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Restaurant owner MTY Food Group Inc.'s appetite for acquisitions, strong financial results and increased investor attention have helped send its stock to fresh highs.

Shares of Toronto-based MTY, the company behind brands such as Mr. Sub, Jugo Juice, Timothy’s World Coffee and Thai Express, hit an all-time high of $70.16 on Friday – an increase of about 40 per cent from a year ago.

The highs come despite weakness in the broader markets, which Ryan Modesto, chief executive of the independent firm 5i Research, says is a good sign for the company. “It’s doing something right,” he says. “It’s not a company we’d bet against.”

At its recent highs, Mr. Modesto recommends investors buy into the stock slowly, taking advantage of any pullbacks, and considers it as a longer-term play. “We like the management team. They’ve done a good job of growing the company and made smart acquisitions.”

MTY is being buoyed in part by its Sept. 24 addition to the S&P/TSX Composite Index, which gives it access to a broader set of investors. The stock really started to take off after Oct. 10, when the company reported third-quarter revenue of $91.2-million, which was ahead of analysts’ consensus expectation of $89.2-million and up from $72.4-million for the same quarter a year ago. Net income was $22.3-million, or 88 cents a share, up from $12-million, or 56 cents, a year earlier. Analysts were expecting earnings of 70 cents a share in the latest quarter. Same-store sales growth (SSSG) of 0.1 per cent was a concern for some. In Canada, SSSG was up 1.2 per cent, offset by a 0.3-per-cent drop in the United States and 5.5-per-cent drop in international markets. About 44 per cent of its revenue is in Canada today, 47 per cent in the United States and 9 per cent abroad.

The company said its third-quarter results benefited from a strong performance from some of its recent acquisitions, such as the $248-million purchase of Imvescor Restaurant Group (IRG) that closed earlier this year, as well as cost-control initiatives. IRG came with brands such as Baton Rouge, Pizza Delight and Scores. MTY is an aggressive acquirer of restaurant brands, most recently purchasing sweetFrog Premium Frozen Yogurt for US$35-million.

Mergers and acquisitions that don’t add value is a key risk for the company, analysts say, alongside higher labour costs, a pullback in consumer spending and increased competition.

MTY’s founder and long-time CEO Stanley Ma is set to retire next month and will stay on as chair, while chief financial officer Eric Lefebvre will take the CEO job. Acumen Capital Research analyst Brian Pow recently spoke to Mr. Lefebvre and said in a note that the new CEO “will be focused on restoring organic growth and using free cash flow to fund acquisitions.”

Mr. Pow, who has a “buy” on the stock, increased his target price to $70 from $63.50 after the latest earnings release. “MTY beat our estimates and consensus, showed strong recurring revenue streams, demonstrated operational leverage, and benefited from business recovery in Western Canada," he said in a recent note.

National Bank Financial analyst Leon Aghazarian increased his target to $70 from $62 – above the average price target on the Street of $66.17. He said the “significant [earning] beat, continued earnings momentum and sizeable M&A looking increasing likely” were behind his decision to upgrade the stock to “outperform” (similar to buy) from “sector perform” (similar to hold).

“Management has indicated a healthy number of targets as it remains confident that consolidation will occur in the foodservice industry,” Mr. Aghazarian said in his Oct. 10 note.

TD Securities analyst Derek Lessard increased his target to $62 from $58 after the recent earnings, but maintained his “hold” rating, believing the shares are fairly valued.

He expects SSSG to be limited given the increasingly competitive restaurant environment, while “price-sensitive consumers are resisting attempts by restaurants to raise prices.”

“Barring a major acquisition, there is no short-term catalyst on the horizon, in our view, that could push the shares materially higher from here," Mr. Lessard said in a recent note.

Stephen Takacsy, chief investment officer at Montreal-based Lester Asset Management, was an early investor in MTY, buying in the $1-$2 range, and sold out when the stock was trading in the low $30-range in 2014. “We are value investors so this fell out of our wheelhouse,” he says. “Hats off to them, they’ve done a great job. … It’s just an expensive stock now.”

Mr. Takacsy has concerns about the challenges in the restaurant business and difficulties generating positive SSSG to please the market. He recommends investors wait for more evidence of organic growth from existing operations and a dip in the stock price before buying.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/05/24 4:00pm EDT.

SymbolName% changeLast
MTY-T
Mty Food Group Inc
+0.56%44.55

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