ozzfan1317 (71.97)

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The Best Micro Cap Know One Knows About

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March 24, 2011 – Comments (5) | RELATED TICKERS: RMCF

What if I told you, you could have a piece of a company with solid double digit growth and a 4 percent dividend yet it was so small hardly anyone followed it? You would tell me such a company must be a mere fantasy however it is very real indeed. The Company is Rocky Mountain Chocolate Factory RMCF and it is indeed tiny with a market cap around 60 million. You can learn more about them here. The company although underfollowed offers a compelling opportunity for opportunistic longs. Solid growth at a reasonable price with the added bonus of an above average dividend yield leaves no doubt in my mind this is one of the best opportunities in the market today. Among the reasons this company is a solid buy are:

Management

Founder Franklin Crail still runs the company and holds a substantial number of shares. A new partnership with Cold Stone creamery is an ingenious way to increase brand recognition. Return on equity is an impressive 30 percent as well return on investments. Book Value has consistently been grown showing a consistent increase in shareholder value.

Financial Strength

The Company has no debt and strong quick and operating ratios showing a pristine financial condition. The increased financial strength allows them numerous options including share buybacks and dividend increases.

Brand Recognition

Although relative smaller the companies brand has a loyal following in the southwest and its hometown in Colorado. This loyalty will only grow allowing for greater pricing power and margin increases. There are numerous positive reviews on the web of their products and they have already shown some pricing power at the Cold Stone locations.

Discounted Cash Flow Analysis

An analysis using the current growth rate of 16 percent puts fair value around 15 dollars a share an upside of around 30 percent from the current share price. Future growth could be even greater as brand recognition grows.

Risks

Heavy dependence on malls

The company has many of its company owned and franchised locations tied to commercial malls an industry that has been devastated by the recession. Lowered foot traffic at these outlets and or losses on real estate holdings could affect earnings growth.

Conclusion

A reasonable valuation, a solid dividend and solid double digit growth make this Micro Cap a compelling opportunity in today’s market.

5 Comments – Post Your Own

#1) On March 25, 2011 at 2:42 AM, ikkyu2 (99.46) wrote:

I try to make it a habit not to buy companies that are in direct competition with Berkshire Hathaway.

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#2) On March 25, 2011 at 2:53 AM, jesvlim (99.39) wrote:

I think it is a worthwhile punt. Hansen fruit juice comes to mind.

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#3) On March 25, 2011 at 3:32 AM, lorteungen (99.21) wrote:

Looks like a healthy little company with a decent business. I like a lot of things about it, but where do you get those growth rates?

As far as I can tell this company has grown sales at an annual rate of little more than 2% over the last 10 years, barely keeping up with inflation. The 16% growth from Q3 10 to Q3 11 looks more like a fluke due to a bad quarter than anything sustainable. If you use that growth rate it's going to throw your DCF way off. The company looks about fairly valued it this price. At $15 it would be substantially overvalued imo.

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#4) On March 25, 2011 at 10:12 AM, tekennedy (60.78) wrote:

I like the company but I'd expect somewhere around 5% growth rates going forward (although this could vary greatly, especially if Coldstone partnership pays off). The growth will be driven by growth in franchisees, which makes any growth unpredictable.

The stock is also economically sensitive to not only mall traffic but to travel spending due to airport and vacation locations.

I believe the stock is likely just under fair value and I have a limit order at $9.

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#5) On March 26, 2011 at 12:06 AM, ozzfan1317 (71.97) wrote:

16% was the most recent quarter however growth prior to the recession was consistently near double figures. It is true if you balance it out to include the recession it is more like 5%.

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