How I Look To Have Affected Bab Inc, Big Apple Bagel, $BABB, With My Recent Article On Them.

In the past two months while I have been working on getting our business started I pretty much blacked out everything investing related.  I did this for three reason; so I wouldn’t be tempted to go back to researching companies because that is where my heart lies, so I could concentrate on getting the business going, and because I needed to take a break physically from the amount of work I was doing.

In the past week or so I have been going over the companies I have written articles on, especially the ones I am interested in or own, to see if I have missed any news in the past two months that is very important and it looks like I have with Bab Inc (BABB.)

My recent article series on them, part 1 and the conclusion, laid out how overall I thought BABB was a very interesting company and how I would love to invest in the company, and possibly becoming activist in the company to help fix its major problem of overly excessive executive pay and overall excessive payroll in my opinion.  In my opinion this is the only major problem with the company and if executive pay and overall payroll was lowered it would help raise the companies earnings and cash flow, and would most likely help to unlock the underlying value of the company that I see beneath the excessive pay.

When looking back to see if I missed anything on the companies I am interested in I found this link.  Since I do not believe in coincidences, apparently BABB management noticed my article somewhere or were threatened by another investor, and have decided to adopt a “Stockholder’s Rights Plan.”  This allows the company to issue rights to current shareholders in the event that someone buys 15% of its shares (20% in the case of an institution) to “Protect Shareholders best interests” from outside investors. These rights would be issued to shareholders as of May 13th if someone were to purchase 15 or 20% of BABB and look to essentially be a way to keep people from making too much noise about change at the company.

There is also this line from the announcement:

BAB’s Board of Directors may redeem the Rights for $0.001 per Right at any time before an event that causes the Rights to become exercisable. The Rights will expire on the third anniversary date of the Agreement, unless the Rights have previously been redeemed by the Board of Directors.

This gives a further advantage to insiders over regular shareholders and is again put in there to keep outside investors from making changes in the company, and is completely ridiculous in my opinion.

 

It looks to me that current BABB management likes the status quo of taking giant payrolls, losing market share, and losing restaurant counts and does not want to have things shaken up by outside investors who may want to lower overall pay, help the company become more profitable, and help the company potentially grow again.

This is my first experience with a company doing something like this and I knew it would eventually happen because of how most nano caps are managed by only a small number of individuals who control the company.  It is still surprising and disappointing that they would do something like this, but apparently they would rather just keep milking the company instead of putting some of that excessive pay towards growing the company or growing earnings and cash flow.  Suffice it to say that I am glad I did not buy into BABB as this shows that in my opinion management does not care about the best interests of shareholders.

This does make me want to buy into the company though to change things even more for the betterment of all shareholders and not just the few at the top of the pyramid, maybe I will at some point.

Getting Back Into The Swing Of Things, My Investing Book, Sold $STRT Up 75%, And What Have I Missed?

Since my last post almost two months ago now my brother and I have been working very hard in our business Black Hills Tech Solutions so I have had almost zero time to look at the stock market since then.  We are doing relatively well so far and are working on building a company’s website right now.  Okay well my brother and his buddy are doing the bulk of the website building since I have no idea how to do any of that.

I have also gotten off of my allergy shots, which have made me feel quite a bit better consistently and have also been forcing myself to take time off from things and relax every once in a while.  I do not know which has helped me the most but I have not been sick in about two straight months since I have started the above and have generally felt pretty decent most of the time.

Since I have been feeling better, (i.e not getting sick all the time mainly) and since I have had a bit of free time with less going on at the business I have had some time to fill my want/need to research companies, learn about investing, and work on my investing book in the past week or so.

In the past week so far I have finished up another two chapters in my book and tonight I will start on another chapter.  I also have been looking for a company to start research on but have thus far had no luck.  It seems that the market has continued to get even more over heated in the past couple months as a week ago I took cursory looks through about 250 companies to potentially do research on and the only ones I found to be even a little undervalued or interesting were Chinese nano caps.

If you have been following this blog for a while you know that Chinese small caps terrify me because of the fraud, misreporting, lying, etc and that I lost a lot of money on them when I first started investing.  Suffice it to say that if I am not comfortable buying into Chinese small caps that I won’t consider even looking into Chinese nano caps.

I have also sold out of Strattec (STRT) in the portfolios that I manage due to it reaching the higher end of my valuation range and I sold out up 75% since December when I originally bought into them.  If, and more likely when, the market crashes I will definitely think about buying into them again as I still really like what they are doing now that they have fixed the bulk of their problems and their management.  The portfolios that I manage are now sitting around 55% cash because of how overheated I think the market is.

I will continue to look for a company to do research on and continue working on my book and hope to post again a bit more regularly now that we have slowed down and settled in a bit more at the business.

Having said that I now ask you if there are any links, websites, articles, etc that have come out in the past couple months that you think are fantastic.  I pretty much blacked everything investing related out in that time frame to concentrate on opening and starting the business so I am sure I missed out on some pretty good information.  I would very much appreciate it if anyone has anything to share that you think I would like to learn from and might have missed in the past couple months and would really appreciate if you were able to share some of those with me.

Until next time.

My Epiphany and Horrid Health, Having A Baby, Writing An Investment Book, And I Started A Business

As you probably know if you have been following this blog for any amount of time I have been trying to find enough funding to open up my own investment firm and I have also been sending out my information and stock analysis articles to a bunch of value investing firms to try and land a job at one of these firms in the meantime while I try to raise capital to open up my own firm.  I figure that I would need around $5 million in assets under management to be able to comply with all regulations, have my results audited, pay accountants and lawyers to make sure I stay in compliance with everything, and still have enough left over to make some money for myself.

Since I do not have a lot of rich friends, know a lot of rich people, and myself do not have anywhere near that amount of money, I had to put this goal to the side for the time being and will explain why below.

As you also know if you have been following this blog for any amount of time, I have alluded multiple times to some pretty serious health issues that I have not fully explained to you and will do so later in this post.  Over the past several months I have been pushing myself extremely hard, too hard as it turns out, to try to get as good as possible as fast as possible at evaluating, valuing, and analyzing companies to determine if they are a good investment, in the hopes of either opening my own firm, or getting noticed by a value investing firm and paid for my research.

Since the summer of 2004, the year before my senior year of high school, up until today I have been, and still on a daily basis deal with extreme dizziness to the point where I have not been able to have a “normal” job since shortly after I graduated high school.  Due to this I have also not been able to go to college and get a bachelor’s degree which I have found out is apparently a MINIMUM requirement to even being considered for being hired at most investment related firms so I have also had zero luck in finding an investment related job up to this point.  My dizziness has gotten quite a bit better over the years (Finally making some progress after almost 9 years of dealing with this) as I have found a couple wonderful doctors who have helped me out quite a bit, but I still need to get over a few humps to get more towards “normal” or at least for me normal health, whatever that may end up being.

Due to me pushing myself to learn as much as possible as fast as possible relating to investing over the last several months I appear to be pushing myself too hard as I have gotten sick/flu/sinus infection/etc 5 or 6 times in the past 5 months or so.  These colds/infections  exacerbate my dizziness while I am sick and makes my dizziness worse than normal for at least a week or two AFTER I get over whatever sickness I have had, so for the past 5 months or so I have felt pretty miserable almost the entire 5 months.  This is one reason why you have seen a slowdown in my blog postings and stock analysis articles over this time period.

A different doctor that I saw has not found any reason why I keep getting sick so I figure it must be because I have been pushing myself so hard lately.  At the recommendation of ValuePrax for something investing related, and completely unrelated to the sickness situation, I read The Four Hour Work Week by Tim Ferriss, which I highly recommend especially for those who are skeptical like I was about pulling this kind of thing off and who wants to be an entrepreneur.  The book is amazing and I highly recommend everyone read it but the main part of the book that I want to talk about here that relates to my health issues is a part of the book where he says you should evaluate how you spend your time to see what you can cut out to become more efficient.  After looking over how I have been spending my time over the past several months I believe I have found the main reason why I keep getting sick, I have been pushing myself WAY too hard.

It turns out that since I dedicated myself to learning and becoming a true value investor in February of 2012 that between taking care of my now 2+ year old daughter full time and learning about investing, evaluating, analyzing, valuing, and writing about companies, I have been working around 100 hours a week for almost a year straight now, or the equivalent of 2.5 full time jobs!  Since I cut out free/relaxing/video game/watching sports, etc time to learn as much as possible as fast as possible literally the only free time I had where I wasn’t trying to learn something, take care of my daughter, or recovering from being dizzy was when I was sleeping.  Not exactly a healthy lifestyle apparently.

The last time I pushed myself like this was shortly after the dizziness started.  I kept trying to do the normal things I used to do at the time: Finishing high school, hanging out with friends, running track, working out, and combined with working a full time job at the time and having a girlfriend who is now my wife.  After having to go to the ER because I was so dizzy I fell down when I was at work and couldn’t walk without falling, I realized that I pushed myself too hard.  I ended up making my dizziness so bad that for a period of literally 2 or 3 straight years I could do literally nothing except lay around and watch TV because I felt so horrible all the time.  Since I do not want to feel that horrible again and set myself back like that, especially considering how much better my dizziness has gotten since then, I realized I needed to change course before I did that to myself again.

Using some of the techniques in the Four Hour Work Week I started to brainstorm business ideas and ways to start making money for my family but also lowering my hours worked dramatically in the hopes to stop getting sick all the time and putting off any kind of massive deterioration in my dizziness like what happened before.  The first idea was to write an investment book.  I have already shared the idea with a couple investors who have had investing related books published, gotten some feedback, changed some of my original thoughts, and they think that if I can write the book properly that the idea is good enough and unique enough to potentially be picked up by a publisher and fully published, not just self published by me!  Up to this point I have written the outline that still needs to be tweaked a bit, the introduction, and five full chapters.  I do not know when this will be done because of the business my brother and I have started which I will talk about below but I think that I can help a lot of newer and intermediate level investors and hope to have the transcript finished as soon as possible.

The second idea was something my brother and I have been kicking around for a while now and we decided to go for it.  My brother and I have started what is called a managed service provider, MSP, computer business to monitor local small businesses computers; do data back-ups, eliminate viruses, spyware, and malware, etc.  Make sure their servers, computers, and computer networks are working properly and keep them working properly and to help the particular businesses become more profitable due to saving them a lot of money, enabling them to have less or no down time, and having a lot less computer related headaches they have to deal with.  Our company is called Black Hills Tech Solutions.  If anyone is interested in this business please visit our website which I have linked.  We do not have any clients as of this time but once we start getting clients we will be making pretty good money and helping companies out by saving them a lot of money, time, and frustration.  If we do things right this will also enable me to work less once we get things rolling due to automation.  My brother is handling the computer and tech side of things and I am handling the business/marketing/sales side of things at this point.

The main reason I had to make a change in what I was doing on a daily basis was because of my horrid health.  The other major reason I had to change course was because frankly I am tired of not being able to make money for my family and I needed a way to make money sooner rather than later.  Why do I need to make money sooner rather than later?  Well besides the fact that I just want to start making my family money and not being able to due to my health reasons up to this point, we have another baby on the way which is very exciting but also expensive, and I want to contribute monetarily to my family.

Due to everything above I will probably post only every once and a while on this blog for the foreseeable future.  My hope is that once we start getting clients at our business and automate things properly is that I will be able to resume this blog on a more regular basis and start researching companies again as this is still my passion.  I also hope that writing this book and starting this business will make me enough money and gain me enough contacts that I will be able to open up my own investment firm sooner rather than later and resume my passion of searching for undervalued companies to buy into on a full time basis.

You all know that I am not a macro guy at all, but another reason I thought this was a good time to change course for a while was because how crazy the market is getting.  It seems to keep going up for absolutely no reason at all and I fear that there will be a major crash at some time in the near future.  Due to the starting of the business, saving up for baby, and my fear of an impending market crash, I have sold all of the stocks in my personal portfolio to help fund me and my brothers business start up and to put some money in savings in preparation for the baby that is due in late October.  The people that I manage portfolios for are sitting around 40% cash right now. Again my hopes are that I will start making some pretty good money relatively soon from the book and business that I will be able to open up my own investment firm relatively soon.

At this time I will urge anyone who is interested in contributing to this blog to please let me know as I am still very interested in having people write while I am working on some of the above things and if possible would like to keep the blog active until I can start writing on a more regular basis again.

I apologize that I have to take some time off from this blog due to my health issues but I do not want to go back to where I could literally do nothing for 2 or 3 years because I felt so horrible all the time. I am deeply saddened by this necessary step away from my passion of value investing but also excited at the same time for the ventures I will be concentrating on for the foreseeable future.

I want to thank you all so much for reading, I appreciate it so much and I hope you continue to read while I concentrate on these other ventures.  I hope to continue writing and researching companies as soon as physically possible.

Again, I would really love to keep content flowing on a somewhat regular basis so if you personally or you know anyone who would want to contribute to the blog it would be very much appreciated and please let me know.

BABB Vs PARF Conclusion Article

This article is the culminating piece that will talk about and compare BABB’s and PARF’s margins, weigh the pros and cons of each company, talk about each companies float, and decide which one, if either of the two companies I plan to buy into.  Originally I had planned to write articles on another two companies but was asked by a fellow value investor who recommended them to me to please not write an article on them since he was planning to.  Of course this is only right since he is the one who mentioned those two companies to me.  I still plan to research both of those companies to see if I would want to invest in either one of them and will let you know if I decide to buy into either of them when I make that decision.

Margin Comparison

						BABB Margins	PARF Margins
Gross Margin TTM						96.2	28
Gross Margin 5 Year Average						88.64	26.32
Gross Margin 10 Year Average						79.25	26.37
Op Margin TTM						17.9	9.9
Op Margin 5 Year Average						-0.76	5.9
Op Margin 10 Year Average						6.75	4.24
ROE TTM						15.51%	8.31
ROE 5 Year Average						-2.80%	5.064
ROIC TTM						14.51%	7.59
ROIC 5 Year Average						-17.20%	9.278
My ROIC TTM With Goodwill Using Total Obligations						24.39%	11.09%
My ROIC TTM Without Goodwill Using Total Obligations						88.11%	11.29%
Earnings Yield EBIT/TEV						14.15%	19.91%
FCF/Sales TTM						15.02	-5.55
FCF/Sales 5 Year Average						13.296	3.116
FCF/Sales 10 Year Average						15.658	2.828
P/B Current						1.47	0.55
Insider Ownership Current						N/A	N/A
My EV/EBIT Current						6.58	4.95
My TEV/EBIT Current						7.07	5.02
Working Capital TTM						1 mil	15.62 mil
Working Capital 5 Yr Avg						1 mil	12.2 mil
Book Value Per Share Current						0.43	39.72
Book Value Per Share 5 Yr Avg						0.498	36.254
Total Executive Compensation as a % of Sales						26.17%	6.00%
Total Executive Compensation as a % of Gross Margin						26.17%	21.00%
Total Executive Compensation as a % of Market Cap						15.91%	16.00%
Total Executive Compensation as a % of Total Enterprise Value						19.65%	11.47%
Debt Comparisons:
Total Debt as a % of Balance Sheet TTM						3.05%	10.12%
Total Debt as a % of Balance Sheet 5 year Average						4.88%	2.64%
Current Assets to Current Liabilities						2.17	4.25
Total Debt to Equity						4.84%	12.56%
Total Debt to Total Assets						3.74%	11.70%
Total Obligations and Debt/EBIT						30.36%	98.78%
Costs Of Goods Sold As A % Of Balance Sheet TTM						0	71.98%
Costs Of Goods Sold As A % Of Balance Sheet 5 Year Avg						10.60%	73.54%

Keep in mind while looking at these margins that PARF is an extremely seasonal business so it margins will probably look different in a month when the company reports its full year results, and probably for the better, at least marginally.

Margin Thoughts

• BABB’s gross margins are phenomenal which should be expected from a company whose only business right now is to sit and collect royalty and franchise fees.
• BABB has superior operating margins, ROE, and ROIC in comparison to PARF.  Again, this should be expected with its business model in comparison to PARFs.
• PARFs earnings yield, in this case EBIT/TEV, is superior to BABBs by about 25%.
• Since this is a new metric I am using I went back and calculated this for the two most recent companies I have bought stock in, STRT and BOBS, and here is how the earnings yields compare: 1) STRT-20.79% 2) PARF-19.91% 3) BOBS-14.80%, 4) BABB-14.15%.
• As I talked about in both of the previous articles both companies ROIC could be higher if executive pay and overall payroll were not at the excessive levels that they are at currently.
• Earnings yields is a rough estimate of the kind of return you may be able to expect in the future by buying the company at its current price and is compared to the current 10 year treasury yield.  I have seen prominent value investors say they like to buy companies with earnings yields at least 3X to 4X higher than the 10 year yield.  Current 10 year treasury yield is 2% currently so all of these companies surpass the 3X to 4X benchmark with Strattec leading the way.
• BABB’s FCF/Sales is exceptional and PARF’s is currently negative but that should change once the full year results are announced.
• PARF’s P/B ratio is incredibly low as the company is selling for only half of its current book value and this value is likely a bit undervalued which would mean PARF is currently selling at even a lower true P/B.
• PARF’s current estimated book value per share is around $40 per share and the company is selling at $22 a share currently.
• Both companies are selling for EV/EBIT and TEV/EBIT ratios fewer than 8 which is again what I want them to be under.
• Both companies executive pay is excessive in my eyes especially BABBs.  Remember also about BABBs is that its entire payroll structure is inflated and the above calculations are not including overall payroll.  Including overall payroll for BABB and its payroll and executive pay take up more than 50% of the company’s gross margin; absolutely insane in my opinion.
• Both companies have minimal debt and have stellar balance sheets.
• PARF’s total obligations and debt/EBIT is too high in my opinion but again this should be at least somewhat corrected when the full year numbers are released.
• COGS for BABB is completely irrelevant now that they do not directly operate any of its restaurants.
• PARFs COGS has been coming down over recent years which have been why margins rose in recent years.

Float Analysis Comparison

BABB Analysis

Financial assets: Cash and cash equivalents=1,256+prepaid expenses of 66+ deferred income taxes 248=1,570.

Operating assets: Accounts receivable of 86+inventories of 27+other current assets of 393+net property, plant, and equipment of 11+goodwill of 1,494+intangible assets of 505+other long term assets of 4=2,520.

• Total assets=4,090

Liabilities:

• Equity=3,158
• Debt=125
• Float=accounts payable of 14+deferred revenues of 71+other current liabilities of 722=807

Total liabilities=923

Float/operating assets=807/2,520=32.02%.  Float is supporting 32.02% of operating assets.

Pretax profits/total assets=ROA

• 434.15/4,090=10.62%

Pretax profits/(total assets-float)=ROA

• 434.15/3,283=13.22%

PARF Analysis

For this analysis I used PARFs 2011 full year numbers because of the extreme seasonality of its business and to get an idea of what the company may look like when its 2012 full year numbers come out in March.

Financial assets: Cash and cash equivalents=7,469+deferred income taxes of 235+ prepaid expenses of 295=7,999.

Operating assets: Accounts receivable of 2,579+inventories of 6,197+net property, plant, and equipment of 4,184+goodwill of 413+intangible assets of 566+other long term assets of 223=14,162.

• Total assets=22,161

Liabilities:

• Equity=19,734
• Debt=313
• Float=accounts payable of 359+taxes payable of 371+ccrued liabilities of 1,218+deferred tax liabilities of 166=2,114

Total liabilities=2,427

Float/operating assets=2,114/14,162=14.93%.  Float is supporting 14.93% of operating assets.

Pretax profits/total assets=ROA

• 1,929.29/22,161=8.71%

Pretax profits/(total assets-float)=ROA

• 1,929.29/20,047=9.62%

Float Thoughts

• BABBs float is supporting more of the company’s operations than PARFs is.
• Other than the directly above, the companies have pretty similar ROAs and amount of float and neither one a distinct advantage in this area.

Conclusion

Combining the above with the information in the previous two articles I have come to some conclusions and about the companies.  BABB has the better business model that leads to generally higher margins and minimal work for the company.  PARF has dominated its market for years, still does and it has found a small niche that has led to great profitability over the years.  Both companies have excessive executive pay in my opinion that if lowered could help each company’s operations become more profitable.  Both companies look like potentially good investment candidates right now so how have I decided which is the better one to buy into at the current time with the companies being very even overall?

With these two companies being so even overall, even in terms of overall undervaluation, how did I come to a conclusion about which company was the better buy now?

1. BABB has a lot of competition in its industry, has been having to close restaurants, and has been losing its miniscule market share to other companies.  Meanwhile PARF has only a few minor competitors and dominates its industry with an estimated 80% share of its market.  Another major positive is that it dominates a very niche industry which should keep competition out of its market further cementing its hold on market share.
2. PARF owns land, building, and property that are conservatively estimated to be worth about $10.40 per share and partially protects the company’s downside. BABB has no such downside protection and if it continues to lose franchisees shareholders are completely out of luck and could stand to lose all of their investment in the company.

So having stated this you would assume that I would no doubt be buying into PARF at this time right?  Normally you would be right to assume so but I have recently had an epiphany about investing and how that relates to my overall health, which has been horrid for the past four month or so, and I have now realized that I have to make changes to what I am doing or I will end up feeling horrible forever.  I did buy PARF and a not yet disclosed company for a couple of accounts I manage but not for myself and I will explain why in the coming days.

My next post I will be talking about the epiphany I had, what I plan to change in the short term to hopefully fix my horrible health of the last several months, the business my brother and I have started, and the investing book I am writing.

Paradise Inc, $PARF, Operates In A Consistently Profitable, Extremely Small Niche That It Has Dominated For Years

In Part 1 of this series I told you that I was starting a series of posts where I would be taking a look at a few nano caps, compare them to each other, and at the end decide which one, if any, would be the best buy right now.  The first article in this series was on BAB Systems Inc (BABB) which looked like a potentially good investment.  The second article in this series is going to be on Paradise Inc (PARF).

Introduction, History, Management Discussion, and Overview of Operations

Paradise began as a subsidiary of a different diversified corporation soon after World War 2, but very soon afterward candied fruit became the focus of its business.  Current ownership purchased the company in 1961 and the name Paradise Fruit Company was adopted in 1965.  It later changed its name to Paradise Inc after diversifying its operations a bit in the 90s.  Paradise Inc. is the leading producer of glace (candied) fruit which is a primary ingredient of fruit cakes sold to manufacturing bakers, institutional users and supermarkets for sale during the holiday seasons of Thanksgiving and Christmas. Paradise, Inc. consists of two business segments, fruit and molded plastics.  As of the most recent quarter the glace fruit segment makes up about 61% of all company sales with the plastics segment making up the remaining 39% of sales.

Candied Fruit Segment Description-Production of candied fruit which is a basic fruitcake ingredient and is sold to manufacturing bakers, institutional users, and retailers for use in home baking. Also, based on market conditions, the processing of frozen strawberry products for sale to commercial and institutional users such as preservers, dairies drink manufacturers, etc.  When PARF does sell these frozen strawberry products it is generally not a big part of its operations.  While there is no industry-wide data available, management estimates that the Company sold approximately 80% of all candied fruits and peels consumed in the U.S. during 2011. The Company knows of two major competitors; however, it estimates that neither of these has as large a share of the market as PARF’s.

Being the dominant company in your industry for years on end, owning an estimated 80% market share of the industry, and being in a niche business that makes it likely that you will not see many, if any new competitors in its market is an absolutely exceptional thing to find in any business.  This combination of characteristics is something I have been looking for in a company since I have started investing seriously and had not found it in any single company until now.

The demand for fruit cake materials is highly seasonal, with over 85% of sales in the glace fruits taking place in the months of September, October, and November.  In order to meet delivery requirements during this relatively short period, PARF must acquire the fruit and process it into candied fruit and peels for an estimated 10 months before this time period just to meet demand. This means that PARF has a massive build up in inventory in the quarter before the holiday months every year, and depletes its cash hoard to pay for the inventory that is needed to make sales in the last quarter of its fiscal year.  These very seasonal circumstances in the fruitcake industry makes the full year results of the company, generally which come out in March of every year, the only financial report of its fiscal year that shows how truly profitable PARF has been for the preceding trailing twelve month period.

Molded Plastic Segment Description-PARF produces plastic containers for its products and other molded plastics for sale to unaffiliated customers.  The molded plastics industry is very large and diverse, and PARF’s management has no estimate of its total size. Many products produced by PARF are materials for its own use in the packaging of candied fruits for sale at the retail level. Outside sales represent approximately 85% of PARF’s total plastics production at cost, and, in terms of the overall market, are insignificant.  In the plastics molding segment of business, sales to unaffiliated customers continue to strengthen. This trend began several years ago when management shifted its focus from the sale of high volume, low profit “generics” to higher technology value added custom applications.

PARF has only recently started to sell these types of packaged fruits as well which could become a bigger part of operations going forward.

Costs of goods sold have ranged between 71-75% of sales every year since 2003 and this year’s trailing twelve month COGS is coming in at 71.98%.  Despite an increase in the cost of raw materials within the fruit segment and increasing cost of resins within the Plastics segment, PARF has successfully maintained control over its production labor costs during the past year.  Management says that this can be traced directly to its previously disclosed decision and action to eliminate 15 full time positions, reduce executive and salary wages by 15% and 10%, respectively, and rescission of a 4% merit increase awarded to hourly workers. These actions remained in place throughout 2011 and have help reign in the cost of sales during this timeframe.

Selling, general and administrative expenses have generally taken up between 18-20% of sales over the past decade but have started to come down a bit over the decade from a high of 20.33% in 2002 to the trailing twelve month period being only 18.14%.   This all leaves PARF’s trailing twelve month operating margin at 9.86% which is much improved and is its highest operating margin in the past decade.  Operating margin has actually been below 5% for most of the last decade so PARF has been able to double its operating margin in recent years.  It’s ROIC and ROE are a bit more volatile over the past decade but are both up over recent years and currently stand at 7.59% and 8.31% respectively over the trailing twelve month period.  My estimates of ROIC are 11.29% without goodwill and 11.09% with goodwill.  One thing of note and concern is that PARF’s cash conversion cycle has jumped dramatically as it stood at 160 days in its 2011 fiscal year and it now stands at 282 days in the trailing twelve month period.  This is most likely the buildup in inventory for the 2011 holiday season and may only be an aberration because of the seasonality of its business but it is something that definitely bears watching when PARF’s full annual report comes out.

PARF is pretty much a family owned and operated business as out of the top five executives four of them are related.  The only one who seems not to be related to anyone is the CFO and treasurer Jack M. Laskowitz.  Melvin S. Gordon who owns around 37% of PARF, and who is the current CEO, Chairman, and a director of the company, has been with PARF since the 1960s in various capacities.  His two sons, one daughter in law, and a cousin make up the remaining five member executive team.  The group of executives has done a pretty good job over the years of managing the company and expanding its operations into the plastic industry to become more diversified which has helped the company’s sales and profitability.  In total insiders own right around 41% total of PARF so outside of Mr. Melvin S. Gordon the other executives own very small percentages of the company.

As with BABB in my previous article, PARF also has excessive executive pay in my opinion.  Just the five executives in the company got paid including bonuses, in 2011 $1.551 million, or about 16% of PARF’s market cap, about 6% of revenues, and about 21% of gross profit.  While BABB’s executive pay is worse in relation to these benchmarks PARFs pay is still excessive in my opinion especially in relation to the company’s small size of around $10 million.

Valuations

These valuations were done by me, using my estimates and are not a recommendation to buy stock in any of the companies mentioned. Do your own homework.

Valuations were done using PARF’s 2011 10K and 2012 third quarter 10Q. All numbers are in thousands of US$, except per share information, unless otherwise noted.

Also remember that these valuations are not containing the full year’s number which generally come out in March of every year, and will show a much truer picture of how the company is operating.  The company’s operations are extremely seasonal and in the most recent quarter PARF had to use up nearly its entire cash hoard to buy inventory.  The cash should be at least partially replenished in the full year report and was standing near $7.8 million before they had to buy inventory.

Minimum Estimate of Value

EBIT Valuation

PARF has a trailing twelve month EBIT of 2,624.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

• 5X2,624=13,120/520=$25.23 per share.
• 8X2,624=20,992/520=$40.47 per share.
• 11X2,624=28,864/520=$55.51 per share.
• 14X2,624=36,736/520=$70.65 per share.

I would use the 5X EBIT estimate of intrinsic value as my minimum estimate of value for PARF.

Base Estimate of Value

Assets:	Book Value:	Reproduction Value:
Accounts Receivable	8,088	6,875
Inventories	11,664	5,832
Deferred Income Tax Asset	235	118
Prepaid Expenses & Other Current Assets	481	241
Total Current Assets	20,468	13,060
PP&E Net	4,037	2,624
Goodwill	413	0
Customer Base & Non-compete Agreement	471	236
Other Assets	233	0
Total Assets	25,622	15,920

Number of shares are 520

Reproduction Value:

• 15,920/520=$30.62 per share.

High Estimate of Value

EBIT Valuation

PARF has a trailing twelve month EBIT of 2,624.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

• 5X2,624=13,120/520=$25.23 per share.
• 8X2,624=20,992/520=$40.47 per share.
• 11X2,624=28,864/520=$55.51 per share.
• 14X2,624=36,736/520=$70.65 per share.

This time I would use the 8X EBIT value of $40.47 per share and it would be my high estimate of value for PARF.

Relative Valuations

• PARF’s P/E ratio is currently 6.9 with the industry average P/E standing at 16.7.  If PARF was selling at the industry average P/E it would be worth $48.40 per share.
• PARF’s P/B ratio is currently 0.5 with the industry average P/B standing at 1.8.  If PARF was selling at the industry average P/B it would be worth $72.00 per share.
• PARF’s TEV/EBIT is currently 5.02.
• PARF’s EV/EBIT is currently 4.95.

Something of major note that is not included in any of the above valuations is that:

“The Company owns its plant facilities and other properties free and clear of any mortgage obligations.”

This means that PARF has some substantial hidden assets that are not fully on its books in the above valuations.  I found one set of links that showed PARF’s combined land, building, equipment, and properties were valued at a total of $6.6 million.

Being conservative I will use the link here where you can search for Paradise in the search bar, which shows a more conservative set of values for the property, land, equipment, and buildings valued at an estimated $5.41 million, or $10.40 per share.  This is probably a very low estimate and the combined value of the land, buildings, and equipments is most likely worth more than the $5.41 million.  Discounting this amount by 40% due to where the locations are at and for the overall sake of conservatism it still brings an extra $6.24 per share to the company’s valuations above.

This means the true valuations above should be: Minimum-$31.47 per share, Base-$36.86, and High-$46.71, making the company even more undervalued.

Valuation Thoughts

• By my absolute minimum estimate of value PARF is undervalued by 36%.  By my base estimate of value PARF is undervalued by 46%.  With my high estimate of value PARF is undervalued by 53% and is a potential double from today share price at $20 per share.  Again, these valuations are not including any cash which will be at least partially replenished when the full year results come out and make PARF even more undervalued.
• PARF is undervalued by every one of my estimates of intrinsic value and relative value.
• PARF’s TEV/EBIT and EV/EBIT are both under 8 which is generally the threshold I like to buy under.
• Again all of these valuations do not contain the full year’s results which are not out yet and will show a much truer picture of the company and its operations.

Customers Thoughts

PARF sells its products on its website, through Wal-Mart and Aqua Cal around the holiday seasons, smaller stores, some restaurants, and Amazon.  Wal-Mart and Aqua Cal both make up a substantial portion of all sales so if either decided not to reorder it would affect the company’s sales, profitability, and margins.

On Amazon, like everything else that is sold on the site, customers leave reviews and generally as you can see with this link, customers seem to think very highly of Paradise’s products.  After reading through all the reviews most people talked about the high quality of PARFs products, and how they couldn’t get glace fruit in their individual local stores even sometimes around the holidays, so they had to search online for them.  This could also be a potential opportunity for PARF because if there is more demand for their products that isn’t being fulfilled currently that could lead to higher sales if more people knew about them.

Some of the negative comments were about how the packaging of the product was poor and came partially crushed or even broken in some cases.  In a couple of extreme cases people said that their products came with ants, bug legs, and other bug parts inside of the products.

It is hard to tell whether this is PARF’s or Amazon’s fault but assuming at worst that it is PARF’s, this is a problem that they need to fix in the process of packaging the product and shipping it because as I talked about in my BABB article, customer reviews like this could lead to trouble in the future for the company if it were to continue to have these types of problems.

PARF has also made it to number 2 in the Top 20 Glace Fruit Sites.  Only one or two of the companies on this list look to be direct competitors with PARF as most of the other companies have operations in a lot of other areas and only do a small amount of business in the glace fruit area.

Catalysts

• PARF becoming more known to people who like making fruit cakes would heighten their sales.

Pros

• PARF is the leader in its industry by far, owning an estimated 80% of all sales in the glace food market.
• PARF is in a very niche industry which should keep away competitors and its dominance intact.
• PARF is substantially undervalued by all accounts.
• PARF’s management team has done a very good job running the company over the years.
• Customers generally seem to love the product.
• There could be potential for a lot more sales if more people knew about PARF’s products as a lot of the customer reviews on Amazon stated that they struggled to find any glace fruit products in their local markets, sometimes even during the holiday season, and had to resort to looking online.
• PARF has nearly $500K worth of non-compete agreements signed with people to keep them from competing with PARF.
• PARF’s margins are overall pretty good and I will talk about that in the conclusion article.
• PARF operates on some amount of float which I will also talk about in the finale article.
• To boost the company’s margins PARF cut costs and payroll in recent years which has helped strengthen its margins.

Cons

• PARF’s business is very seasonal and requires a lot of lead time so if demand drops for fruitcake during the holiday season the company’s results would be highly affected.
• PARF’s management and executive pay is a bit excessive in my mind.
• A few customers have had some nasty problems with PARF’s products being delivered to them broken or with bug parts being in the product.
• PARF is highly dependent on Wal-Mart and Aqua Cal (Sales to these two companies make up between 20 and 25% of sales in recent years) purchasing their products for sale around the holiday season so if either one didn’t reorder it would affect PARF’s results.
• So far in the trailing twelve month period there has been a 120 day jump in the cash conversion cycles which is alarming.  Hopefully this is just due to the lead up in having the buy inventory for sale during the holiday season and will not be a problem after full year results come out.

Conclusion

Paradise looks like a fantastic company to own right now.  It is undervalued substantially and owns a conservatively estimated $5.4 million with of property and land that partially protects the downside of buying into PARF.  It has dominated its market for years and continues to do so.  Being in a very niche market and industry that it is dominating, it is unlikely that someone would come in and try to compete with them.  PARF has generally good to very good margins and its operations are partially supported by float.  The continued dominance and good to very good margins lead me to believe that the company also has at least a small moat as well or at the very least being in this extreme niche market has helped it to gain moat like qualities due to lack of competition.  I will talk about margins and float in depth in the conclusion piece of this series of posts.  PARF’s customers seem to love its products and since a lot of them complain that they cannot find glace fruit products in their local markets PARF might be able to capitalize on this with  through more advertising and advertising to a wider audience that they sell their products online.

PARF does have some negatives as well with what is in my opinion excessive executive pay, heavy reliance on two customers, some previous problems with its packaging, and it’s very seasonal market but up to this point PARF looks like a very exceptional company to invest in as the positives far outweigh the negatives in my opinion.

Next up in this now shortened series is the conclusion.

BAB Systems Inc, $BABB, Owner of Big Apple Bagels and My Favorite Muffin Is Undervalued But Has A Glaring Issue

This is the beginning of my series on nano-cap companies.  Specifically in this series I will be turning my analytical eye towards companies with market caps of $10 million and under to see if I can find any good companies to buy in this very small and relatively unfollowed area of the market. Over the next several articles I will introduce each company, talk about its operations, pros and cons, valuations, etc. At the end of each article I will state my overall opinion of the company and whether or not I think the company would be a good potential investment.  At the end of this series I will go over and compare all of the companies’ margins, floats, the pros and cons of buying into each company, and valuations to determine which one(s), if any, I have decided to buy and state why I have decided to buy into at this time.  I hope you enjoy this series on nano cap companies.

Introduction And Overview

The company I will be talking about in this article is BAB Systems Inc, (BABB) a very small and unfollowed $4.4 million market cap that is traded on the OTC market, company based in Deerfield, Illinois which is the parent company and franchise owner of My Favorite Muffin, Sweet Duet Frozen Yogurt & Gourmet Muffins, and Big Apple Bagels stores.  BABB also sells Brewster’s Coffee at its restaurants. As of August 31, 2012 BABB had 97 franchise units and 6 licensed units in operation in 24 states and zero owned stores after selling the only one last year. BABB’s revenues are derived primarily from the ongoing royalties paid to it by its franchisees and from receipt of initial franchise fees. BABB also gets income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including to Mrs. Fields Famous Brands (Mrs. Fields), Kohr Bros. Frozen Custard, Braeda Cafe, Kaleidoscoops, Green Beans Coffee, Sodexo and through direct home delivery of specialty muffin gift baskets and coffee.  Below are descriptions of the different operating segments taken from BABB’s annual and quarterly reports.

Big Apple Bagels

BAB franchised stores daily bake a variety of fresh bagels and offer up to 11 varieties of
cream cheese spreads.   Stores also offer a variety of breakfast and lunch bagel sandwiches, salads, soups, various dessert items, fruit smoothies, gourmet coffees and other beverages.

My Favorite Muffin

MFM franchised stores daily bake 20 to 25 varieties of muffins from over 250 recipes,
plus a variety of bagels. They also serve gourmet coffees, beverages and, at My Favorite Muffin and Bagel Cafe locations, a variety of bagel sandwiches and related products.

Brewster’s Coffee

Although the Company doesn’t have, or actively market, Brewster’s stand-alone
franchises, Brewster’s coffee products are sold in most of the franchised units.

Sweet Duet Frozen Yogurt

On May 7, 2012 the Company issued a press release announcing the launch of its new franchise concept, SweetDuet Frozen Yogurt & Gourmet Muffins, which it is preparing to roll out this year. While BAB will be offering franchises in all 50 states, its initial development focus is targeted for the Midwest, specifically Illinois, Michigan, Wisconsin and Ohio. As part of its introductory development plan, BAB will be donating 10% of the initial franchise fee from its first 50 units to the Cystic Fibrosis Foundation, of which BAB is a corporate sponsor.  SweetDuet, as its name implies, is a fusion concept, pairing self-serve frozen yogurt with BAB’s exclusive line of My Favorite Muffin gourmet muffins, broadening the shop’s offering and therefore differentiating itself from the numerous frozen yogurt outlets already populating the market. SweetDuet Frozen Yogurt & Gourmet Muffins shops will also include BAB’s. Brewster’s Coffee and a streamlined breakfast menu. The concept is designed to work in 1600 square feet of space.  The SweetDuet concept will be included as part of the Systems franchise operating and financial information.

Typically all of these restaurants seat around 30 people.

Operations And Management Discussion

Currently BABB’s is pretty much a holding company operation now that it does not directly run any of its restaurants and it derives its revenue from collecting royalty fees from its franchisees (5% of net sales.)  Initial franchise fees when a new store opens ($25,000 for a franchisees first “Full production” Big Apple Bagels or My Favorite Muffin.  Fee for subsequent stores opened by franchisees is $20,000.)  Big Apple Bagel and My Favorite Muffin franchisees also contribute 3% of net sales towards advertising and marketing to BABB.

Since BABB does not currently directly operate any restaurants, and BABB just does corporate back office work for the whole company, locates new franchisees and franchise locations, markets the company, and sits back to collect fees from the franchisees of course you would expect BABB to have absolutely exceptional margins.

The company does have some pretty good TTM margins: Gross margin at 96.2%, operating margin at 17.9%, ROE of 15.51%, and an ROIC of 14.51%.  However the companies operating margin, ROE, and ROIC could potentially double if payroll and payroll related expenses could be halved from their extremely high current levels (Which is probably a bit optimistic and I will talk about more below) and didn’t amount to more than $1 million, or about 25% of the companies entire market cap, and about 1/3 of its enterprise value.

If payroll and payroll related expenses which totaled about $1.4 million for the entirety of 2011, 53% of BABB’s gross profit, (Or an incredible $100,000 per employee at a $4.4 million market cap company) could be cut in half that would add 9 cents to BABB’s EPS, which would almost triple current EPS.  Cutting payroll expenses by half is just an estimate of what the company could do and may be a bit optimistic but BABB management should certainly be able to get close to halving payroll if it really wanted to become a more efficient company.  That 9 cents per share extra could be put towards growing the company further, paying an even bigger dividend (current dividend yield is 3.31%), or my favorite option, buying back shares outstanding since I am finding BABB to be undervalued currently and which I will talk about later.  Just the top three executives of the company made nearly $700,000 in 2011, not including the also generous options that have been given in the past, are still being given, and can still be exercised for even higher compensation for the three main executives of BABB.  Company insiders do own about 38% of BABB but that is down from a few years ago where insiders owned 48% of BABB.

At November 30, 2011 there are 360,400 of unexercised options that are not included in the computation of dilutive EPS because their impact would be antidilutive due to the market price of the common stock being higher than the option prices.  At November 30, 2010 there were 368,373 unexercised options that were not included in diluted EPS because their impact would be antidilutive due to the market price of the common stock being higher than the option prices.

Executive pay has also been rising in most recent years even as the number of total restaurants franchised and owned has dropped from 129 total restaurants in 2007 down to 103 total restaurants.  Since BABB no longer operates any of its restaurants the drop in number of total restaurants has also dropped royalty income, operating income and total company value.  Again, executive pay has continued to rise in recent years as this has been going on.

On top of all of this the CEO Mr. Michael G. Evans, is on BABB’s compensation committee which never looks good, especially in this case due to the high executive pay in comparison to the overall size of the company.

Also of note as it pertains to how the company operates is that as I talked about above the company receives 3% of net sales towards marketing and advertising for the restaurants.  This amount for several years now at year end has stayed consistently in the $300,000 a year range in unused advertising and marketing funds that the company could be putting towards better use than just sitting in company accounts waiting to be used.

Management could also be getting a bit sidetracked with opening up its new restaurant concept Sweetduet Frozen Yogurt as well and may be better served concentrating on and improving its already established Big Apple Bagel and My Favorite Muffin restaurants.

Valuations

This section will illustrate why I think management could be doing a much better job, especially when it comes to their own pay, and putting some of that money to better use for shareholders.

These valuations were done by me, using my estimates and are not a recommendation to buy stock in any of the companies mentioned. Do your own homework.

Valuations were done using BABB’s 2011 10K and 2012 third quarter 10Q. All numbers are in thousands of US$, except per share information, unless otherwise noted.

Cash and NOL Valuation (Absolute Minimum Valuation)

• BABB has 1,239 in cash (17 cents per share) + total net operating loss carry forwards of $5,857, discounted 50% which I will talk about later to $2,928 (40 cents a share)= a total valuation of 57 cents per share.

EBIT, Cash, and NOL Valuation

Cash, cash equivalents, and short term investments are 1,239

Total current liabilities are 822

Number of shares are 7,266

Cash and cash equivalents + short-term investments – total current liabilities=

• 1239-822=417/7266=$0.06 in net cash per share.

BABB has a trailing twelve month EBIT of 504.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments+$2,928 in NOL’s, or $0.40 per share:

• 5X504=2520+1239=3759/7266=$0.52 per share+$0.40 in NOL’s=$0.92 per share.
• 8X504=4032+1239=5271/7266=$0.73 per share+$0.40 in NOL’s=$1.13 per share.
• 11X504=5544+1239=6783/7266=$0.93 per share+$0.40 in NOL’s=$1.33 per share.
• 14X504=7056+1239=8295/7266=$1.14 per share+$0.40 in NOL’s=$1.54 per share.

Right now BABB’s operations at 5X EBIT are only adding 2,520 (35 cents per share) to its overall valuation due to overall restaurant count dropping and now only collecting royalty, license, and franchise fees but even at that valuation BABB is selling at a 35% discount to today’s share price of 60 cents a share.    I chose to discount the NOL’s by 50% in the above valuations for conservatism because a lot of these NOL’s will take years to accrue to BABB.

Relative Valuations

• BABB’s P/E is currently 9 with the industry average being 17.9. With BABB’s current share price of 60 cents per share, if it was selling at the industry average P/E it would be worth $1.20 per share.
• BABB’s P/B is currently 1.4 with the industry average being 3.7.  With BABB’s current share price of 60 cents per share, if it was selling at the industry average P/B it would be worth $1.58 per share.
• BABB’s TEV/EBIT is 7.07 and its EV/EBIT is 6.58.  Both of which are under 8 which is generally what I like to see in companies I think about buying into.

Valuation Thoughts

• BABB’s, which is currently selling at 60 cents per share, is undervalued by every one of my estimates of intrinsic value and relative value estimates when compared to its industry.
• BABB has $153,000 in total debt, or only 2 cents per share so even subtracting the company’s debt it is still undervalued.
• By my absolute minimum estimate of value BABB valued about fairly right now but that only includes cash and NOL’s.  Adding in BABB’s operations into the valuation makes BABB undervalued by 35% currently.

Customer Reviews

As I have been researching and writing this article one thing has continued to bother me and not made very much sense about BABB.  The restaurant count dropping has been a bit perplexing to me as the company has been profitable every year since 2002 except for 2009, and I would not have thought that bagel sales would have suffered a massive drop during the recession, so the restaurant count dropping in 2007 from 129 total restaurants to now only having 103 total restaurants (Or a drop in total restaurant count of 20%) has continued to bug me as the process of researching this company has gone on.  I have not eaten at any of BABB’s restaurants before as the closest one of its restaurants are a six hour drive away from me so I decided to find customer reviews online to help me get a bit of perspective on how the franchise restaurants are generally thought of by its customers. After reading through dozens of customer reviews from different franchise locations I think that I am able to come to some conclusions about what its customers think about Big Apple Bagel restaurants and think that I have found the answer to the dropping restaurant count problem that has been bothering me.

• Generally customers only think that the food is average to good.
• Generally people think that the bagel/sandwich products are overpriced.
• A lot of people think that competitors have better bagels in their respective local areas.
• More than a few people mentioned that they only went there because of coupon promotions (buy 1 get 1 half off or free on bagel sandwiches.)
• More than a few people who said they went there only because of the coupons said that even with the coupon they thought the products were overpriced.
• The biggest overall concern that I saw stated over and over again from customer visits to multiple different franchise locations was that customer service was rated at best ok to absolutely horrible.

Through my studies of many different companies in many different industries I have learned many things that can help and hurt the company’s sales and profitability.  One of the biggest things that can help or hurt a company, especially in today’s world where people can write things like customer reviews on the internet for everyone to see, is customer service or the lack thereof.  I think that one of the reasons Amazon has been such a huge success is due to its customer service which is exceptional and one of the best I have ever dealt with.  The reverse can also happen if you have a reputation for poor customer service and can lead to customers not coming back to your stores and restaurants.  Combine the poor customer service with products that the customers think are overpriced (even with buy 1 get 1 free coupons) and the combination of these two things may be why restaurant count has dropped by 20% in recent years.  Maybe the restaurants are losing customers, sales, and the franchise locations are becoming unprofitable leading the franchisees to close restaurants.  There is not really a mention of why the restaurant count has dropped in BABB’s annual reports and to this point I have not been able to talk with company IR and have not had my phone calls returned to get these questions answered so for now this is my best guess as to why the number of restaurants have dropped in recent years.

Catalysts

• If management decided to cut payroll expenses and put that money towards much better use the share price would no doubt rise.
• Gaining more franchisees would up sales and profitability which would make the share price rise.

Pros

• BABB is at minimum fairly valued, and undervalued sometimes substantially with my other intrinsic and relative valuations.
• BABB’s margins are pretty good overall.
• Insiders own around 38% of BABB.
• If BABB’s management decided to cut payroll expenses it would raise EPS and overall profitability of BABB, potentially substantially depending on how much they decided to cut payroll.

Cons

• BABB’s restaurant count has dropped by 20% since 2007 which has lowered the amount of royalty fees collected, thus lowering sales and profitability for the overall company.
• Management’s pay is excessive in my view taking up 53% of gross margin.  Last year overall payroll and payroll expenses amounted to $1.4 million dollars with the company only having a $4.4 million market cap.  Stated another way payroll and payroll expenses make up 32% of the companies entire market cap.
• Just the top three executives of BABB made around $700,000 last year, not including options, or 16% of the entire market cap.
• BABB’s margins could be a lot higher if management cut payroll expenses.
• A few years ago insiders owned 48% of the company and now only own 38%.
• At the very least the company is perceived to not have very good customer service.
• Several reviewers online also thought the products sold at BAB restaurants were overpriced, even when they had a buy 1 get 1 half off or fee coupon.

Conclusion

I will save in depth talk about margins, float, and the other normal things I talk about in my articles for the conclusion piece in the series of posts but my overall investment thesis is very simple with this company: BABB is at worst fairly valued when only counting cash and NOL’s and is undervalued by a substantial margin (about 35%) when including its operations.  If management were to cut payroll and other payroll expenses, especially executive pay and options, and put that money (Potentially as much as 9 cents per share if they were to halve payroll expenses) towards improving company operations and/or expanding the number of franchises, paying a higher dividend, or buying back shares the company could potentially appreciate by even more.

In my opinion management could be doing a much better job helping this company expand and to improve operations, especially the customer service side of things.  I do not think that BABB is necessarily a buy and hold forever company like some of the other companies I own, but I do think that BABB could grow its restaurant count, become more profitable, and turn into a much more attractive company to own, and potentially turn into a buyout candidate.  Payroll expenses taking up 53% of gross profit is absolutely insane, and if BABB decides to cut some corporate excess/waste and put that money to much better use for shareholders and the overall company, BABB could potentially double or triple from today’s current share price of 60 cents per share.

I still have a few more companies to write articles about before making a definite buy decision or not about BABB, but overall it looks like a potential investment opportunity at this point, especially if management would cut payroll expenses and put that money towards much better use for shareholders.

The next article in this series will be about Paradise Fruit Company Inc (PARF).

Article Update and Weekend Reading Links

I have finished up all three articles in my now shortened series and will proofread and do some light editing over the weekend and post them as soon as possible after I am able to acquire the shares I want.

Psy Blog-How Long To Form A Habit.

Hardcore value-Amazon, Apple, and The Beauty Of Low Margins.

Distressed Debt Investing-One Of Warren Buffett’s Greatest Trades.

CSInvesting-Video Lecture Course On Security Analysis and The Intelligent Investor.

Share Sleuth-Finding Hidden Debt.

Can’t Eat Value’s Blog-What’s Your Investing Edge.

Oddball Stocks-Value Momentum, Speculating On Recovering Net Nets.

The Equity Desk-Benjamin Graham: An Investing Legend.

Ragnar Is A Pirate-Fraud, Bankruptcy, and Ethanex.

25iq.com-Charlie Munger On The Psychology of Human Misjudgement.

Basehitinvesting.com

Wexboy-Why I Write…

The Globe and Mail-Article By GreensKeeper Asset Management Principle Michael McCloskey.

Distressed Debt Investing-My Three Favorite Quotes From Baupost’s 2012 Year End Letter.

Graham And Doddsville-Legacy Of Benjamin Graham.

Wexboy-The Great Irish Share Valuation Project Part IV.

GuruFocus-Answers From Tom Gayner’s Interview With Guru Focus.  Thanks for the link Obtuse Investor.

Sahara Investing-Triyards Holdings.

World Financial Review-Repeatability: How Companies Create Enduring Businesses In A World Of Change.

CSInvesting-More Valuation Case Studies.

An Update, New Translation Page, and Links

As you might have noticed at the top of the page is now a translation page where you can translate the entire blog into many different languages.  I found something similar to this a few days ago but could not get it to work on the blog so I enlisted the help of my brother and he got the translation page working, thanks a lot Kev.  This also means that the short-lived Mandarin Value Investing Journey is also not now needed and will be going away.  I am sure the 20 of you who visited the mostly untranslated site will miss it dearly .

A quick update on where I am at with the process of my article series.  I have now finished up the first two articles of the series and as you know I had planned to write articles on one or two more companies and then do a conclusion article.  Two of the companies I was planning on writing articles on I have been asked not to by the person who recommended them to me because he is planning on writing articles about them.  I am still going to read those companies annual reports and other filings but will not be writing articles about them so this has turned into a three-part series covering the two companies I have already written articles about and the conclusion article where I decide which of them to buy.  I will hopefully have the whole series posted as soon as possible.

“Things do not happen–they are brought about by careful planning, diligence, application, and direction.”George Mecherle, Founder of State Farm Insurance.

Valueprax-This One Is Personal.

25iq.com-Charlie Munger On The Importance Of Worldly Wisdom And Consistently Not Being Stupid.

CP-Africa.com-Meet 31 Year Old Ashish Thakkar-Africa’s Youngest Billionaire.

OTC Adventures-International Wire Group Is Cheap, But Is It Safe (ITWG)

Valuewalk-Baupost Group’s Seth Klarman Sees “50 Shades Of Value” In The Market.

Valueinvestingblog.net-CASA Holdings and Fiamma Holdings.

CSinvesting-A Reader’s Question On Case Studies.

Santangel’s Review-Benjamin Graham On Staying Small.

Motley Fool-Charlie Munger Info From A Board Poster.

Valueprax-Notes-Nintendo Back In The Saddle?

CSInvesting-Valuation Case Study HVAC.

OTC Adventures-Value Investing Strategy and Unlisted Securities Part 2.

CSInvesting-ValueUncovered Philosophy; Treat Everything As A Case Study.

Wexboy-2013: The Great Irish Share Valuation Project Part 2.

Credit Bubble Stocks-Horizon Kinetics, Owner Operators, and the Predictability Arb.

Fantastic Idea From Valueprax: Mandarin Value Investing Journey. 从Valueprax国语价值投资之旅的奇妙的想法。

As you know I have been learning Mandarin for the past several months and yesterday Valueprax and I were talking on Twitter yesterday and after telling him that I am learning Mandarin he came up with a fantastic idea.  He said that I should translate my blog into Mandarin to get myself out there further.  Up to this point I have not been able to find any Mandarin language value investing blogs so this is another way to get myself out there.  This will also help me learn Mandarin faster, get myself out there to potential value firms in Asia which may lead to potentially getting hired or at the very minimum hopefully gaining a new audience in Asia.

The new Mandarin language version of Value Investing Journey is below and I am currently undertaking the process of translating the entire blog into Mandarin so if you are curious what the blog would look like in Mandarin feel free to take a look.  If you know anyone who reads Mandarin and is interested in investing I would really appreciate if you could pass this link on.  Thank you and I hope you enjoy.

http://mandarinvijourney.wordpress.com/

你知道我一直在学习普通话在过去的数个月，昨天Valueprax和我聊天昨天在Twitter上后，告诉他，我学习普通话，他想出了一个绝妙的想法。他说，我要我的博客翻译成普通话，没想到却在那里进一步。这点我一直没能找到任何的普通话价值投资博客，所以这是另一种方式来让自己有。这也将帮助我更快地学习普通话，让自己有潜在价值，公司在亚洲，这可能会导致潜在的被聘用，或最起码希望在亚洲获得了新的观众。

新的普通话语言版本，以下是价值投资之旅，我目前正在进行的过程中，整个博客翻译成普通话，所以如果你是好奇，到底是什么东西的博客看起来像普通话随时来看看。如果你知道谁读普通话及有兴趣投资，我会很感激，如果你可以通过这个链接上。谢谢你，我希望你能喜欢。

Catching Up On Some More Links

Farnam Street-The World Is Much More Interesting Than Any One Discipline.

Wexboy-Tetragon Ready To Be A Star.

Sahara Investing-The Luxury Goods Market.

Oddball Stocks-Thoughts On Quantative Value Investing.

Valueinvestingblog.net-Investing In Japan: Late To The Party.

Valuewalk-Insurance Companies, Where Buybacks Are Key: Travelers.

Farnam Street-Mastery.

OTC Adventures-Value Investing Strategy And Unlisted Securities Part 1.

Whopper Investments-The Best Values Are Over The Counter Stocks So Is $OTCM A Great Value Too?

Ragnar Is A Pirate-Changing 13D’s At Trinity Place Holdings.

The Aleph Blog-On Insurance Investing Part 2.

Quotations Page-Persistence Quotes, my favorite is the Calvin Coolidge One:

Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘Press On’ has solved and always will solve the problems of the human race.

Absoutely love that quote.

Mises.org-Cartman Shrugged: The Invisible Gnomes and The Invisible Hand In South Park.

CSInvesting-The Secret To Investing Success (Munger Tip).

Valueconferences.com-Adib Motiwala: Your Instructor At Small Cap Investing Summit 2013, hour long interview.