Every year, millions wait anxiously for the annual report of Berkshire Hathaway. Why such clamor for a notoriously boring document? It’s the opportunity for everyday investors to see what famed investing genius Warren Buffett is investing in.
That simple document tells you every investment Buffet has made, and it allows thousands to follow in his footsteps.
Now, I’m not going to argue with the logic of following other successful investors… I’ve looked at my share of unknown stocks just because a big name investor has been buying it by the truck full.
However, allow me to make one simple observation… there’s a lot of successful investors out there. Buffett isn’t the only one!
Take for example the investors Austin Marxe and David Greenhouse.
If you don’t eat and breathe investing like I do, you may have never heard of them. However, these two run one of the most intriguing investment funds around – “Special Situations” is the name… and let me tell you, their success is legendary.
At last count they were managing almost $800 million in funds.
That’s why I sat up when I learned they owned a significant chunk of a very tiny company… Noble Roman’s Inc. (NROM.OB)
They own over 1 million shares, representing over 5% of the company. It’s worthwhile taking notice of the penny stocks major investors are holding onto. After all, these guys didn’t earn their fortune without making wise investing decisions.
When I examined the company, I really liked what I found… there’s a lot more to the story than just a few big named investors!
NOBLE ROMAN’S BUSINESS
Noble Roman’s owns a variety of popular restaurant trade names, and sells and services franchises. Their restaurants include Noble Roman’s Pizza and Noble Roman’s Take-N-Bake Pizza.
In addition to its pizza brands, the company also franchises its Grab-N-Go Subs, Tuscano’s Italian Style Subs, and the Noble Roman’s Bistro trade names. Many of their franchises are located in very non-traditional venues like universities, convenience stores, and even hospitals.
Now, the franchises are all built around one overriding ideal… selling high quality food with fast service at affordable prices. They focus on using fresh ingredients and providing a big menu full of choices.
When the business first started, they owned and operated all of their locations… but in the late 1990s, the company shifted focus. Today, Noble Roman’s operates only two locations for demonstration purposes. As a result, the bulk of revenue comes from franchising and licensing fees.
I’ll tell you more about their numbers in a moment…
The franchise business has been good to the company. Noble Roman’s boasts locations in Italy and Canada in addition to its locations in 45 states and Washington D.C.
The company has over 1,112 locations, and 314 were added in 2010 alone!
Clearly the company has been growing in difficult economic times. And their growth is poised to climb even higher as consumers spend more money eating out in 2011 and 2012.
Another appealing aspect of this company is its product diversification. In addition to its traditional franchises, Noble Roman’s also offers licensing for the Take-N-Bake Pizza trade name.
The Take-N-Bake Pizza products serve as add-ons for existing convenience store franchises. However, Noble Roman made it a stand-alone offering for grocery stores as well. The company has already signed 635 grocery stores to participate in the program!
Now, let’s take a closer look at the business outlook.
As everyone knows, the restaurant industry suffered following the 2009 recession. Since then, the outlook has brightened considerably.
According to experts, the entire restaurant industry is positioned to see substantial sales improvements in the next few years. And we’re already seeing consumer discretionary spending rebound.
It all means higher sales for Noble Roman’s… and greater returns for investors.
Clearly Noble Roman’s industry and the company are poised to see substantial growth in the coming quarters. Now’s the perfect time to step in and buy this company stock while it’s cheap!
Before we get ahead of ourselves, let’s take a closer look at the numbers.
NOBLE ROMAN’S FINANCIALS
The key to Noble Roman’s strong financial performance is due to the business model. They generate most of their revenue from high margin franchising and licensing fees.
The company’s revenues remained strong in 2010, despite a drop in same store sales in the first part of the year. Total revenues were $7.3 million in 2010, which was down slightly from $7.5 million in 2009.
Remember, their business model means low overhead and operating expenses.
Just look at the company’s margins. As of the most recent quarter, they’re showing operating margins of over 40.4%. These margins are huge compared to the restaurant industry as a whole, which is lucky to see operating margins over 10%.
Now the company stock has suffered because of a fall off in net income. The loss was due to an accounting charge on discontinued operations in 2010. The future is looking bright however.
For the first quarter of 2011, the company announced revenue climbing, operating income moving higher and net income climbing as well. As a matter of fact, the company is on track to generate close to $1.4 million in net income this year.
NROM VALUATION
At first glance, Noble Roman’s stock looks a bit overvalued. They have a trailing P/E of 63x! A ridiculous number for a restaurant.
But this high valuation is because of the accounting write-down. If you look at their most recent quarter… and assume they do about the same for the following few quarters… NROM should generate close to $1.4 million in net income.
Based on that number, their P/E becomes a much more attractive 13x. As a matter of fact, the company is trading at a valuation about 7% below the S&P 500.
But that’s not all.
With the rebound in consumer spending… the bright outlook for the restaurant industry… and the company’s huge leverage and stellar financial performance, I could see Noble Roman’s performing even better in future quarters.
And that tells me the company is very undervalued!
ANALYSIS OF NROM’S STOCK
NROM is trading at bargain basement prices right now. The stock trades at $1.01 per share. As you can see from the chart, this is a stock you should buy on the dips.
Remember, as the business improves, and the company continues to drive bigger profits, the stock is sure to skyrocket.
Chart courtesy of StockCharts.com
ACTION TO TAKE
If you like what you’ve read, do your own research… then Buy NROM.OB up to $1.20 a share.
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Prices as of May 27, 2011
The “Recommended Price” is as of the date and time of the recommendation (adjusted for splits and dividends), you may pay more or less. “Buy-up-to” means don’t pay more than this price for the stock. If you can get it cheaper, then great! “Hold” means hold if you own it, but don’t buy it if you don’t. “Sell” means sell. Remember to consult your investing professional before making any trade or investment. And remember all investments have some risk.