RE:RE:Q2 2020 Results to be Announced this Friday before open
I think I will just wait it out although I am not entirely decided. MTY is about 4% of my portfolio. I have held it for about 5 years with about 1/3 added last November... meaning my average cost is about twice the price it is trading at this point :( .
It used to be a nice steady eddy with below average beta, which almost nobody knew about. I have no idea what is going on now. The price is on a roller coaster with zero news... and on many days it seems to do the opposite of the market. Several mutual funds and institutional investors have also exited or greatly reduced their MTY position even if they have been overweight the stock for years and were buying just this winter.
I like the business model but it has been impaired by the recent unexpected events and government regulations. I am quite concerned about their profitability and debt levels for at least the next couple of years so I am hesitant to add any fresh money to it. I hold other stocks which have been similarly masacred and yet have less leverage and are on some metrics are cheaper than MTY.
For example, here are three somewhat comparable companies in my portfolio now [with TTM/before covid data]
MTY: EV/EBIDTA 11.02; leverage 3.42; ROE 12.77%; beta 1.79; weight 4% (quick serve restaurant franchisor)
LAS: EV/EBIDTA 9.58; leverage 2.16; ROE 11.38%; beta -0.79; weight 5% (juice/wine/specialty food)
ATD: EV/EBIDTA 13.87; leverage 2.55; ROE 24.50%; beta 0.78; weight 5% (convenience store/gas station)
I rather add to both LAS and ATD before adding to MTY since they are more essential, less risky, higher quality companies which will have better financial metric ratios after MTY's Q2/3.
I am pretty sure both Q2 and Q3 will be very ugly for MTY. Q2 includes March, April, and May - ie the time when everything was closed (especially malls, office building/university food courts, etc.) and will include large intangible impairment charges. Q3 will include June, July, and August and is their strong quarter due to the frozen treat category (which is weighted heavily to US west/south which is having their second wave moment right now). Pappa Murphy's is also weak during the summer so the Q3 2019 to 2020 will not be favourable for Q3 as well. If the stock market is in any way connected to news, we should expect a drop in price at least after Q2 results will come out... unless the management can pull some magic rabbit out of a hat and calm everyone down.
Most if not all of MTY's locations do not have drive-through and used to have quite limited delivery options. Several of their new purchases were shifting to casual in-restaurant dining and these will likely be bleeding money until the COVID situation will be over (fewer families, more affluent older customers, large groups, and severe cuts to maximum occupancy as well higher labour and ingredient costs). Without the summer crowds and several big holidays, they might also never break profit for the whole year. Typical restaurant has below 4% net margin so they are barely scraping by and are not profitable most days of the week. Even though MTY is not an operator but royalty franchisor, if the underlying restaurants are going broke, the franchisor will also be negatively impacted. All of MTY's larger brands are cigar butts which were already in a deep decline before they bought them. The COVID-19 might have been just he excuse the existing struggling operators have been looking for years to finally quit. It is not easy making money running a restaurant and dealing with all of the issues. This is very dangerous in my opinion. Especially, since MTY does not have comparable advertising budget or public branding as other big multinational franchises, so they will struggle to attract both new customers as well as new franchisees if the grandfathered franchisees quit.
If I did not already own MTY and wasn't 1/2 underwater, I would be really excited to dollar cost average in. Given my situation, I am scared to average down. We don't know whether their debt covenants have been relaxed. We don't know what is going with rent forgiveness and especially reductions for the future. We don't know how the rising minimum wage and government benefits have impacted staffing of restaurant jobs. We don't know what will happen if a second wave will hit. With several of these factors, MTY could go into very difficult financial situation which could necessitate issuing of new shares to help pay off their debt and boost their balance sheet. This would destroy a lot of shareholder value and permanently impair their per share profitability for many years into the future.