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?
- 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.
- 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.
Value Investing Journey 