Noble Roman's Inc (NROM.OB) is an undiscovered, profitable
microcap company with 35% operating margins at an inflection point
of growth. Historically, Wall Street has given some of the largest
PE multiples to restaurant rollout stories and especially to
companies with high operating margins. The key is finding them
before the growth materializes, and buying the stock before the
"smart" money buys them. Noble Roman's is currently on a $0.13
pre-tax EPS run rate, and in this article I will outline how I
believe the company will be on a $0.20 EPS run rate by YE 2013
which will warrant a much higher stock price.
In 2010, US Pizza Sales were $35 billion, up 1% over 2009.
Independents owned 57% of pizzerias and controlled 48% of sales.
After independents, the Top Three pizza chains are Pizza Hut,
Domino's Pizza (
DPZ
), and Papa Johns (
PZZA
). Pizza Hut, which is owned by Yum! Brands (
YUM
), holds the top spot with ~7500 units in the US and captures
roughly 15% of all US pizza sales, followed by Domino's (9%), Papa
John's (6%), Little Caesars (3.5%), and Papa Murphy's Take-N-Bake
(1.9%). The top four chains have been mainstays for over a decade,
but Papa Murphy's growth from #10 to #5 is the most notable, and
illustrates why take-n-bake is the fastest growth arena in the
pizza industry.
(click to enlarge)
Noble Roman's, Inc., an Indiana corporation incorporated in
1972, sells and services franchises and licenses for
non-traditional foodservice operations under the trade names "Noble
Roman's Pizza", "Noble Roman's Take-N-Bake", "Tuscano's Italian
Style Subs" and "Tuscano's Grab-N-Go Subs". The concepts' hallmarks
include high quality pizza and sub sandwiches, along with other
related menu items, simple operating systems, fast service times,
labor-minimizing operations, attractive food costs and overall
affordability. Since 1997, the Company has focused its efforts and
resources primarily on franchising and licensing for
non-traditional locations and now has awarded franchise and/or
license agreements in 49 states plus Washington, D.C., Puerto Rico,
the Bahamas, Italy and Canada.
Noble Roman's is a turn around story that has been plagued the
last few years by a lawsuit which forced management's attention
away from expanding the business in order to defend itself. The
amazing thing is how profitable the company continued to be even
while only having the business in "first gear". The company went on
to prevail in the lawsuit and actually expects some monetary
remuneration in the future. Most of the time required on the
lawsuit is now behind the company, so now the management team is
focused on growth.
The overriding macro trend the management team is looking to
exploit moving forward is providing a better tasting product
offering at affordable prices. The company is focusing its efforts
on the take-n-bake (ie cook at home) arena, which is the fastest
growing segment of the pizza industry. Take-n-bake has been
embraced by the consumer because the product is "fresh and
delicious" when compared to frozen pizza, is hot when the customer
is ready to eat it as opposed to delivery pizza, since it is an
unfinished food product there is no sales tax and the customers do
not feel obligated to tip the drive, and, as a nice plus, the
consumers can use food stamps to purchase the pizza at the grocery
story or stand-alone locations. A further analysis of the role food
stamps play can be found [
HERE
].
Noble Roman's is currently focusing its sales efforts primarily
on three growth verticals.
- Selling franchises/licenses for non-traditional locations
primarily in convenience stores and entertainment
facilities.
- License agreements for grocery stores to sell the Noble
Roman's Take-n-Bake Pizza.
- The Company has recently developed a stand-alone take-n-bake
pizza prototype and has entered into agreements with two separate
existing independent franchisees to open a total of four such
units in the upcoming months.
Non-Traditional Franchises and Licenses
(click to enlarge)
The Company believes that in today's macroeconomic
circumstances, it has an opportunity for increasing unit growth and
revenue within its non-traditional venues, particularly with
convenience stores, travel plazas and entertainment facilities. The
Company's franchises in non-traditional locations are foodservice
providers within a host business, and usually require a
substantially less investment compared to a stand-alone traditional
location. Non-traditional franchises and licenses are most often
sold into pre-existing facilities as a service and/or revenue
enhancer for the underlying business. In 2012, the company has
signed franchise agreements for 27 new non-traditional locations
other than grocery stores including 12 locations with Huck's, a
110-unit convenience store chain located in five states, plus an
agreement with The Pantry, Inc (
PTRY
)., a convenience store chain of over 1,650 locations. Normally, a
convenience store chain will sign up for one or two units to test
out the concept and if deemed successful will roll it out to a
greater number of stores. As stated earlier, In 2012 Noble Romans
has 27 signed non-traditional locations across 13 chains which in
total represent a ~1,940 store opportunity. Each non-traditional
franchise location is expected to produce ~$20,000 per year in
revenues and operating income to Noble Romans, plus upfront fees of
approximately $8,000 per location.
Grocery Store Take-n-Bake Licenses
Since September 2009, when the Company started offering
take-n-bake pizza to grocery store chains, through August 9, 2012,
the Company has signed agreements for 1,206 grocery store locations
to operate the take-n-bake pizza program and has opened take-n-bake
pizza in approximately 945 of those locations. In 2012, the company
has signed license agreements for 267 additional grocery store
take-n-bake locations. The Company is currently in discussions with
numerous grocery store operators for additional take-n-bake
locations. To further accelerate the growth of take-n-bake pizza in
grocery stores, the Company has focused on signing agreements with
various grocery store distributors to market the take-n-bake pizza
program to the distributors' current customer base. As of August 9,
2012, the Company had signed 13 grocery distributors to the
program, and continues to pursue others as well. Each additional
grocery store on average is expected to produce ~$2,000 per year in
revenues and operating income to Noble Roman's.
Stand-alone Take-n-Bake Pizza Franchise Concept
In July 2012, Noble Roman's announced that it signed its first
franchise agreement for a new, stand-alone take-n-bake prototype,
and since then has signed agreements for three additional
locations. This really caught my attention, since they would be
looking to go head to head against Papa Murphy's which has a
dominant market share (1300 stores) position in the stand-alone
take-n-bake market. Noble Romans believes this new stand-alone
take-n-bake franchise will garner a lot of interest from
franchisees. First, the company believes the product taste and
product line are superior. Secondly, capital cost and operational
cost are half that of buying and operating a Papa Murphy's
franchise. This growth vertical is very exciting, and its one that
will get wall street very excited with any signs that it is
catching on. Each stand-alone store on average is expected to
produce $44,000-$55,000 per year in revenues and operating income
to Noble Romans and, in addition, will receive approximately
$17,500 in upfront fees for each new unit.
Growth Moving Forward
Since 2009, one part of Noble Roman's has been in decline
(Traditional Franchise) and two others increasing (Grocery Take N
Bake and Non-Traditional Franchise) with the company showing flat
sales overall. Management believes that the traditional franchise
business has now stabilized which will stop negatively impacting
overall sales of the company. As the three growth verticals kick in
towards year-end, I expect to see meaningful top and bottom line
improvement based on a conservative set of assumptions/inputs
moving forward.
Assumptions and Inputs for Modeling Growth
Revenues are somewhat challenging to predict because of the lag
that occurs when a grocer, non-traditional, and stand-alone are
signed versus when they start selling product. I've found that it
is normally about 3 months for a grocer, but could be 3-9 months
for a non-traditional, and 6 months for a stand-alone. The good
thing as an investor is it's only a matter of time until they are
implemented. The bad thing is it's not going to be immediate.
Below, are three models representing what I believe are
conservative, most likely, and best-case scenarios for growth in
2013 and 2014. The company has historically (since 2010 launch)
signed 400+ grocery stores per year to take-n-bake licenses, so
this input in all three scenarios is feasible based on past
performance. Since the beginning of the year the company has signed
up 27 non-traditional franchises, so again we have some historical
record to show that adding 20-50 per year is feasible. As it
relates to grocery store take-n-bake licenses and non-traditional
additions, I feel I'm conservative across all three scenarios
simply because I have no idea of what the attrition rate is amongst
these verticals. For example, the company could also lose 100
grocers a year and 10 non-traditional, and I have no gauge on that,
so I'm conservative on the additions to also reflect some sort of
attrition rate. Noble Roman's announced the stand-alone take-n-bake
initiative in late June and signed up 4 franchises by mid-August,
so I feel my potential additions for 2013 and 2014 are
feasible.
(click to enlarge)
The company has stated they can double the size of the business
with no material increase in SGA. Even in my conservative case
model, you can see the operating leverage in the model. In the most
likely case scenario I have the company earning $0.14 pre-tax EPS
this year (2012), $0.19 EPS in 2013, and $0.25 EPS in 2014. Net
operating margins exceed 50% by 2014.
Looking at the balance sheet, the company does have $5 million
in debt that has just been refinanced with BMO. The debt is a
48-month facility at LIBOR plus 4% which the company pays $104,000
per month in principal. The company plans to use any increase in
cash flow to pay down this debt quicker, including any remuneration
from the lawsuit that they won. Based on my most likely case
scenario model, I believe they could pay this debt off by mid-2015.
Management's goal is to pay an ongoing meaningful dividend to
shareholders once the debt is paid off.
Comparisons
Noble Romans has a licensing-franchising business model and
doesn't own operate stores like all of he public comps I have found
below. This allows Noble Romans to show superior financial
performance while also not having the risk of owning and operating
storefronts. I find that companies that demonstrate superior growth
and superior margins always carry the highest valuations. Noble
Romans has by far the best margins amongst the group, and even
though growth has been flat, I expect that to change in 2013. When
you look at the financial metrics, it is also easy to conclude that
the company is currently undervalued based off what the company has
already done/achieved, let alone future growth. For example, I
think its interesting how Pizza Inn (
PZZI
) trades at 2x the market cap of Noble Romans and yet Pizza Inn
literally earns less money and has 1/8 the operating margins.
(click to enlarge)
Some Issues
I do see some issues that I think are warranted to bring to
investors attention. Most of these issues derive fighting off
lawsuits, and scrimmaging against a group of shareholders that
wanted to take the company private. So a lot of the issues I see
stem from watching the expense line like a hawk, while also being
leery of bringing in "outsiders".
- Paul Mobley and Scott Mobley pull a generous salary ($400k
and $300k) which I believe they both earn, but this is double the
amount of salary that is normal for a company this size. I
believe this could scare off some potential investors. Paul does
own a healthy equity position (17% of the company).
- Paul Mobley is the CEO and CFO. In today's world of investors
demanding more corporate oversight and governance I believe the
company willneed to hire a CFO. I would expect to see the company
hire a full time CFO sometime in late 2013-2014, hence part of
the bump up in SG&A in my model. Along with this Paul wears a
lot of hats at the company which is fine to some regard, but who
would be able to step in as CEO if something were to happen to
him.
- I would like to see some additional independent board members
brought on that have backgrounds that would provide some real
value to the company.
- The website really needs some work on a variety of levels
especially as it relates to communicating with potential
consumers, investors, and franchisees.
- Robert Stiller, the founder and
recently ousted
chairman of Green Mountain Coffee (GMCR), owns a large position
(17.5%) of Noble Roman's. He has been a seller due to his
financial issues, but since he is owns well over 10% he can only
sell 190,000 shares every 90 days.
- The company has $5 million in debt which it recently
refinanced through BMO.
Valuation and Conclusion
Noble Romans looks to be set for a turnaround in late 2012
onward. The company has industry leading operating margins, and now
with some legacy issues behind the company, management can start to
execute on its growth strategy. Pizza industry comps trade anywhere
from 14 - 44 PE (pre-tax), while Noble Romans currently trades at a
5 PE. The company does have some issues to work through but if we
just apply a conservative 10 PE to Noble Romans TTM EPS of $0.13,
it gives us a short-term target of $1.30 PPS. Below is a simple PE
- EPS matrix and potential stock prices.
Given realistic and feasible inputs in my Most Likely Case
growth model, Noble Roman's could be on a 20c pre-tax EPS run rate
by Q4 2013. If you put more of a growth multiple on these expected
earnings its easy to get a stock price that should be $3.00 PPS or
higher.
I see the blue sky potential for the story being the stand-alone
take-n-bake franchise. Wall Street always goes gaga over restaurant
rollout stories, and if Noble Romans shows any type of success in
rolling out the first 10-20 units and provides visibility for an
increased rollout, the stock will likely trade at a very high
multiple.
In conclusion, Noble Romans is currently trading at least 50%
below where it should be trading which provides a nice margin of
safety when looking at the potential 12-24 months out. If Noble
Roman's is moderately successful in its growth strategy, the
company will be able to double EPS (from 0.13 to 0.25) over the
next 24 months. If a mediocre growth multiple of 15 PE is applied
by that time, it would produce a stock price $3.75, which is 500%
ROI from current prices. Management's goal is to have all debt paid
off within three years and to then pay a meaningful ongoing
dividend.
Disclosure:
I am long [[NROM.OB]]. I wrote this article myself, and it
expresses my own opinions. I am not receiving compensation for it.
I have no business relationship with any company whose stock is
mentioned in this article.
See also
Top 5 Global Agriculture Stocks By Market Cap
on seekingalpha.com