This restaurant company is seeing double-digit revenue and earnings increases, and is growing rapidly via acquisition.
Meritage Hospitality Group Inc. (MHGU)
From Internet Wealth Builder
Meritage Hospitality Group Inc. (MHGU) owns and operates a network of branded restaurants in the quick-service and casual dining restaurant industries. The company operates approximately 250 Wendy’s restaurants across seven states within the quick-service restaurant (QSR) industry and five casual dining restaurants under the banners Twisted Rooster, Crooked Goose, and Freighters in the state of Michigan. Meritage’s strategy is to further consolidate the existing network of Wendy’s franchises in North America through acquisitions and to improve sales and profitability of acquired restaurants through integration into its IT platform and restaurant remodeling.
On July 18, the company reported strong financial results for its second quarter ended July 2. Here are the highlights:
• Sales increased 34.3% to $78.7 million from $58.6 million for the same period last year.
• Earnings from operations increased 35.8% to $5.4 million from $4 million for the same period last year.
• Net earnings increased 53.9% to $3.2 million compared to $2.1 million for the same period last year.
• Consolidated EBITDA (a non-GAAP measure) increased 61.8% to $8.8 million compared to $5.5 million in 2016.
• The company completed the acquisition of 57 Wendy’s restaurants located in four states during the second quarter.
• The strong sales and earnings growth in the second quarter was partially driven by the successful integration of the 57 newly acquired Wendy’s restaurants into its operating platform late in the period.
The company announced new targets for the full fiscal year as follows:
• Sales growth of 30% to 40%.
• Income from operations growth of 45% to 55%.
• Net earnings growth of 45% to 55%.
• EBITDA growth of 35% to 45%.
• Common stock dividend growth of 30% to 40%.
Meritage reported approximately $1.15 in diluted earnings per share (before one-time expenses) over the previous 12 months which equates to price-to-earnings valuation of 17 times. Looking forward, the company is targeting revenue growth of $90 million from recently announced acquisitions alone, which equates to a 37% increase over reported revenue in the previous 12 months.
We anticipate some fluctuation in profit margins depending on the timing of expenses associated with acquisitions and restaurant reimaging; however, over the course of the five-year plan we expect an overall margin increase resulting from economies of scale. Considering the strong growth profile, we believe that Meritage offers attractive value for investors looking to hold the stock for at least one to three years.
Meritage reported very strong financial results in its second quarter with 34.2% growth in sales a 53.9% increase in earnings. This strong performance is the direct result of the company’s ongoing restaurant network expansion and reimaging program.
The company started the year with 175 Wendy’s restaurants and targets up to 400 restaurants by the end of 2021. So far, Meritage has signed agreements to acquire 69 new restaurants, which is an excellent start, only a few months into their five-year growth plan. These acquisitions alone are expected to add $90 million to revenues, an increase of 37% from sales over the past 12 months.
What we like about Meritage is that it is a simple to understand business with an excellent track record of achieving growth targets and an aggressive but fully achievable growth plan. Despite the gain to date, the stock continues to trade at a discount to the market average price earnings multiple.
Buy.
Ryan Irvine in Gordon Pape’s Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, July 31, 2017