There's something refreshing about finding a company that no one has heard of, that no one on Wall Street -- literally, no one -- is following. Free of distractions from the burbling brook of analysts whispering estimates, of investment banks declaring "buy," declaiming "underweight," and opining "accumulate," an investor can finally focus on the business. Focus on the numbers.
And most of all, forget the hype -- because there's quite simply no one around to do the hyping for a micro cap like Motley FoolHidden Gems' putative tiny gem, Mexican Restaurants (NASDAQ:CASA). And in the absence of second guessers, an investor receives a brief moment of solitude in which to quietly contemplate at least this one company's 2004 earnings report. So let's dig in.
We've never written about Mexican Restaurants before at the Fool, so today we'll just skim the menu, and leave examining the list of ingredients to the quarters and years to come. This company, as its name suggests, runs a network of 80 company-owned, franchised, and licensed Mexican-themed restaurants. The vast majority of those are company-owned, and this year the number got a little more vast, as Mexican Restaurants bought out 14 of its franchise shops.
Over the past year, Mexican Restaurants grew its revenues by 43%, and traded its year-ago $1 million loss in for $1.8 million ($0.48 per diluted share) in profits in fiscal 2004. Same-store sales increased at a moderate clip, up 3.1% for the year -- and up year-on-year in each of the past four quarters. In the first two months of 2005, the story got even better, as Mexican Restaurants posted same-store sales growth of 4.5%.
Mexican Restaurants did not provide a cash flow statement with its earnings release. Perhaps, given the lack of analyst coverage, management figured no one would be interested. (Hey! Over here! We're interested.)
Lacking details on the full-year dinero flow, we'll look instead at the 3-month-old cumulative report for Q3 2004. That one showed that, three quarters through an overall strong year, Mexican Restaurants had already generated $1.9 million in free cash flow, putting it on track to generate roughly $2.5 million for the year. At its current $38 million enterprise value, that would give the company a 15 EV/FCF ratio. Pretty reasonable if the company can keep on growing its revenues at a 43% rate. And with free cash flow looking to be up on the order of 400% over last year's number, this could turn out to be quite a tasty entrée indeed.
Please remember, though, that micro caps are tiny companies that carry bigger risk than larger firms. Don't consider investing in one until you've carried out thorough research... or you may wind up with some heartburn.
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Fool contributor Rich Smith has no position, long or short, in Mexican Restaurants.
