Group Inc. (NYSE:MO) since 2003. At first, even though I knew the tobacco industry was a money-printing machine, we don’t talk about Philip Morris in the same conversation as the Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) of this world. That is, companies that made people very rich.

My first two articles were about two high-tech stocks that changed people’s lives for the better – Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). Philip Morris’ products are not known to make life better. I see a couple of reasons why the Altria Group is not lumped with the “cool” high return companies. The first reason is that the tobacco industry is boring. Second, when you think of Philip Morris, you think of big fat reliable slowly growing dividends, not an innovative company with amazing growth prospect. The suggestion to write about Philip Morris led me to research it and I liked what I saw.

Today Altria Group is a $122b market cap company with approximately $19b in revenues. The cigarette manufacturer distributes annualized dividend of $2.44 per share that provides a yield of 3.9%. The Altria Group owns 100% of Philip Morris USA, John Middleton (machine-made cigars), Philip Morris Capital Corporation (leveraged leases), U.S. Smokeless Tobacco Company, and the Ste. Michelle Wine Estates. Altria also owns 9.6% of Anheuser-Busch InBev. It’s a pretty diversified group but it’s mostly known for its cigarettes and its Marlboro brand.

Source: Altria Group

I bring up the dividends early on because it has been such an important contributor to its performance. Altria has increased its dividend 51 times in 48 years. Altria targets a dividend payout ratio of approximately 80% of adjusted earnings per share. The dividends have turned Altria into a dominant investment. It has been a favorite of dividend investors for a long time, as the company has consistently made healthy payouts to its shareholders. The company has provided the killer combo: the income they need and the capital appreciation they want.

Altria recently revised its guidance for 2016 full-year adjusted EPS from a range of $3.01 to $3.07 to a range of $2.98 to $3.04, representing a growth rate of 6.5% to 8.5% from a 2015 adjusted EPS base of $2.80. Altria aims to maintain its long-term financial goals of growing adjusted diluted EPS at an average annual rate of 7% to 9% and a target dividend payout ratio of approximately 80% of adjusted EPS.

Source: New-York Times, May 23, 1919


The full corporate story of Philip Morris is complex but the outstanding performance of its stock makes it worth looking into. Determining what your initial investment in the original companies that formed the Altria Group/Philip Morris Companies would be worth today is very complicated due to the number of spinoffs, mergers, splits, and IPOs. There’s a reason why it was called Philip Morris Companies Inc. In addition to the U.S. and international tobacco business, Philip Morris owned Kraft Foods and still owns its original stake in the Miller Brewing company that became SABMiller, and now Anheuser Bush Inbev SA (NYSE:BUD).

There are many layers to this. For an idea of the complexity, just take Kraft for an example. After Philip Morris bought Nabisco Holdings, it combined General Foods, Kraft, and Nabisco Holdings into one company called Kraft Food. Then there was the IPO of Kraft in 2001, its spin-off in 2007 and a split in two companies in 2012 with the other half becoming Mondelez International. At the time, the value of the spun-off Kraft shares was almost 24% of Altria’s total value prior to the spinoff, leaving Altria subsequently about three-quarters as large as it had been.

Then in 2015 Kraft was acquired by Heinz. Then I have to calculate the appropriate cash dividend from all the subsidiaries because Philip Morris International was spun off too and in this case Altria was the much smaller company. This can be a messy exercise. What’s clear is that long-term shareholders of the Altria Group have been very well rewarded. Even though that over time, Kraft and Philip Morris have rewarded their shareholders in their own unique ways, for simplicity’s sake, I focused solely on the Altria Group even though the “full complete” investment performance would be much higher.

Today you can follow many of Philip Morris’ companies:

  • Altria Group Inc. is the original company and subject of this article. It’s the U.S. tobacco business and many other companies mentioned at the beginning of the article.
  • In 2008, Altria Group spun off its non-US tobacco business, Philip Morris International (NYSE:PM) to its shareholders. Altria investors received Philip Morris shares on a 1-for-1 basis. Philip Morris was actually the much larger offshoot, with Altria representing barely 30% of the value of the two companies. The reason for the split was to set free the faster-growing overseas operations while the U.S. business was entangled in smoker lawsuits. It markets and sells its products in approximately 180 countries.
  • Kraft Food is now The Kraft Heinz Company (NASDAQ:KHC). Mondelez International (MDLZ) is still a standalone company. The IPO was in 2001 and was the spin-off in 2007.
  • The Miller Brewing Company became SABMiller and is now Anheuser-Busch InBev SA/NV (NYSE:BUD). Altria owns almost 10% of the newly merged company.

Unfortunately, when it came to calculating its performance, I couldn’t go back all the way to 1919 when it was first publicly available to the public and was majority owned by the Tobacco Products Corporation. I spoke with investor relations and they didn’t know what their investment return was since 1919. However, they did refer me to a paid service that might find out for me but I refused to pay $25. So I had to use the data available to me.

The earliest I could go back is November 23, 1970. That’s as far as Altria would go. However, historical closing prices and dividend payments for Altria dating back to the early 1970s are available on Yahoo Finance. That’s fine since we can reasonably assume that a long-term shareholder wouldn’t have acquired his shares in 1919. That’s also essentially a working lifetime. However, it’s reasonable to assume that one could have held shares for twenty or thirty years.

Source: Buy Out British Interests; Tobacco Products Get Control of Philip Morris & Co. of New York. New York Times, February 14, 1919

You can read the full article here on Seeking Alpha.

Continue reading “Altria Group Inc. – One Of The Best-Performing Stocks Ever”

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


  • 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.



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.

Apple Computer’s IPO

Apple Computer's first logo. 1977
Apple Computer’s first logo. 1977

One of my most popular article to date on Seeking Alpha. It’s was a top trending article for two day and it has received a lot of good comments. I’m proud of the achievement but again any article on Apple, Facebook, Google, or the cool stock of the moment will get you trending. It’s great, but it also goes against what Seeking Alpha is about, which is shining a light on companies with limited or no coverage. SA still serves that purpose and it’s great for that, but it’s still hard to get attention sometimes on little unknown companies. Apple has so many analysts so I’m not sure why people bother writing articles about it on SA. There are so many companies that are bargains but nobody has never heard of them.

Anyway here’s a preview of my article on Apple’s IPO. The full article is free on SA. I suggest you go read the comments. There’s a lot of good stuff there. It’s almost like a trip down memory lane for so many people.



Apple Computer’s IPO


  • Apple was a 205-bagger from 1990 to today (3-17-2016), without calculating dividends.
  • But you needed an 80% loss twice in order to get it.
  • Not your classic buy and hold fairy tale.

I’m a big fan of history and business. Combine both of them and you have quite a passion. While reading on what makes companies into multi-baggers, Apple Inc. (NASDAQ:AAPL) came up. I started researching old documents on Apple Inc. which eventually led to the IPO. I wanted to know, what at the time, made Apple a multi-bagger. Multi-bagger is a term popularized by Peter Lynch, author of One Up on Wall-Street and a manager at the Magellan Fundat Fidelity Investments from 1977 to 1990. Peter Lynch often uses the term “10-bagger,” which is when a stock goes up 10 times in value. I hope I’m not shocking anyone by stating the fact that Apple qualifies as a multi-bagger. Actually Apple is a multi, multi-bagger. My research led me to the Apple IPO, which was pretty interesting itself. So I decided to make an article out of it to share some of my research and findings. I might write an article on multi-bagger companies later. At today’s price of $105, Apple is a 205-bagger plus from 1990 to today, without dividends. For those who observed Apple’s share price from outside, the stock performance seemed to be an unbeatable machine. However, a closer look would reveal that it wasn’t always a fantastic engine.

In 1977, Apple Computer (now known as Apple, Inc.) was a very different company and Steve Jobs was a very different entrepreneur. Apple had its IPO in 1980 which I review in detail below. By looking at Apple’s stock price today, around ~$105 post-split, investing in Apple at the beginning would have looked like a no-brainer. You always hear people saying that if they bought Company X when it first came out, they would have been multi-millionaires today. The real story for early Apple investors, however, wasn’t all sunshine and rainbows. This is not your classic “buy and hold” fairy tale. If you would have bought Apple at the beginning and held on to it, you would have been clinically depressed for a good part of your life, unless you get joy out of pain. I did open my article by mentioning that Apple is a multi-bagger, but you needed an 80% loss twice in order to get it.

First, let’s start with the IPO then I will walk you through the performance history.

The Successful IPO

*Price per share mentioned are pre-splits numbers unless mentioned otherwise.

Source: Clipping from The New-York Times, December 15, 1980 – By Vartanig G. Vartan – Business – Print Headline: “New Stocks Drawing Intense Investor Interest”

I like how the clipping above had to mention that Apple was a Californian company that makes personal computers. For part of the research, I have to thank the Computer History Museum and The New York Times archives for my research. The Computer History Museum has two special documents from Apple Computer during the early days of personal computing. The first is thePreliminary Confidential Offering Memorandum – a document supporting a private placement of funds for Apple before the IPO. The document also contains the product and marketing plan. Computer History Museum CEO John Hollar noted the plan also “goes to great lengths to explain why anyone would even want a personal computer (e.g., forecasting eight reasons “that indeed, by 1985, a household using a computer will have significant advantages over one that doesn’t”), and that every single competitor listed is no longer in the PC business.” And if you are really interested, the second document is thePreliminary Macintosh Business Plan, which is post-IPO.

Source: Apple’s Preliminary Confidential Offering Memorandum

Apple Computer Inc., now renamed Apple Inc., had its IPO (prospectus) more than thirty-five years ago, on December 12, 1980, with 4.6 million shares priced at $22 ($0.39 a share post-split). Since then the stock has split four times, including three 2-for-1 splits (1987, 2000, 2005) and recently one 7-for-1 split (2014). That means your 100 shares would have multiplied into 5,600 shares today, or 56 times your original holding. Apple raised $101 million. Apple sold 7.4% of the company of the 54.2 million shares outstanding at the time. On that day, the Dow soared 21.59 points to 958.79, staging its biggest one-day rally since spring 1980. The Dow jumped because of a surprise half-point reduction in the prime rate by Wells Fargo to 20.5%! (Yes, you read that correctly, interest rates were extremely high back then, don’t ever forget that it could happen again).

During fiscal year 1980, Apple had sales of $118 million, up from 774k in 1977. Earnings also came at $11.7 million, or EPS of $0.24, compared with $41,575 or EPS of $0.01 in 1977. Now, think of how much Apple makes every minute. In 2015, Apple had sales of $233.7 billion and $53 billion in net income. Apple had a second offering of 2.6 million shares that quickly sold out in May 1981.

I found old news clipping below from The New York Times archives on Apple’s IPO.

Source:The New York Times, December 13, 1980. First Business Page, Part 1.

Source:The New York Times, December 13, 1980. Page 3 of the Business Page, Part 2.

Source: The New-York Times, Business Digest, Saturday, December 13, 1980.

As the article states, the IPO was a major success. The shares jumped immediately to $29, peaked at $29.25, and closed at $28.75. The offering happened to be the largest IPO in 15 years at the time since Comsat (side note: Comsat is the same company that owned the Denver Nuggets from 1989 to 2000, and bought the NHL Quebec Nordiques and moved them to Denver as the Colorado Avalanche. Comsat was acquired by Lockheed Martin Corp. (LMT)). The original offering was estimated at between $14 and $17, but due to strong demand was raised to $20 and $22.

Sorry, to cut you short, the full article is on SA or they will ask me to take it down. Thanks.

Moleskine SpA: Paper Is Not Dead

My latest article published on Seeking Alpha. It’s on the iconic and global brand Moleskine. This is the same company that is all the rage right now among artists and professionals. It’s also makes a great gift.

Seeking Alpha has the rights to the article. For the full article you have to visit their site.

Moleskine SpA: Paper Is Not Dead

Reposted from Seeking Alpha
By Brian Langis


  • Moleskine is an iconic and global brand. The Moleskine brand has developed a cult-like following.
  • Over the years Moleskine has delivered continued double digit revenue and EBITDA growth.
  • Solid balance sheet. Almost net cash (4.1m euros in debt).
  • The notebooks are popular amongst professionals, artists, hipsters, and collectors.
  • Slump in the share price is not justified. Moleskine is consistently matching or beating their targets. The market is not noticing.

Borsa Italiana Milan ISIN: IT0004894900, Bloomberg: MSK:IM

Moleskine is primarily traded on the Milan stock exchange Borsa Italiana under the ticker MSK:IM, where there’s plenty of volume. I will be referring to the Italian symbol for the article.

Note: Dollar amounts are in Euro € unless mentioned otherwise. EUR-USD 1.1025. Price of 1 EURO in USD as of February 25, 2016.

Moleskine SpA (OTCPK:MOSKY) is an Italian manufacturer of luxury notebooks and other stationery items such as agendas, journals, bags and cases. The company might have an Italian headquarters, but its business is global. You would actually think it’s American with its Star Wars and Batman notebooks. Moleskine suffers from a lack of coverage. Except for one article in 2015 and (one in) 2013, there is no coverage on Seeking Alpha. Part of this article is to demonstrate this opportunity, and I sort of hope the article can spark further discussion on the investment merits of Moleskine. Throughout the article I will refer to journals, diaries, planners, agendas as “notebooks” for simplicity’s sake.

Moleskine’s business might be exploding but its stock is not. The stock has been trading on the Milan Stock Exchange since 2013. As the graph below demonstrates, the stock has been slumping since the IPO.

Source: Google Finance. Stock is down 31.7% since the IPO in 2013.

In this article I will provide my investment case for Moleskine. With a conservative approach, I believe the stock has a 30% to 40% upside from where it’s trading today. There are several catalysts that could turn the slump in the stock price around such as: continued growth at a double digit rate, more market coverage by analysts and the media that enhances the stock’s visibility, a share buyback program to take advantage of the discounted price, a take-over offer, and the market realization of the full value of Moleskine’s assets and brand. The current slump in the share price is unwarranted. Moleskine is consistently matching or beating their targets but the market is not noticing.

Revenge of Analog

Source: Moleskine

You wouldn’t expect a paper notebook company to be successful in a digital world. Moleskine is not an isolated case of “old world” technology making a comeback, or simply refusing to disappear. Moleskine’s success is part of a movement that some have labelled the “revenge of the analog”, especially among the young people. The movement, where certain technologies and processes that have been rendered “obsolete” suddenly show new life and growth, even as the world becomes increasingly driven by digital technology. You can see this renaissance with business cards and the return of vinyl records.

For the full article and valuation, it’s available on Seeking Alpha since they have the rights to the article. Thank you for reading.

Clarke Inc. – Canada’s Activist Value Investor

Latest article on Seeking Alpha. Below is a sample since Seeking Alpha has the rights. The article is free for for a month before the paywall us up. Enjoy!


Reposted from Seeking Alpha
By Brian Langis



Clarke Inc. is primarily traded on the Toronto Stock Exchange under the sticker CKI. Last thirty day trade value is approximately $93k per day.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.3371 Price of 1 USD in CAD as of November 29, 2015.

Part of my writings is to shine the light on companies that deserve more attention. My most successful investments are usually found in places where nobody is looking since this is where you get the best deals. I believe that Clarke Inc. (OTC:CLKFF) is a company that deserves to be on your investment radar. CKI is a company that people will talk about one day after making a huge successful deal and they will wonder why they haven’t heard of it in the past (CKI is too small for analysts and institutional investors).

Clarke Inc. is an investment holding company based out of Halifax, Nova Scotia. Don’t let the Halifax part fool you. After all, isn’t Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) run from Omaha. For the skeptics, CKI has an office in Toronto; it’s where the deals flow in Canada. CKI is company with a ~$155m market cap, trading at ~0.8x book value and provides a 4% dividend yield. Clarke Inc.’s Chairman is George Armoyan, a colorful activist value investor in Canada. CKI describes itself as an activist catalyst investment company with a diversified portfolio of strategic and opportunistic investments. More often, Clarke seeks active involvement in the governance and management of the company which it invests with the goal of improving the underlying company’s performance and maximize the company’s value. For this research, I have not spoken to George Armoyan, but I spoke to Michael Rapps, the CEO.

This is a brief rundown on how Clarke Inc. usually operates. CKI starts accumulating shares of a target company, mostly mid-size companies so far, those with a stock market value of around $50m to $150m. Then when it crosses the 10% threshold that requires CKI to publicly disclose its holding, the company demands seats on the target’s board of directors and input into management. The goal is to gain control and then engineer a turnaround and generate a profit.

A quick look at Clarke Inc.’s investment portfolio is not pretty. It’s not supposed to be. That’s the key to its superior returns. I looked at past Clarke investments and none of it was sexy. Every investment Clarke Inc. made money on in the past didn’t have a sign pointing that’s going to be the next big money maker. It’s still the case today with its current portfolio; it’s not composed of stocks everybody likes to buy. Following the trends that are popular isn’t a formula for success and CKI definitely knows that. If you want a real bargain, you have to look where nobody is looking, where there are problems, and where there’s blood on the street. Most people simply don’t know how to find it and or they simply don’t have the spine to go through with the investment.

Like most stocks, Clarke Inc. took a beating during the recent downturn and now provides an interesting entry point to build a position. CKI was trading at a peak of $12.30 in July to fall where it’s currently trading at now, around $9.90. The slump represents a 20% fall from its peak. The table below is five-year chart of CKI’s stock price. You will notice the stock was mostly flat until late 2013 and had a run-up that more than doubled the share price. There’s a reason for the run-up which is explained below.

(click to enlarge)

Source: Google Finance. CKI 5-Year Chart. CKI is up 136.8% vs. 3.85% for the S&P TSX.

Regarding holding companies, aside Berkshire Hathaway and Power Financial Corp. (OTCPK:POFNF), I don’t own any other investment holding companies even when they trade at a significant discount to book value. I have seen the compelling investment thesis; the sum-of-the-parts are much higher than market value, you get this part of the business for free, it trades for less than cash etc…and despite all the great reasons to own the “cheap” stock, the price barely moves. I find that most holdings companies are asleep and there’s a lack of action to unlock value. There are exceptions and I’m generalizing the sentiment. I have been following many investment holding for years out of curiosity, and most of the time nothing happens, like Power Financial Corp., where the stock price hasn’t gone anywhere in a decade (but at least it distributes a dividend).

Clarke Inc. is a different investment holding. The company is pro-active and cares about its stock price. In the last two years, Clarke has demonstrated that it wants to close the discrepancy between quoted value and intrinsic value, as demonstrated by the run-up in the stock price for that period (see previous chart above). To achieve those superior returns, the team running Clarke have divested the company of some of its private holdings. Turning these assets into cash has helped close the gap between market price and book value. Then the company modestly raised its dividend from $0.06 per share to $0.08, and now $0.10 per share. The current dividend yield of ~4% certainly attracts more investors, such as your income-oriented class. CKI has also been very aggressive at buying back its share, with $40m in repurchase in the first half of 2015 alone. Clarke has fully redeemed its debentures and has eliminated its debt. The company also decided to regularly put out presentations to make the case for investing in its stock. These are some of the different initiatives the company has put together to raise its profile among the investor community. The combination of actions shows that the CKI cares about its stock price.

Here’s Clarke’s mission and business operation:

Clarke is an investment company. Our objective is to maximize shareholder value. While not the perfect metric, we believe that Clarke’s book value per share, together with the dividends paid to shareholders, is an appropriate measure of our success in maximizing shareholder value over time.

We attempt to maximize shareholder value by allocating capital to investments that we believe will generate high returns and reallocating capital over time as needed. In doing this, Clarke’s goal is to identify investments that are either undervalued or are underperforming and may be in need of positive change. These investments may be companies, securities or other assets such as real estate, and they may be public entities or private entities. We do not believe in limiting ourselves to specific types of investments. From time to time, Clarke will invest passively in a security where it believes the security is undervalued and there is no need for change or where it believes the security is undervalued but that the management team in place at the underlying company is doing an appropriate job to reduce the undervaluation.”

I don’t usually buy into these nice scripted mission statements and you shouldn’t either. It’s a given that every company says their objective is tomaximize shareholder value. However, Clarke Inc.’s actions lead me to believe that it stands by what it wrote. The first part of the statement is generic boilerplate statement. It’s the second part that’s retained my attention. In the second part, the key statement is “allocating capital to investments that we believe will generate high returns and reallocating capital over time as needed.” This statement reminded me right away of the excellent investment book by William Thorndike, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. The book demonstrates CEOs who created exceptional long-term value because they excelled at capital allocation. For CKI, as an example, excellent capital allocation decision is buying back shares when it’s trading below book value.

At the moment, being an activist investor is the approach du jour on Wall-Street but not in Canada. Activism is more looked down upon in Canada than the US. The approach of ruffling feathers when things go bad is heavily criticized which fuel the negative perception of activist investing. It seems that all activist investors are being lumped together, good and bad. However, I believed there are two kinds of activist investors, the ones with a long-term approach like ValueAct and Nelson Peltz, which have proven to create shareholder value over time and the ones with a short-term approach, which are usually value destructive because they focus on short-term gain at the expense of the long-run performance. George Armoyan and Clarke Inc. were activist investors before it was a cool word. Mr. Armoyan’s track record has proven that he can work positively with the management team, make changes that are beneficial to shareholders, and have a positive impact on rational capital allocation over time. My point is that he’s not another guy getting on the activist bandwagon. Mr. Armoyan is not a trend.

You can copycat Clarke Inc. by investing in the stocks that the company holds. However, you would enter your position at a higher price than Clarke Inc. did because once it obligated to reveal a position, the herd jumps in and the target company’s stock price shoots upward. The better option is ignore the herd and to buy shares of CKI. At a discount, you will have the same exposure than buying the stocks on your own, benefit from an excellent owner-operator, receive a dividend, and benefit from Clarke Inc. buying back its shares. In the last five years, the latter seemed like a good strategy. I am convinced that Clarke’s underlying businesses have value that far exceeds where the public market values them.

About Clarke Inc.

Clarke Inc. was a family business founded in 1921 and its IPO was in 1998. Today’s Clarke Inc. has nothing in common with the original company. Clarke Inc. used to be in the transportation industry and there’s no more link to the original founding family. Clarke Inc. was an underperforming trucking company that George Armoyan took over in 2003 through his private investment vehicle, GeoSam Investments (named after his two kids, George and Sam). He changed management and redirected cash flow through different investments. Clarke Inc. sold its transportation and logistics service to TransForce in 2013. Clarke Inc. used convertible debentures to fund it buying spree and has since redeemed all the convertible debentures. Below is a graph of the brief corporate history since Armoyan got involved.

(click to enlarge)

Clarke Inc. is patient. The company doesn’t mind sitting on cash until it finds the right target. CKI only deploy capital when it has real conviction that it has found a solid idea. When it doesn’t find interesting ideas, it holds cash.

When I spoke to Michael Rapps, he told that Clarke Inc. will not limit itself to any sectors and it will go anywhere opportunities are. Its mandate is to make money. However, Mr. Rapps told me that they have a “no” list. They don’t invest in mining, tech companies, and pharma among other things. They have a penchant for real assets, such as real estate, things that can be monetized and provide downside protection.

The full article is accessible on Seeking Alpha here.

The Suncor – Canadian Oil Sands Guide

 Below is a portion of my article published on Seeking Alpha on Suncor’s bid on Canadian Oil Sands. I got a few questions regarding the bid so I decided to write a post to address some of the concerns. Full article at Seeking Alpha (free one).


  • Suncor Energy looks opportunistic. The 43% “premium” sounds generous but is much lower than most investor’s average price.
  • Suncor Energy is a much better company than Canadian Oil Sands. It’s Suncor’s low offer that seems to be the issue, not the share exchange.
  • The current market price of COS expects a better offer from Suncor or a rival bid.
  • Investors seem very split. This article is a provide guidance and a break down of the offer.

Suncor Energy: SU, TSX: SU

Canadian Oil Sands : OTCQX:COSWF, TSX:COS

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.3047 Price of 1 USD in CAD as of October 6, 2015.

I woke up Monday morning with a Bloomberg notification saying that Suncor has made a hostile takeover bid on Canadian Oil Sands. The offer came in as a surprise and caught everyone off guard. Let’s just say it’s not very “Canadian” to go hostile, especially in the oil sands close circle. Then my phone started to ring and my inbox filled up with questions from investors on what they should do. People seemed more stressed than usual. I believe the source of stress is due to people feeling pressured to make a decision and since it’s related to money they want to make the right one. Another layer of stress is that most investors are likely losing money on their position on COS, which is a painful position to be in. Accept the offer and lose less money, or don’t accept and lose more money while hoping that oil prices recover one day, or sell when the stock is trading at a premium to the offer. One only needs to read the comment question of news article to see how emotional, opinionated, and split investors are regarding the bid.

First you can relax because you have until December 4, 2015 5:00 pm to make a decision. A lot can happen until then. I would also suggest you read the Take-Over Bid Circular. It lays out the offer and a lot of details. It’s a very legal boring document to read but there’s section that covers the essential. Plus reading it will make you a more informed investor.

People were quick to react on the little information they knew. A lot of the questions seemed to surround what they should do, whether to sell or not, or if the offer was fair, or they simply didn’t understand the offer. There are things I can answer and others that I can’t or will need to wait. The objective of this article is to help investors guide themselves. The following text is of general nature and does not constitute to be legal advice. For disclosure reasons I do not own any shares in COS. I own a little bit of Suncor and it’s not a significant position in my portfolio. Here’s what I gathered so far.

What happened?

Low energy prices have brought havoc to Canadian Oil Sands’ share price. Below of is a chart of COS, Suncor over the last two years:

(click to enlarge)Source: Google Finance. Over the last two years COS lost -53.8% of its value vs –6.55% for Suncor.

Suncor has about $5 billion in cash and decided to do something about it. Suncor is making an unsolicited offer to acquire all of the outstanding shares of Canadian Oil Sands. Unsolicited means that COS wasn’t seeking a buyer. Unsolicited bids are also known as hostile bids. Suncor tried twice to buy COS and the Board rejected. Suncor’s offer was $11.84 on April 9, 2015(based on March 31, 2015 closing price, 0.32 Suncor/COS shares), much higher than Suncor’s current offer of $8.84 (based on October 2, 2015 SU’s closing price) and higher than COS’s current trading price. Suncor made another offer in April and was again rebuffed. Suncor said that the latest offer reflects the 17% drop in crude oil prices since its friendly approach. It looks like Suncor really wants this company and is now going directly to shareholders. Suncor needs 66.6% (two-thirds) of the outstanding shares of COS to be tendered by December 4 2015 to have the deal to be approved. This should be an interesting vote since COS is a widely held company.

Suncor and Canadian Oil Sands have links to each other. They are both partners in the Syncrude Project. Syncrude is the largest producer of light, sweet synthetic oil from Canada’s oil sands. COS has a 36.74% interest in Syncrude but it doesn’t operate the project, its role is to manage the investment and its shareholders. Suncor has a 12% stake, meaning Suncor would own just under half of Syncrude if it successfully buys COS. Other Syncrude partners are: Imperial Oil with 25%, Sinopec 9%, Nexen 7%, Murphy Oil and Mocal Energy with 5% each.

The Offer

Here’s a breakdown of the offer.

Suncor is offering $4.3 billion in its own stock and would take on about $2.3 billion of COS debt, bringing the total price tag to $6.6 billion. The offer is a 43% premium over the COS’s closing price on October 2, 2015 and a 35% premium over the volume weighted average trading price of the shares for the 30 trading days.

Under this offer you don’t get paid cash. Instead you become a shareholder of Suncor, which includes the Petro-Canada chain of fuel stations as well as its own oil & gas production and refining operations. Suncor is offering of 0.25 of a common share of Suncor for each common share of COS. This sounds simple but was the source of many questions. This is how you interpret this offer:

This means that the value of the offer fluctuates. If Suncor’s stock price goes up, so does the offer. The opposite is also true. As a COS shareholder, you are switching your equity into Suncor.

Full article at Seeking Alpha (free one).

Movado Group: Luxury On Sale

Movado Group (MOV), the luxury watch maker, is the subject of my latest research published on Seeking Alpha. I make the case that Movado is currently undervalued vs its peers and that the Apple Watch threat is much milder than expected. Movado has a rock solid balance sheet with net cash, a diversified pipeline of products, is increasing sales and improving margins, and is aggressively buying back shares. The company also distributes a small dividend.



  • Rock-solid balance sheet with $148m in net cash.
  • Movado trades at 4.9x next fiscal year EV/EBITDA (FY2017). MOV trades at lower multiple than its peers.
  • The Apple Watch turns out to be a much milder threat than expected.
  • Movado is an asset-light business. It doesn’t manufacture watches. It’s a cash-rich business.
  • Movado is aggressively buying back its shares.

Movado Group (NYSE:MOV) is one of the world’s premier watchmakers. Movado Group designs, sources, markets and distributes fine watches in almost every major category comprising the watch industry. You have seen some of its many well-known brands. Its portfolio of brands currently comprises core brands such as Concord, Ebel, ESQ Movado and familiar fashion licensed names as Coach Watches, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado, and Tommy Hilfiger Watches. The watches are fabricated through independent contractors in Switzerland and Movado is headquarted in Paramus, New Jersey.

Movado is an American company, but has the majority of its watches manufactured in Switzerland and it has been a tough year for Swiss watchmakers. For the past year, Movado’s stock price has taken a major fall. Movado is under attack on two different fronts, technology and the rise of the Swiss franc. China’s recent stock market turbulence also took its toll on the stock. The introduction of the Apple Watch, combined with a surge in the Swiss franc, have sent Movado stock price from the $40s to a low of $21.42. But the single largest factor behind the decline is due to Apple (NASDAQ:AAPL) entering the Smartwatch industry. Apple is casting a giant cloud over the entire industry. Apple has a history of disrupting and dominating an industry once it enters (iTunes, mobile, tablets, you name it etc.).

“Apple Watch is the most personal device we’ve ever created. We set out to make the best watch in the world,” said Tim Cook on September 9, 2015 during the Apple Watch announcement.

(click to enlarge)

MOV 5-Year Chart. Source: Google Finance

According to the five-year performance chart above, the stock has seen better days. In November 2013, Movado hit a peak of $46.88 per share and traded in the $40s range weeks before the Apple Watch announcement. The stock has been on a downward trend most of the year to hit a low of $21.42 in August. The stock has since recovered with the release of good Q2 results on August 27, 2015. By looking at the graph, you might wonder about certain sharp fluctuations. The severe drop in November 2014 was due to disappointing Q3 results and revised downward guidance. However Q4 2014 results turned out above the revised guidance and the stock picked up to $30 to only make its way down afterward. YTD the stock is down -4.37% and the 1-year return is down -20.35%.

Apple’s entry into watches is definitely a concern, but the Apple Watch turns out to be a much milder threat than expected. There’s positive side to the Apple Watch story. First it got millennials interested in watches or at least talking about them. One needs to look at a company like Shinola, which prides itself on manufacturing its watches in Detroit; it’s a major hit among hipstersand I should mention that the company’s watches are good old quartz ones, not smart. Swatch Group AG (OTCPK:SWGAY) said the company has been trying to sell its smartwatch since 2000. Now that Apple is there, demand for Swatch’s smartwatches has boosted. Second, concerns about smartwatches are driving innovation across the Swiss industry, which could help longer-term sales. Most brands are coming out with some kind of wearable/smart device. Some will be hits, some will be mostly misses. However, this innovation will plant the seeds for the future of the industry. There will be trickle-down effects and lead to better products down the line.

Movado doesn’t have significant exposure to Asia, with only 8% of net sales. The U.S., a strong and growing watch market, is responsible for 55% of Movado’s sales. Swatch Group AG, probably Movado’s most comparable competitor, has a lot of exposure in Asia. Swatch posted a 20% drop in first-half profit, and noted weaker demand from markets, such as Hong Kong, but net sales increased 2.2% to 4.19 billion swiss francs from 4.1 billion swiss francs. Updates from the Compagnie Financiere Richemont (OTCPK:CFRHF) and Prada (OTCPK:PRDSY) were better than expected, despite the turmoil gripping China. Basically this is saying that China’s thirst for luxury goods is still there.

There are many things that I like about Movado. It is a business that has good or improving economics, and often generates sales and profits in multiple jurisdictions. Movado is cheap. It is attractively valued at 4.9x next fiscal year EV/EBITDA and a price to earnings of 11.3x (detailed valuation below). The balance sheet is mostly cash and inventory. The company carries net cash of ~$148m. That’s a lot of cash when your market cap is about $600m. At the moment, Movado is completing a $100m share buyback program. It’s expected to continue to aggressively buyback shares with a renewed program in November 2015. Usually when you buy 10%-15% of the float, it should fuel EPS higher. Movado trades at 1.3x book value and no value is given to its own brands. Movado’s brands – Ebel, Concord, ESQ, and Movado – are given no intangible value on the balance sheet. They are obviously worth something on the open market, since they bring so much cash to Movado. The business model is asset-light, because the capital intensive process of manufacturing watches is done by somebody else. The latest quarter revealed that the Apple Watch threat was overblown. Sales were up 1.4% over the same quarter last year, and that’s taking into account a $6.8m hit because of the currency fluctuation. Movado also maintained its full-year guidance for this fiscal year. As for the smartwatch threat, Movado is entering the arena in Q4 with its own “smart” device.

And last, I’m not a watch connoisseur but I really like the look of the classicMovado Museum style. I find a lot of watches to be jam-packed with info and too crowded (Movado has those too). I just need a watch that looks good with a suit or to go out to a dinner, not a tool to control a space station. It’s clean, simple, and elegant. There’s an intangible there. Movado watches looked great forty years ago, look great today, and will look great in forty years.

(click to enlarge)

Movado Museum designed by artist Nathan George Horwitt in 1947

You can read the complete research and the valuation on Seeking Alpha (they have the rights to the article.

MTY Food Group Inc. – Another Restaurant Stock In For Your Portfolio

This is an update on the restaurant group MTY Food Group Inc. My original article was published in December 2013, so an update won’t hurt. I’ve been more conservative with my valuation. I didn’t include any acquisitions or potential expansion plan in the U.S. If any of the two events happens then MTY is worth more than my estimates. I valued MTY on its current business and not its potential. MTY is a serial acquirer and the market is not giving any value to a potential large accretive acquisition. MTY’s growth-by-acquisition strategy makes it difficult to forecast earnings and therefore to value.

Below is a portion of the article. The full article is available at Seeking Alpha.


MTY Food Group Inc. – Another Restaurant Stock In For Your Portfolio


  • For each plate that is sold MTY earns royalties. MTY simply collects royalties and has very low capital expenditures and financial risk.
  • 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.
  • Stanley Ma has proven to be a great capital allocator.
  • Because of its asset light model, generates a lot of Free Cash Flow.
  • MTY distributes a modest but growing dividend.



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 1.3183 Price of 1 USD in CAD as of September 15, 2015.

MTY Food Group Inc. (NYSEARCA:MTY) is a restaurant stock that owns a collection of 35+ brands that operates over 2,792 locations. 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. Because of this successful recipe, MTY receives recurring revenues that contributes to its growing war chest aimed at acquisitions.

Canadians In December 2013 I published my initial research on MTY, MTY Food Group Inc. – A Restaurant Stock For The Wallet. At the time of the publication MTY was trading at $32.75 and has been up and down since then to end up around ~$31 at the time of this writing. If I had published my update just over month ago it would have looked like a winner when MTY peaked to $37.42 on July 31, 2015. Since then MTY has fallen sharply with market turbulence that followed. There wasn’t any bad news linked to the slump in the stock price and just like many companies MTY is simply a victim of the general selloff in global markets.(click to enlarge)Source: Google Finance

However the current drop doesn’t affect the intrinsic value of MTY. The latest price slide offers investors an opportunity to buy it cheaper than when I published my original research. The price per share is cheaper and on a valuation metric basis it’s cheaper too (MTY has grown into its multiple). Expect sharp ups and downs with this stock. MTY is a small Canadian company with rarely any announcements other than results four times a year and the occasional acquisition. Let’s just say that public relation is not their thing. So there are days where you scratch your head when the stock suddenly drops or pops.

My almost two-year chart above is not representative of the growth MTY had in the past. The chart below represents the compounding effect of MTY. (click to enlarge)Source: Google Finance and Yahoo! Finance only provides graph that debuted once MTY got listed on the TSX. MTY was upgraded to the TSX in May 2010.

The stock really started taking off once it dropped its other business line in 2003 to focus on the food industry. The early form of MTY was in the restauration business but also in IT and other things. That didn’t go well with the tech bubble crash. That’s not the case anymore. Today MTY is much more focused and profitable.

Let’s review why MTY Food Group Inc. is an interesting investment.

Investment Thesis

MTY Food Group carries a lot of the qualities I look for when investing in a company. The company is easy to understand and franchising is an asset light business model. The business model helped MTY achieve a long history of profitability and generates growing free cash flow. That money is reinvested to compound shareholder value. MTY is headed by Stanley Ma, an excellent capital allocator. He’s disciplined and doesn’t like to overpay for acquisitions. He has proven to be a great steward of shareholder capital. He’s not afraid to say “no” and to walk away if the terms are not satisfying. MTY has also initiated a small dividend in 2010 that’s been growing modestly (well, it has doubled since from $0.05 to $0.10 per share, it represents a 1.27% dividend yield). And more importantly, MTY’s valuation is below its peers. I have a section on the valuation towards the end of the article. Patient investors should realize the benefits of compounding.

There’s no doubt that the restaurant/food industry is hyper competitive. It’s a crazy business to be in. Barriers to entry are low and a successful concept is easily copied. However I believe MTY might have an economic moat. I think MTY has one and it is its concentrated presence in food courts. Aside from Mcdonald’s, Subway, and A&W Restaurant, MTY almost runs a monopoly in most food courts. MTY’s brands are everywhere in the food court. In a food court there are only so many spots available and MTY is the biggest player. I don’t know the exact percentage of MTY’s market share of the food court units, but my personal observations tells me its pretty high. That’s why Stanley Ma has been nicknamed “the king of food court”. Such a concentration doesn’t represent a risk for shareholders. If anything, the recurring revenues from the mall helps finance its expansion on the street front. In Canada MTY might not have the same growth rate as in the past, that’s why it’s turning to the U.S. market for its next growth phase. Consumers looking for a bite at the mall are forced to choose between McDonald’s and MTY’s group of brands. If a location is doing poorly MTY can replace it with another concept. Malls love MTY because it’s only one person/entity to deal with and they will fill up the food court without worrying about if rent is going to be paid on time. You can argue that it’s a form of cannibalization between franchisees but for MTY it still gets its ~6% royalty no matter where the consumer buys its plate. On the downside the mall locations are open fewer hours than the street units. Conversely, the economic moat I’m talking about is not applicable to MTY’s street locations, where it’s really hard to have a competitive advantage for any kind of retailer but you have longer hours. Most of MTY’s units are in the food court but the company has been expanding outside and has been acquiring full service restaurants such as Madisons New York Grill & Bar (great restaurants and ribs by the way, make sure you get a sub-zero pint in a chilled glass)

MTY’s main growth driver is acquisition. MTY Food Group Inc. is a business built on acquisitions. A disciplined approach to acquisition and an under-levered balance sheet (Net Debt/EBITDA 0.27x vs peers 1.5x-1.8x) provides the muscle for MTY to continue their serial acquisition approach. MTY is also looking at the United-States for their next phase of growth where it presently has a small base of restaurants.

My valuation, which is detailed in the article below, only values MTY at its present state. I believe that MTY can deliver a 10-20% return in the short-term. This doesn’t include any acquisition. A growth-by-acquisition strategy makes it difficult to forecast earnings and therefore to value.

Recent acquisitions since my last article are: Madisons New York Grill & Bar($12.9m for 90%), Van Houtte Café Bistros ($950k), Café Depôt, Muffin Plus,Sushiman and Fabrika ($13.9m), Manchu Wok, Wasabi Grill & Noodle and SenseAsian ($7.9m), and most recently MTY will soon be adding Big Smoke Burger ($3m for 60%) to its collection of brands.

What is MTY Food Group Inc?

If you are an American you probably never heard of MTY and Canadians consume their products on a regular basis without ever knowing it. If you are not very familiar with MTY it’s because you are not going to find a restaurant with the name MTY on it.

MTY operates over 2,792 locations under a collection of 35+ brands. Canadians are probably more familiar with names such as Country Style, Tutti Fruitti, Mr. Sub, Thai Express, Jugo Juice, Cultures, Valentine, Extreme-Pita, or Tiki-Ming, Van Houtte, Madisons New York Grill & Bar, Mucho Burrito, Café Depôt, Manchu Wok, Big Smoke Burger ; all brands that MTY operates. As for the American market, in May 2013 MTY announced their first foray into the U.S. with the acquisition of Mucho Burrito, Extreme Pita and PurBlendz brands. They have every type of chain you can imagine, from sushi to Greek to burgers, with most of the locations in mall food courts. MTY’s current market share is difficult to estimate, due to the continued addition of concepts and the constantly changing competitive landscape. According to Technomic, MTY’s portfolio of brands contains 11 of the top 100 Canadian Restaurant Brands (but I’m usually skeptical of these kinds of surveys). (click to enlarge)Source: AIF 2014. The chart is missing Big Smoke Burger.

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 that contributes to its growing war chest aimed at acquisitions.

Of the brands above some were developed internally and the rest is from acquisitions and licensing deals. MTY holds the license agreement for Yogen Fruz, Taco Time, TCBY, and Greek restaurant Au Vieux Duluth. For a complete list of the brands (new and old) I would refer you to page 12 of the 2014 Annual Information Report.

The MTY headquarters is located near a major mall in Montreal (Place Vertu Mall). There’s nothing particular about this mall except it’s worth mentioning that MTY maintains a good relationship with the owner of the Place Vertu Mall and the food court there serves as MTY’s personal laboratory. The owner of the mall allows MTY to test new food concepts. MTY owns the lease, so if a banner doesn’t work out it can easily be replaced with a different one. Food courts are great for new brands with little recognition; customers take their tray based on taste impulse rather than brand loyalty. In food courts big bright colorful menus is more effective than traditional advertising. MTY’s multiple banners allow it to have a direct pulse on the trends in the food industry. They have a strong sense for changing public tastes. It also allows MTY to match the cuisine to each location and demographic.

The full article is available at Seeking Alpha.

TransForce: Time To Get Rolling

Reposted from Seeking Alpha
By Brian Langis


  • TransForce, Inc. is one of the largest logistics and transportation companies in North America and the leader in Canada.
  • The company generates strong, growing free cash flow. It’s actively repurchasing its shares.
  • Alain Bédard, the CEO, is a wise capital allocator.
  • TFI should benefit from the weak Canadian dollar and the growing U.S. economy. Exports in Quebec and Ontario have started to pickup.
  • TransForce fell 27% since management slightly lowered guidance.



TransForce, Inc. is primarily traded on the Toronto Stock Exchange under the sticker TFI (Editors’ note: with average daily volume of ~$CAD 6.5-7M)

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.3094 Price of 1 USD in CAD as of August 21, 2015.

TransForce, Inc. [TSX:TFI]; (OTCQX:TFIFF) is a company that I’ve been following for many years, and the recent drop in the stock price finally provided the entry point I was looking for.

TransForce is one of the largest logistics and transportation companies in North America and the leader in Canada, which was achieved mainly by acquisitions (it has acquired over 140 businesses since 1998). The company’s main operating segments include Package and Courier, Less-Than-Truckload (LTL), Truckload (TL), Waste Management as well as Logistics and Other Services.

Investors have been dumping TransForce mainly because management has lowered guidance due to economic concerns in Alberta and the lack of economic pickup in Ontario and Quebec. On top of that, the market is in a correction. Regarding the weak Canadian economy, when a currency devalues there’s usually a lag between the drop and a revival in exports. Latest data suggest that Ontario and Quebec are starting to see the benefits of the low dollar. Trade numbers from June 2015 suggested exports are up versus the same period in 2014. Exports are up 15.2% in Ontario, 11.8% in Quebec, and Canada as a whole is up 6.3%. Most of the increase in exports is led by sales in the U.S. which directly touch TFI.

For 2015, management now expects adjusted earnings per share to be in the range of $1.97-$2.12, down from its earlier projection of between $2.15 and $2.30. Revenues are revised down to $4.3b; adjusted EBITDA is revised down to $510m-$530 from $550; and free cash flow should exceed $300m. From the EPS guidance’s midpoint to midpoint, that’s an 8% revision downward. However, the market didn’t digest the revised forecast well. TransForce’s YTD return is down 17% and is off 27.4% from its 52-week high of $31.60.

TFI ChartTFI data by YCharts

Investment Thesis

TFI is a stock you should have on your buy list, and it’s now for sale at an attractive valuation. TransForce is a serial acquirer in the highly fragmented trucking industry and is currently taking a pause to digest some massive acquisitions in 2014. As it grows, the company looks for ways to cut costs and make its operations more efficient in a bid to boost margins.

TransForce is a catalyst-rich name led by Alain Bédard, Chairman and CEO, who has proven to be a wise capital allocator. TFI generates growing free cash flow; it distributes a growing dividend; it’s active on share repurchases; and it has near-term catalysts. The company is well positioned to take advantage of the weak Canadian dollar and a recovery in the Canadian economy when that day comes. After all, a weak CAD and a growing U.S. economy should stimulate imports from Canada. TFI gets approximately ~30% of its sale in the U.S. and there’s plenty of room for growth since the U.S. economy is continuing to expand and trucking companies have had to keep up with the ever-growing freight demand.

“If we want to be at C$5 billion, it’s going to have to be south of the border…For sure over the next few years our growth will be mostly in the U.S.”Alain Bédard in a Bloomberg phone interview in 2012

The average exchange rate used to convert TransForce’s business generated in U.S. dollars was $1.2297. Today, the USD/CAD is around $1.31, a 6.5% rise, which should have a positive impact of a few million on sales and EBITDA.

“The relatively healthier U.S. economy and weaker Canadian dollar should provide more favourable conditions to improve return on capital employed on both sides of the border.”Outlook in the Q2-2015 MD&A

Also, there are potential near-term catalysts. In the past, TFI has mentioned divesting its Truckload business and more recently its Waste Management business. The Truckload business is too capital intensive, and TFI prefers an asset-light business model. The Waste Management business with ~$195m in revenues in 2014 is a high-margin operation that could be sold to a strategic player in the medium term hence crystallizing its value (which is not being captured fully as part of TFI’s operations). The Truckload business is also being discussed to be a spin-off. Alain said we should expect some kind of an announcement before the end of 2015.

Other catalysts are potential acquisitions. Acquisitions are part of Bédard’s push to remake Canada’s largest trucker into a continent-wide company selling transport, logistics and energy services.

My valuation doesn’t take into consideration any spin-offs, acquisitions, or an economy recovery in Canada. If any of the scenarios mentioned occur, TransForce is worth north of my current valuation. In the short run, the company is worth $29.35 per share, which implies an upside of 27.9% excluding the dividend. While you wait, TFI distributes a growing $0.68 annual dividend per share at a yield of 2.9%, which sounds better than leaving your money in the bank.

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