A Long-Term Pick That Won't Let You Down

Investors in it for the long run are always searching for that company with just the right qualities to make it a long-term, low-risk pick. These traits range from high barriers to entry, to cash-flow-intensive business models, and plenty more in between. These aren't necessarily the companies that will yield runaway, market-beating success in a year or two, but instead ones that will consistently generate alpha for investors and leverage the power of compounding growth. Retail franchiser Winmark  (NASDAQ: WINA  ) may just be one of these high-conviction, buy-and-hold-for-years businesses.

Desirable business
Winmark owns five different retail franchise businesses, with high franchisee-renewal rates and strong unit growth. The company recently reported earnings, and its 995 franchises are set to grow by 88 already-approved locations.

The company also maintains portfolios of small, medium, and large business equipment leasing.

Both segments are long-term-oriented, cash-flow-heavy businesses. The bulk of Winmark's revenue (north of 60%) comes from royalties on sales at the franchise stores. On the income statement, this gives the company phenomenal margins at nearly every level. Gross margins are above 90%, operating margins above 50%, and net income margin around 30%. Over the longer term, the company has extremely light capital expenditures and, thus, juicy free cash flow to enhance shareholder value.

Currently, the company pays a small 0.2% dividend, but in the recent past it has issued a special dividend of $5 per share. Management is dedicated to smart capital allocation practices and increasing the long-term value of the company. The company's stock price compound annual growth rate from January 2009 through today is about 47%, but there is little sign of overvaluation or a drop-off in growth.

More reasons
Winmark has very high insider ownership, and a glance at GuruFocus shows the company directors making open-market purchases consistently. Since March 2012, CEO John Morgan has made such purchases amounting to 43,700 shares at prices from $50 to $68 per share. All in all, the company's chief executive (and founder) owns more than 30% of the business -- ensuring he is invested right alongside ordinary shareholders.

The company's balance sheet is impeccable. Current assets of more than $27 million handily cover Winmark's total liabilities of slightly less than $16 million. The business is easily run on the cash flow it generates -- a criterion often espoused as crucial by master investor Warren Buffett.

Winmark offers investors predictable and attractive cash flows with the benefit of at least two fast-growing franchise names (Plato's Closet and the new Style Encore, which retails gently used apparel for women). Morgan has proved himself, thus far, to be an intelligent capital allocator, if a bit conservative. The company has the potential to put more of its cash flow to use through strategic investments. In the meantime, though, the strategy of using franchise cash flow to build out the leasing portfolio has certainly paid off.

All in all, Winmark is a long-term investor's dream stock: a capital-light, cash-flow-heavy, owner-operated, diversified retail business.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2013, at 6:01 AM, gratefuldba wrote:

    Also, my niece keeps doing on-the-ground fundamental analysis on Plato's Closet for us, she claims that she spends all of her money there, .........another key sign that they may be on to something. ......Great article !

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10/30/2014 3:59 PM
WINA $80.98 Up +0.61 +0.76%
Winmark Corp CAPS Rating: *****

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