A Chocolate Dream for Investors

Johan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Who doesn't love chocolates? Chocolates are for everyone. One American small cap company that is going to conquer the world bit by bit is Rocky Mountain Chocolate Factory (NASDAQ: RMCF).

Rocky Mountain Chocolate Factory, Inc., headquartered in Durango, Colorado, is an international franchiser of gourmet chocolate, confection and self-serve frozen yogurt stores and a manufacturer of an extensive line of premium chocolates and other confectionery products. As of January 13, 2013 the company and its franchisees operated 376 stores in 42 states, Canada, Japan and the United Arab Emirates

Q3 HIGHLIGHTS

  • Total revenue for the third quarter and nine-month period increased by 4.3 percent and 6.2 percent, respectively.
  • Adjusted gross margin improved to 34.9 percent and 37.8 percent in the third quarter and nine-month period, respectively.
  • EBITDA, a non-GAAP financial measure, increased by 5.7 percent and 6.1 percent in the third quarter and nine-month period, respectively, excluding non-recurring asset impairment and restructuring charges related to frozen yogurt operations (see reconciliation of GAAP and non-GAAP financial measures later in release).
  • Diluted earnings per share for the nine-month period of FY2013 increased by 4.9 percent to $0.43 excluding non-recurring charges related to frozen yogurt operations.
  • Company enters into licensing agreement with global consumer food products company for use of Rocky Mountain Chocolate Factory trademark on cereal brands.
  • 5th new store in Japan opened in third quarter in accordance with 100-store Master Licensing Agreement.

The conference call made clear that there are ongoing negotiations about some other master licensing agreements which could be finalized this year. International expansion is top priority for this small cap. The disposal of their Aspen Leaf Yogurt concept to U-Swirl, Inc. (SWRL.OB) for a 60% controlling equity interest is the right step going forward. The non-recurring, non-cash asset impairment charge related to this disposal is just a scratch in the company's financials and future. 

Institutional investors have also acknowledged the investment opportunity in this small cap company. The company has 30 institutional holders. Read more:  http://www.nasdaq.com/symbol/rmcf/institutional-holdings#ixzz2IkLj8Ldj

<table> <tbody> <tr> <td colspan="3">Rocky Mountain Chocolate Factoryl</td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td>Market Cap</td> <td>71.09M</td> <td>P/E forward</td> <td>13.51</td> <td>ROA</td> <td>12.58%</td> <td>Shs Outstand</td> <td>6.05M</td> </tr> <tr> <td>Income</td> <td>2.70M</td> <td>EPS (ttm)</td> <td>0.43</td> <td>ROE</td> <td>15.63%</td> <td>Shs Float</td> <td>5.08M</td> </tr> <tr> <td>Sales</td> <td>36.16M</td> <td>P/S</td> <td>1.97</td> <td>ROI</td> <td>14.82%</td> <td>52W Range</td> <td>8.13 - 13.70</td> </tr> <tr> <td>Book/sh</td> <td>2.95</td> <td>P/B</td> <td>3.98</td> <td>Gross Margin</td> <td>42.31%</td> <td>Avg Volume</td> <td>13.82K</td> </tr> <tr> <td>Cash/sh</td> <td>0.95</td> <td> </td> <td> </td> <td>Oper. Margin</td> <td>11.08%</td> <td>Price</td> <td>11.75</td> </tr> <tr> <td>Dividend%</td> <td> 3.74%</td> <td> </td> <td> </td> <td>Profit Margin</td> <td>7.47%</td> <td> </td> <td> </td> </tr> </tbody> </table>

If you don't like the low liquidity of the Rocky Moutain Chocolate Factory, stay away and look for alternatives. They are hard to find, but you could always buy Hershey (NYSE: HSY)or Tootsie Roll Industries (NYSE: TR).

The Hershey Company is the largest producer of quality chocolate in North America and a global leader in chocolate and sugar confectionery. With revenues of more than $6 billion, the company is not a one-trick pony. It offers confectionery products under more than 80 brand names worldwide.

Personally I think Hershey has already risen quite a lot, to an all time high of $78.79 and the valuation is not that cheap anymore. A P/E of 27 and dividend yield of a little bit more than 2 are no competition for Rocky Mountain's yield of almost 4% and forwarded P/E of around 14.

Another candidate Tootsie Roll Industries is run by one of America's oldest CEOs, but has a lousy dividend and IR, the only sweet spot could be the retirement of the company's management. This would finally lead to more openness and transparency, which could be beneficial for the company and its stock price.

For now I stick with Rocky Mountain Chocolate Factory. RMCF shares are currently trading approximately $11.75, more than 50% below their 2005 high of $24.50.

The current share price represents an attractive opportunity for both chocolate lovers and investors to invest in a company that could easily double in size and revenues five years from now. Emerging markets and Japan will play in important role in this growth scenario. 

Chocolates are for everyone, so Wake Up and Don't Fool Yourself!


WakeUpInvestorhas a position in Rocky Mountain Chocolate Factory. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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