MTY Meals Group’s regular free-cash-flow-creation skills can be found at a reduction.
House to over 90 snacking and restaurant manufacturers that span the quick-service, fast-casual, and conventional eating industries, MTY Meals Group (MTYF.F 0.55%) is a kind of firms that you’ve got in all probability interacted with however won’t know by title. A few of its most distinguished manufacturers are Papa Murphy’s, Chilly Stone Creamery, Well-known Dave’s, Village Inn, Wetzel’s Pretzels, Thai Categorical, and TacoTime.
With over 7,100 areas, MTY Meals Group operates the overwhelming majority of its outlets via a franchise mannequin, giving the corporate an asset-light, high-margin profile. Producing constructive free money circulation (FCF) yearly for the reason that flip of the century, the inventory has delivered complete returns of three,600% over that point — or seven instances the S&P 500 index’s return.
Regardless of this observe file of success — together with earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) and FCF development of 81% and 73% over the past 5 years — the share worth for MTY inventory buying and selling over-the-counter within the U.S. is down 40% from its excessive.
This is why this drop could possibly be a once-in-a-decade alternative for buyers.
MTY Meals Group: A serial acquirer
MTY Meals Group has made 50 acquisitions since 1999, together with 27 over the past decade. Whereas firms that depend upon megamergers or one-off jumbo acquisitions to gasoline their development usually disappoint, serial acquirers like MTY usually show to be outperforming propositions.
A latest evaluation from McKinsey finding out companies from 2013 to 2022 confirmed that shares with a mergers and acquisitions (M&A) program in place beat the broader market by 1.8 proportion factors. Although it is a shorter time-frame than I want to see, sure firms have confirmed able to reinvesting their FCF in M&A at a extremely worthwhile charge, and MTY matches this invoice.
During the last decade, MTY has averaged a return on invested capital (ROIC) of 15%, producing excessive ranges of FCF in comparison with the debt and fairness it makes use of to fund its M&A ambitions. In comparison with its weighted common price of capital (WACC) of seven%, the corporate persistently creates worth for buyers.
Spending its FCF on new acquisitions, the corporate is laser-focused on constructing its meals manufacturers empire.
MTYFF Free Money Move and EBITDA information by YCharts
After making two hefty $200 million purchases for Wetzel’s Pretzels and BBQ Holdings (Well-known Dave’s) in 2022, the corporate has paused its M&A spending over the previous 12 months. This $400 million outlay provides the corporate loads of integration work to do because it focuses on paying down its $686 million web debt steadiness.
Although this $686 million in debt might look alarming, the corporate maintains a debt-to-adjusted EBITDA ratio of two.6, which is according to its historic norms and acceptable for a constant FCF-generating enterprise like MTY.
Picture supply: Getty Photographs.
Regular free money circulation funds a rising dividend
MTY Meals Group has grown its FCF-per-share by 251% over the past decade, permitting for ample dividend will increase over the identical time.
MTYFF Dividends Paid and FCF (TTM) information by YCharts
Had the corporate not paused its dividend funds through the earlier days of the pandemic out of an abundance of warning, it will have most definitely raised its dividend yearly since 2010. Regardless of these dividend will increase over time, MTY’s money dividend payout ratio is a mere 14%, leaving a ton of room for future will increase. Contemplating the corporate already pays a good dividend yield of two.5%, there may be a number of passive earnings potential attainable from an funding in MTY.
Along with this promising dividend, administration has been shopping for again shares over the past 5 years, decreasing the corporate’s share depend by 1% yearly over that point. Greatest but for buyers, with the board and administration proudly owning 16% of MTY’s shares excellent, they’re nicely incentivized to proceed these shareholder-friendly money returns.
MTY’s once-in-a-decade valuation
As promising as MTY’s portfolio of manufacturers, FCF development, and serial acquisition technique are, its present once-in-a-decade valuation could also be much more intriguing.
Proper now, the corporate’s enterprise-value-to-EBITDA and enterprise-value-to-FCF ratios are very near 10-year lows — exterior of the drop throughout March 2020.
MTYFF EV to EBITDA and EV to FCF information by YCharts
Along with these valuations, MTY’s 2.5% dividend yield is nicely above its 10-year common of 1.5% and is its highest ever exterior of 2015, when the corporate paid a particular dividend, and through the pandemic, when the market dropped briefly.
Finally, MTY Meals Group is not going to set the world on fireplace with blazing development charges. Nonetheless, the corporate’s observe file as a serial acquirer, its top-tier FCF technology, and its ample money returns to shareholders make the franchisor a powerful dividend inventory to purchase at right this moment’s once-in-a-decade valuation.
