Should Investors Buy the Dip in MTY Stock?

MTY stock has fallen 35% from its 2023 highs as the new macro-economic environment has hit profitability and revenue growth.

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MTY Food Group (TSX:MTY) is one of the largest franchisors in North America’s restaurant industry. MTY stock has a strong performance history — up 530% in the last 15 years. More recently, things have been a little more difficult for the company, and the stock has fallen more than 35% from its 2023 highs.

Is this an opportunity for investors to buy the dip of MTY stock? Let’s explore.

MTY’s reliable, consistent business

MTY Food Group is one of the largest franchisors in Canada’s restaurant industry. Some of the company’s well-known franchises include Extreme Pita, Cultures, Mr. Sub, and Mucho Burrito.

A very compelling characteristic of MTY’s business is its ability to generate strong cash flows. For example, in 2023, MTY’s operating cash flow came in at $185 million, 25% higher than last year, and 15.8% of revenue. In the last five years, MTY has generated strong cash flows, prompting four dividend increases for investors.

In fact, the dividend increased 69% over this time period for a compound annual growth rate of 11.2%. At this time, MTY stock’s dividend yield is a respectable 2.4%.

Why is MTY stock down so sharply from its highs?

The first quarter of fiscal 2024, however, was less favourable as revenue and earnings declined. The 2.6% decline in sales was attributed to lower consumer spending and adverse weather. The 6% decline in earnings was driven by lower revenue and impairment charges.

This result is all the more worry-some when we consider the leverage that MTY has accumulated. A long-term debt balance of $1.15 billion and a debt-to-total market capitalization ratio of 61% make this dynamic of declining earnings all the more concerning.

What’s next for MTY?

Even before the latest quarter, MTY Group’s profitability was declining. In 2019, MTY’s operating margin was a healthy 17%. In 2023, it fell to 9.3%, and in the latest quarter, it hit 7.2%. This has been the result of rising costs — food costs and labour costs have increased significantly in this inflationary environment.

The question of what’s next for MTY is an interesting one. On the one hand, MTY gives consumers affordable options to dine out. On the other hand, people are dining out less in general as consumers’ wallets are stretched. Also, inflation is hurting MTY’s profitability, and this, combined with its still heavy debt load, is concerning.

Finally, a quick look at valuation and earnings estimates shows us that MTY stock is seeing a revaluation. Earnings estimates are being reduced quite dramatically, and many analysts are cutting their target prices on the stock. Naturally, MTY stock has been following these trends downward. While the fast-food market will likely continue to grow in the long term, the immediate future is looking very uncertain, with rising prices hitting consumers and MTY Foods alike.

The bottom line

MTY Foods stock is rallying today as investors are seemingly taking advantage of its recent share price decline or buying the dip. Looking ahead, the consumer remains in cost-saving mode and MTY Foods’s restaurants will likely continue to feel the negative impact.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends MTY Food Group. The Motley Fool has a disclosure policy.

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