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.

A Portfolio Update And Two Powerful Insights Every Serious Investor Should Read

Portfolio Update

Yesterday I made some adjustments to my portfolio and the portfolios I manage and I just wanted to update those positions.

Personal Portfolio and Portfolios I Manage:

  • Bought Strattec Security Corporation $STRT

Personal Portfolio:

  • Sold Altria $MO up 18%.
  • Sold Philip Morris $PM up 24%.
  • Sold Intel $INTC up < 1%, could have sold a while ago up 30%, doh!

All sold positions are after fees but before taxes.  I never bought any of the above three positions for the portfolios I manage and I bought Altria, Philip Morris, and Intel before doing any kind of valuations or any kind of in depth research so I am a bit fortunate to end up anything in those positions.

I said a couple months ago that I planned to hold the above positions for the foreseeable future because I felt that I could have my results compound well over time in all of the three companies.  I still think that is true for all of the above companies but have still decided to sell them all.  Lately I have been gaining confidence in my abilities to analyze companies, and I now think that I am at the point where I am getting pretty good at analyzing companies and think I can find better opportunities in the smaller mid to nano caps that I am concentrating on now.

Also as Red reminded me of the other day, why would I try to compete with the millions of people who are invested in and analyze those massive companies when I can find less competition, potentially less efficiency, and more upside, in the much smaller companies.

After selling those companies to free up cash for future opportunities, my current portfolio stands as follows, ranked by position size.  Portfolio does not add up to 100% because of rounding:

  1. $VIVHY.PK-28% of portfolio.
  2. Cash-26% of portfolio.
  3. $STRT-16% of portfolio.
  4. $MAIN-11% of portfolio.
  5. $CMT-8% of portfolio.
  6. $DOLE-8% of portfolio.

Two Powerful Insights Every Serious Investor Should Learn From and Reread.

Fundoo Professor-Presentation On Moats And Floats.

The Red Corner Blog-Kfaftwerk; A look at economies of scale and how Wal-Mart changed its industry and made a ton of money.

I hope you enjoy the above links as much as I have.

I have already started researching another company and tomorrow I will post some links and ask your advice on something I have been thinking about quite a bit lately.

Portfolio Update and A New Dole Article Planned

I just sold my entire position in Taseko Mines (TGB).  TGB released its most recent quarterly report yesterday and yet again it was a disappointment.  It seems that ever since I bought into this company every quarter has been a disappointment at least on some level with excuses being given by its management for why it is not performing as good as it could.  Also of note is that TGB had to resubmit its New Prosperity mine assessment report at the end of September and now a decision will not be made until sometime in 2013 about if the mine will be approved or not.  The original plan was to have a decision by this month which was the only reason I had even held onto it this long.

This is yet another company I bought before doing any kind of valuations and only minimal research and again I paid the price with a total loss of 47%.  The only thing that again saved me was that at least I was smart enough to make my positions pretty small when I first started out so I didn’t lose a ton of money.

My portfolio is now 23% in cash and I am down to owning stock in only six companies. After clearing out the only remaining company that I knew for sure I was going to sell at some point, I now only own stock that I think are good companies and have the potential to continue to compound into the future.

The three remaining companies I own from before doing valuations and anywhere near the amount of research that I am doing now: $MAIN, $MO, and $PM, are all by my estimates either fairly valued or overvalued by quite a bit and I may sell stock in each of these three companies if I detect deterioration in any of their businesses.  If I do not see deterioration in the businesses I will most likely hold these companies for years because I think each of these companies will compound their results well into the future, unless of course I find a better company to put my money into.

The three companies I have bought into since doing valuations and the amount of research I am doing now are: $CMT, $VIVHY, and $DOLE.  At this point I still think that CMT and VIVHY are undervalued and will let you know if I decide to buy any more stock in either of those two.

This gets me to Dole.  I got a request from one of the readers of my original Dole article that I posted on Seeking Alpha who liked my original analysis series on Dole, Chiquita, and Fresh Del Monte and he was asking if I would do an updated valuation and analysis article on Dole now that it has sold some of its assets and is able to pay off most of its debt.

The reader asked if I would do an updated article giving my thoughts on how Dole stands now after it sold some of its assets and paid down debt, if I still think that it is undervalued, and what I think of its operations going forward now that it eliminated its biggest problem.

I have learned a lot since that time and hope to use some of my new knowledge to see what I think about Dole now, if I still think they are undervalued after rising in price as much as 75% at one point and currently still being up 47% since I originally bought into it.  I am researching its land, other assets, and history more fully now in preparation so that when its next quarterly report comes out on November 15th I am ready to value the company with updated numbers and post the article shortly after that.

In the mean time I will continue to post any updates and links that I think contain knowledge.  I may also every once in a while ask some questions of you since I know some of you are more knowledgeable in certain areas than I am.  Since I am planning on adding some new things to this article I may need some feedback making sure I am applying the new techniques correctly.