CORRECTION (5/30/2014): The original article erroneously stated “As evidenced by Chipotle Mexican Grill’s (NYSE: CMG) ~90% three-year returns, investors have a strong appetite for franchise businesses across many different sectors.”. Chipotle Mexican Grill is not a franchise operation and its restaurants are wholly-owned by the company. As a result, the sentence was removed from the edited article appearing below.
The over-the-counter market is often compared to a graveyard, with shells of former companies and others that are barely surviving. Given the grim reputation, most institutional investors are forbidden from buying or selling over-the-counter stocks. These dynamics provide individual investors with great opportunities if they are able to uncover the proverbial “diamonds in the rough”.
Creative Learning Corporation (OTC: CLCN), both profitable and growing, may be just such an opportunity. With a market capitalization of just $30 million the company trades under the radar of many institutional investors, which has led to a cheaper valuation than many of its larger competitors. Shareholders could see tremendous expansion over the coming years as the company continues to mature.
In this article, we’ll take a look at why individual investors may want to take a look at the small and growing company as it gains traction in key end markets.
Profitable & Growing
Creative Learning generated revenue that grew 8% to $1.9 million and net income that rose 24% to $296,800, or $0.03 per share, during the quarter ended December 31, 2013. In FY 2013, the company grew its franchises from 210 to 395 both domestically and internationally. Royalties from existing franchises also continued to grow, suggesting robust organic growth in franchisee businesses.
On its balance sheet, the company recorded $2.6 million in cash and $3.5 million in total assets compared to just about $800,000 in total liabilities. The company’s trailing twelve months (TTM) Altman Z-Score of 19.03x – which measures the likelihood of bankruptcy using five financial ratios – suggests that the firm faces very little risk, while its outsized cash position provides management with capital to grow without dilution.
Creative Learning trades with a TTM price-earnings (“P/E”) ratio of about 23.48x and a price-earnings to growth (“PEG”) ratio of just 0.18x. By most accounts, a PEG ratio of less than 1.0x suggests that a company’s stock may be undervalued if its growth rates are expected to continue. Accelerating growth rates over the coming quarters could pave the way for these multiples to expand over the coming months.
The company also operates a very profitable business at its core with 25% TTM EBITDA margins and very little overhead. Return on equity – which measures net income as a percentage of shareholders’ equity – stands at over 60% and demonstrates the strong profitability. By comparison, companies like LeapFrog Enterprises Inc. (NYSE: LF) have just a 24% return on equity.
Creative Learning has a number of key upcoming growth drivers. With 61 new franchises signed in the quarter ended December 31, 2013 alone, the company could see a significant expansion in its royalty income from new franchisees if their businesses grow as existing franchisees have seen. These high-margin revenues should help boost both the company’s top- and bottom-line financial results.
The company also recently launched a new franchise concept, Challenge Island® which now has 21 franchises, and will be launching its third franchise concept Sew Fun Studios this month (the bulk of the current business is the Entrepreneur Magazine award-winning Bricks4Kidz® franchise). By addressing new domestic and international end markets, these franchises could drive its franchisee sign-ups as they gain traction and further boost its top- and bottom-line growth. These franchises just began selling in 2013 and haven’t had much of an impact on revenue quite yet.
Creative Learning appears to be trading at a discount to its growth due to its status as an over-the-counter stock, which presents individual investors with a potential opportunity to profit as the company matures.
Investors in profitable and growing over-the-counter stocks, like Grupo TTM SAB (OTC: GTMAY) or Alliance Creative Group Inc. (OTC: ACGX), may also want to take a look at Creative Learning Corp. given its robust growth, profitable operations, and solid balance sheet. Over the coming quarter, the company has significant growth opportunities that could catalyze the stock to move higher.