Updated Boston Pizza Report

The Boston Pizza report is updated and rated (higher) Strong Buy at $16.90.

Normally I would not expect Boston Pizza to provide much in the way of a capital gain. It’s the yield that is attractive. But given that a more reasonable price (or value) is likely at least $22 it could give a capital gain this year. If not, the 8.2% yield provides plenty of reason to buy.

Warren Buffett always talks about looking for PREDICTABLE companies. I could be wrong but it seems to me to be extremely likely that Boston Pizza will still be around in say ten years and that its distributions per unit will be somewhat larger than today. The royalty units simply skim a franchise fee from food sales and so unless the BP restaurants are going to go out of business there is still going to be franchise fees to collect in ten years and 20 years and probably much longer than that. In a recession its same-store sales might fall but it just does not seem to have the risk that a normnal corporation has. Normally as investors we rely on earnings. Earnings can sometimes fall to zero even while revenues drop only modestly. In the case of Boston Pizza we don’t have to forecast hard things like the price of oil or how wages will compare to revenue or how its rents will increase. We just have to think about whether the restaurants will stay in business and how their revenues might grow or shrink. To my mind, it would take quite a severe recession before same-store sales would fall (on average) by more than say 10% or before we would see restaurant closures exceed new openings. ¬†(And even in that case it would be a set-back, not a disaster) There are never any guarantees and perhaps some strange legal reason could cause a big problem. Or a giant food poisoning scare could happen. But overall I see the cash flows¬† from Boston Pizza as being among the more predictable investments.

Of course, I also thought it was a decent investment at $22 and a great investment at $18.50. The price fell with the market and due to fears of lower sales in Alberta. Meanwhile same-store sales have continued to grow on average (despite some declines in Alberta). And meanwhile Boston Pizza undertook an unusual transaction that allowed it to bring its share of the franchise fees from 4% to 5.5% (albeit by issuing many new units). Previously the franchise fee above 4% went to basically the founders of BP but now the Royalty entity has purchased a fatter share of the franchise fee.

Boston Pizza today announced a 6.2% increase to its distributions. They would not have done that if they were not confident it could be maintained. I would not count on any further distribution increase for at least another year and possibly longer. But the current distribution seems to more than justify the current price.

It also appears that Boston Pizza is simply not well known and well followed as an investment. With a market cap of just $346 million the big boys simply can’t play here. And with stable cash flows the speculators and hot stock pick folks also are not interested. That leaves small investors who might think that an 8.2% cash yield that might even grow slowly over time is an attractive investment.

This is not a stock to win the lottery on. It would be more of a place to park existing winnings for a decent return.