Recipe Unlimited Corp.? Is that, like, a cookbook company or something?
Nope, it’s the new name for Cara Operations Ltd., better known as the owner of Swiss Chalet, Harvey’s, East Side Mario’s, Montana’s, The Keg and other establishments where Canadians like to chow down.
And it’s a fitting moniker, given that Canada’s largest operator of full-service restaurants has recently been cooking up some tasty returns after a period of sluggish sales.
Recipe’s modest dividend isn’t going to satisfy every investor’s hunger for income. And the stock isn’t cheap, particularly after surging about 19 per cent over the past three months. But for long-term investors seeking capital and dividend growth, the company might be worth a nibble – especially if the price were to cool off. Here’s why.
Sales are growing again
Despite intense competition in the restaurant business, Recipe reported a same-store sales increase of 2.1 per cent in the first quarter – the third consecutive quarter of growth after five straight declines. The increase was particularly impressive given that Easter typically a slow sales period – was included in the first quarter of 2018 but fell in the second quarter of 2017. Restaurant renovations, an improving economy in Western Canada and menu price increases – which helped to offset minimum-wage hikes in Ontario and Alberta – all contributed to the better-than-expected same-store sales. Total system sales for the 13 weeks ended April 1 grew 14.7 per cent to $755.9-million – helped by recent acquisitions of The Keg, Pickle Barrel and Burger’s Priest – while adjusted net earnings, which excludes one-time items, were essentially flat at $25.9-million or 41 cents a share.
A small, but growing, dividend
In March, the company hiked its quarterly dividend by 5 per cent to 10.68 cents a share, or 42.72 cents annually. Based on Recipe’s closing price of $27.95 on Tuesday, the stock yields about 1.5 per cent. That barely qualifies as an appetizer, but the company has signalled that further dividend increases are possible.
“With the company’s strong balance sheet and growing cash flows, management will continue to pursue strategic acquisitions and will explore alternatives to return more capital to its shareholders including continuation of its [share buyback program] and increases to the company’s dividend rate,” Recipe said in its first-quarter earnings release.
A new CEO
In addition to a new name, Recipe has a new chief executive officer. On May 10, Frank Hennessey took over as CEO from Bill Gregson, who was named executive vice-chairman. Mr. Hennessey was most recently CEO of Imvescor Restaurant Group Inc., whose chains include Baton Rouge and Pizza Delight, and was credited with turning that company around before Imvescor was sold to MTY Food Group Inc. earlier this year. At Recipe, Mr. Hennessey – who spent 11 years with Cara previously – is expected to focus on improving the customer experience and building relationships with franchisees.
“This is not a turnaround situation. Our fundamental goal here is to continue the progress that has already begun and to ensure that we are continually improving the guest experience in a profitable way,” Mr. Hennessey said on the first-quarter conference call. “Franchisee engagement is a pretty critical factor. If you ever want to get anything done, having a high degree of engaged franchisees is ... critical in that area.”
More acquisitions likely
Given Recipe’s modest debt levels (about two times earnings before interest, taxes, depreciation and amortization, or EBITDA) and strong free cash-flow generation (about $102-million in 2018, climbing to an estimated $125-million in 2019), CIBC World Markets analyst John Zamparo expects that the company will look for more deals.
“Cara is underlevered compared to most peers, and acquisitions are certainly a possibility for the company, particularly in segments or concepts in which it currently has little presence – i.e. fast-casual, pizza,” Mr. Zamparo said in a note. Still, he has a “neutral” rating on the shares, which are trading slightly below his 12- to 18-month price target of $29 that is based on an enterprise-value-to-EBITDA multiple of 10.3. “We believe [the stock’s current] valuation limits upside, at least for now,” he said.
Of the nine analysts who follow the shares, there are five buys and four holds, with an average price target of $30.89.
Closing thoughts
Recipe almost certainly has plenty of sales, earnings and dividend growth ahead of it, but waiting for a better entry point may be a prudent strategy. Also keep in mind that the casual-dining segment is highly competitive and could suffer if the economy takes a turn for the worse. Remember to do your own due diligence before investing in any security.