Updated analysis: Good Times Restaurants
Active buyback program (already bought 15% of the company), pending of a trial resolution which was hold this Friday
Hi There,
This week we analyse the situation of a company forgotten by the market, without analyst coverage, which has practically eliminated its debt since the new management arrived (board owns 25% of the company) and has already repurchased 15% of the company awaiting the conclusion of the trial regarding the non-sale of one of its two brands (whose resolution occurred this Friday, 2nd Feb)
The Week in the Markets: A summary of the main events of the week. Including liquidity, commodities, China, 4Q23 results…
Good Times Restaurants $ GTIM - Ultra detailed thesis of a microcap company with an imminent catalyst and possibilities of unlocking the hidden value of the company
Portfolio Management: An interesting week where, as a result of the work in recent weeks, we presented a fairly high turnover in the watchlist and radar sections, introduced new companies, and discussed everything related to our portfolio.
The Week in the Markets
Yet another eventful week unfolds, marking 13 out of the last 14 weeks where the S&P 500 has reached historic highs. This week was greatly influenced by the strong performance of large corporations. However, it started on a downward trend due to lower-than-expected earnings guidance from major companies like Microsoft and Google (which dropped by over 6%), only to rebound on Thursday with the outstanding results reported by Meta and Amazon. Additionally, NVIDIA surged by more than 8%.
Furthermore, on Wednesday, Powell spoke, and perhaps the quote of the week was about the probable non-cut in rates in March: "I do not think it is likely that the committee will reach a level of confidence by the time of the March meeting."
This significantly affected small caps, which once again fared poorly for the week. However, despite the decreased likelihood of a 25bps rate cut in March (and our belief that such a cut will not happen), there are two points we would like to highlight in favor of the cut. First, the left-hand image shows that real inflation in the US has already dropped to 1.35% (for those unfamiliar with Truflation, we consider it the only reliable source for reporting inflation). Second, the results of regional banks have revealed their significant weaknesses (reviving the panic of March last year)
Regarding the macro aspect, the latest report from the Labor Department revealed a significant increase in nonfarm employment for January, along with positive revisions for November and December. Unexpectedly, average hourly earnings also rose, although the average workweek slightly decreased. In the manufacturing sector, revisions to January's data indicated better-than-expected growth, signaling potential signs of recovery in the struggling industry. Market dynamics saw fluctuations, with the yield on the 10-year U.S. Treasury note initially rising post-jobs report but ending the week lower overall. Positive trends emerged in the municipal market, contrasting with increased activity in the high yield market, which saw strong demand for new deals. Furthermore, trading levels in the bank loan market approached normalcy after weeks of aggressive repricing activities.
Commodities
The worst part of the week was experienced by commodities, resulting in WTI's worst week in over 3 months. The week began with the announcement that Saudi Aramco would not increase its current production capacity of 12MM - initially, the plan was to raise it to 13 by the end of the decade - which had a tremendous impact on the Offshore Drillers industry, particularly for Valaris, which has a 50% JV with Saudi Aramco to operate in the area. After the brief rebound on Tuesday, the rest of the week saw a further decline of over 5% due to rumors of a ceasefire negotiation in the Israel-Hamas war. Similarly, this week, The committee proposed no change to OPEC’s decision to slash 2.2 million barrels per day from the market this quarter.
The Henry Hub (US natural gas) continues to decline with the recent news from last week of the pause in new LNG export licenses (as we mentioned, with no short-term effect - 3/4 years - as construction of ongoing projects is allowed to proceed), coupled with production at its peak and a milder winter compared to previous years (natural gas demand heavily relies on heating). This situation creates the impression in the market that American natural gas will be in surplus for the following years
China
China's stock market continue falling from a cliff, with the Shanghai Composite Index down 6.19% and the CSI 300 dropping 4.63%, hitting five-year lows. The Hang Seng Index in Hong Kong also fell by 2.62%. January's economic indicators were mixed. While the official manufacturing PMI improved slightly to 49.2, indicating contraction, the non-manufacturing PMI exceeded expectations at 50.7 and the private Caixin/S&P Global survey of manufacturing activity held steady at 50.8.
A Hong Kong court ordered the liquidation of China Evergrande, a major property developer, due to its failure to restructure after defaulting on bonds. Analysts are concerned about the impact on China's financial system and housing industry, especially if mainland China follows suit. Despite government intervention, property sales remain weak.
4Q23 results
Although our publication specializes in small-cap theses, the companies driving the markets are the large corporations. That's why we allocate space for them in the weekly macro summary. Similarly, in the Portfolio Management section, we often discuss exposure via ETFs to everything except small caps from developed countries, as well as exposure to other types of assets.
Meta: reported revenues of $40.11 billion, exceeding estimates, with an EPS of $5.33. Platform data showed increases in daily and monthly active users for Facebook, along with growth in FamilyApp users. Ad impressions rose by 21%, but the average price per ad increased by only 2%. Meta announced a quarterly cash dividend of $0.50 per share and increased its buyback by $50 billion. The company expects revenue between $34.5 billion and $37.0 billion. Additionally, Meta's CFO mentioned a $2 billion increase in their capital expenditure guidance for fiscal year 2024.
Apple: Revenue reached $119.58 billion, up 2.1% YoY, surpassing estimates. EPS was $2.18, exceeding expectations. By segment, product revenue increased, with iPhone revenue up 6% YoY. However, iPad and Wearables, Home, and Accessories revenue declined. Services revenue rose 11% YoY. Despite optimistic rhetoric, China revenues fell short of estimates, declining 13% YoY. Apple expects gross margins of 46-47% for Q2 and challenges in comparisons for the March quarter.
Amazon: Revenue reached $169.96 billion, a 14% year-over-year increase, surpassing estimates of $166.21 billion.. Earnings per share of $1.00, up from 94 cents in the previous quarter, beating estimates of 78 cents. Among the segments, online store sales were $70.54 billion, physical store sales were $5.15 billion, third-party seller services were $43.56 billion, and AWS sales were $24.20 billion. North America net sales rose to $105.51 billion, while international net sales reached $40.24 billion. North America's margins improved to 6.1%, exceeding estimates, while international margins declined slightly. Forecasts for the first quarter predict revenue between $138.0 billion and $143.5 billion and operating income between $8.0 billion and $12.0 billion.
OneWater Marine: It reported poor results, as expected, but managed to avoid the guidance downgrade that its main competitor MarineMax announced the previous week. Revenue dipped slightly to $364 million, with same-store sales seeing a modest 2% increase. However, the real issue lies with the debt and inventory, and it only takes a little digging to see the brewing disaster. The $8 million losses are compounded by over $17 million in interest paid in the quarter. Inventory continues to rise, surpassing $700 million, meaning interest payments will keep increasing (seasonally, we believe they'll only manage to decrease them in the summer quarter). Notes payable stand at $562 million and long-term debt at $433 million. A word to the wise is sufficient.
The two main weeks of earnings presentations have concluded. So far, 230 companies from the S&P 500 have reported, with 80% of them beating expectations. The stock market continues to hit highs, and the combination of strong results, liquidity, and upcoming elections doesn't lead us to believe that the landscape will change much in the coming months. However, what really interests us begins now as most small caps tend to report in the latter part of the season. Here are the main companies reporting this week, and of course, if you'd like to discuss anything, feel free to send us an email at info@moram.eu
Macro
The reality is that the US economy seems to be accelerating, with very positive data such as the manufacturing ISM and consumer confidence continuing to rise. Meanwhile, the labor market remains very strong, although upon closer examination, we see that the employment figures reveal a shift towards temporary jobs.
United States
Consumer Confidence 114.8 vs 114.2 expected & 108 previous)
FED interest rates decision 5.50% (as expected)
Unemployment rate (3.7% expected 3.8% previous 3.7%)
Manufacturing PMI 50.7 vs 50.3 expected and 47.9 previous
ISM Manufacturing PMI 49.1 VS 47.2 expected (highest level since Oct-22)
Europe
UK Manufacturing PMI 47 vs 47.3 expected (improved from 46.2 previous)
UE CPI 2.8% expected 2.7% previous 2.9%
BoE (UK) interest rates decision: maintains at 5.25%
The part about China has already been discussed in the previous section. What we observe is that with a weight close to 30% in the Emerging Markets index, it is dragging down the performance of several of these countries (besides, it's obvious that when China struggles, Southeast Asia suffers as well). However, as we have mentioned in past editions, we believe that with all the measures being taken or about to be taken, we should see a rebound in Chinese equities (our exposure is purely through ETFs, as discussed several times in the PM section).
Good Times Restaurants
Good Times Restaurants ($GTIM) is a microcap in the restaurant industry. It owns and operates 65 (+7 franchises) stores in several states (Colorado and North Carolina are the main ones), generates continuously positive EBITDA and FCF (around $6MM/year) and it is using that money to buyback shares, minority interest and franchises. Its Enterprise Value is $25MM and it is on net cash position ($3MM)
Good Times Restaurants owns two concepts - the original Good Times Drive Thru and Bad Daddy's Burger Bar (fully-acquired in 2015)
Good Times Burgers & Frozen Custard is a regional chain of quick-service restaurants located primarily in Colorado. There are 25 company-owned Good Times restaurants and 6 franchised ones. They reactivated this brand during the last 12 months after 3 years of minimum Capex (due to the trial) and its bet is paying off
Bad Daddy's Burger Bar is a full-service and more upscale restaurant concept (Chef driven menu of gourmet signature burgers plus a full bar featuring a selection of local craft microbrew beers in a high-energy atmosphere). And it is where the company is focusing all its growth plans. So far, there are 40 owned venues plus a franchise.
There was an internal restructuring process in 2019 that concluded with a new CEO and the board of directors reduced to 5 people (two of whom impulsed the process) and the support of principal shareholders. Since then, the company has been focused on margins instead of growth. In three years, it eliminated its $10MM net debt and it has $2.5MM net cash as of today.
Good Times Restaurants has an active buyback program in place where they have already bought almost 15% of the company shares in the last 24 months.
They have experienced management, full alignment with main investors, the board has 25% of the company and the CEO & vice presidents’ incentives are fully aligned with shareholders
Despite continued cash generation and a healthy balance sheet position, the company is trading 5x EV/EBITDA due to the fact that it is an illiquid company with no analyst coverage and a pending court resolution regarding the NO-sale of the Good Times Burgers part of the business for $10MM to a PE firm back in 2019 which final sentence came out this Friday.
Good Times Restaurants history
Good Times Restaurants was founded in 1987. In 2013, they purchased 48% of Bad Daddy Bar Burger and they acquired the remaining 52% in 2015. They focused on the expansion of its Bad Daddy’s brand, growing the number of restaurants from 2 in 2014 to 37 in 2019. However, margins were declining and the business was not profitable.
Two of the directors (Stetson and Jobson) resigned as board members on a disagreement over the profitability on January 2018. Two months later, Delta Partners and REIT Redux LP (principal shareholders of $GTIM) supported reducing from 7 to 5 the number of directors and electing Stetson and Jobson as directors again. Boyd Hoback (CEO) was sacked in October 2019. However, during the last months of Hoback, the board tried to sell the company. In fact a preliminary agreement (which was not consummated) was reached with a Private Equity firm for $9.75 MM. However, this preliminary agreement was later broken, and the PE firm sued GTIM.
Stetson and Jobson appointed Zink Ryan as CEO (the current one) in the 4Q19. He took the decision of stopping the high-growth strategy of the 2013-2019 period, which brought huge unit expansion but losses almost every year, and focused on margins. Good Times Restaurants reassessed its strategy and looked to improve its financial position.
In August 2021, $GTIM launched a tender offer for $6.5MM at $4.6 per share, targeting 1.413MM shares. However, only 333,241 accepted the price (2.6% market cap), so the company spent $1.5MM. With the remaining proceedings of the tender offer and taking advantage of the share price, Good Times Restaurants announced a $5MM share repurchase program at the beginning of 2022 ($1.4MM remaining). In January 2023, Good Times Restaurant won the case against the PE firm and reactivated the investment into its Good Times Burger brand. Unfortunately, White Winston (the PE firm) appealed the decision and the trial continued until this Friday evening.
In today's analysis, we dissect GTIM's business model, its economics, its growth plan, and evaluate both brands separately to make it easier to make a decision depending on the market's reaction to the trial outcome.
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