The first-quarter results that MTY Food Group Inc. (CA:MTY) reported on April 12 were good enough that National Bank analyst Vishal Shreedhar raised his target price for the stock by $2 to $74. He has an ‘outperform’ rating on the stock. Outperform, indeed. (All figures in Canadian dollars, unless otherwise specified.)

Also raising his target price on one of Canada’s largest restaurant franchisors and operators was Scotia Capital analyst George Doumet. While the analyst rates it a ‘sector perform’, he did increase his previous $6.50 target on the news to $75.

I’m seeing a pattern here.

MTY continues to grow its footprint of restaurants through a combination of acquisitions and organic growth. As a result, it remains an exciting play for aggressive investors.

Pretzels Present

If you’re unfamiliar with MTY, its history dates back to 1979, when founder Stanley Ma opened Le Paradis du Pacifique in Montreal, a full-service restaurant providing Chinese and Polynesian cuisine.

Ma created MTY’s first brand, TIKI-MING, four years later, serving Chinese food. Today, it owns more than 90 restaurant brands, operating 7,128 locations (both franchised and company-owned) in Canada and the U.S.

In Q1 2023, MTY made two acquisitions.

The first was Wetzel’s Pretzels, an operator and franchisor of quick service restaurants (QSR) in 25 U.S. states, Canada and Panama. As of Dec. 8, 2022, Wetzels had 328 franchised locations and another 38 company-owned ones. MTY paid $275.4 million for the QSR operator.

The second was a much smaller acquisition. On Dec. 15, 2022, it acquired Sauce Pizza and Wine for $13.6 million. The Arizona-based brand operates 13 company-owned fast casual restaurants in the state. It acquired the small chain as part of its plan to expand MTY’s offerings in the U.S.

CEO Eric Lefebvre said that “In terms of capital allocation priorities for 2023, we will continue to opportunistically seek acquisitions, reduce our debt, invest in our business, and reward shareholders with healthy dividends,” Lefebvre stated.

Revenue Jump

On the top line, MTY’s revenue in the first quarter was $286.0 million, 104% higher than a year earlier. Revenues jumped considerably due to acquisitions. Its system sales increased by 69% in the U.S., 32% in Canada, and 12% internationally. Its revenue outside Canada accounted for 67% of the total, demonstrating it is no longer just an operator of Canadian restaurants.

On the bottom line, it generated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $64.0 million in the quarter, 79% higher than a year ago.

MTY finished the first quarter with net debt of $1.3 billion. That’s a high 89% of its current market cap of $1.46 billion.

Bay Street Thoughts

Scotia Capital’s Doumet had some good things to say about MTY’s first-quarter results.

“MTY reported a second consecutive quarter of strong results, supported by healthy internals,” The Globe and Mail reported Doumet’s comments. “Adj. EBITDA beat our estimate by 6 per cent (and the Street by 17 per cent), driven by higher revenues and a stronger contribution from the corporate segment.”

MTY finished the quarter with 96.7% of its 7,128 locations franchised, with just 233 company-owned. It opened 76 locations in Q1 2023, one more than in the same quarter last year. It also acquired 379 during the quarter, more than 10x a year earlier, due to acquisitions, and closed 115, down from 121 a year earlier.

On the news, Raymond James analyst Michael Glen upped his target price by $1 to $66.

The analyst stated that although its shares are reasonably valued at 9.0x its historical forward EBITDA, he believes investors can do better than a $60 entry point. Glen argues that MTY needs to articulate its share repurchase plan better. Further, the company could do a better job helping investors understand its store openings and closings each quarter.

As a result, the analyst has a Market Perform rating on its stock.

Fintel Scores

Across Fintel’s scores, MTY is showing its strongest number for Momentum, where the 78.22 score ranks it at 14,259 out of 43,054 companies screened, based on their stock’s six-month momentum.

On Quality, with a score based on a stock’s cash generating efficiency, MTY garners a 65.80, ranking it at 9,660 out of 12,098 companies screened.

At 55.58, MTY stock’s Value score ranks it 10,986 out of 22,912 stocks screened. This uses a proprietary scoring model that ranks companies based on their relative valuation. Scores range from 0 to 100, with 100 being the most undervalued.

This article originally appeared on Fintel

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