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Wednesday, June 4, 1997
Einstein/Noah
Bagel Corp. HOW DID IT FIND TROUBLE? In the first months following its August 1996 initial public offering at $17 a share, Einstein/Noah Bagel Corp. left investors rolling in the dough as the stock heated up to $36 1/2. But the investors who got caught up in this bagel fad have found out the hard way that it's no fun getting creamed. Einstein's stock price collapse comes down to the theory of relativity, which should have alerted investors to the black hole of valuation at the center of this story. That's why our own Rick Munarriz (TMF Edible) picked the company as a short candidate in his weekly Food Industry column back in October. Rick doubted that Einstein deserved to be valued at more than three times the combined price of the three largest bagel chains: the Bruegger's division of QUALITY DINING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QDIN)") else Response.Write("(Nasdaq: QDIN)") end if %>, BAB HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAGL)") else Response.Write("(Nasdaq: BAGL)") end if %>, and MANHATTAN BAGEL CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGLS)") else Response.Write("(Nasdaq: BGLS)") end if %> Mix in some growing pains and lousy performances throughout the industry, and this Trouble is easily explained. BUSINESS DESCRIPTION Einstein/Noah Bagel Corp., based in Golden, Colorado, is currently number two in bagels, having franchised 420 retail bagel stores in 28 states, most under the name Einstein Bros. Bagels (283 stores) or Noah's New York Bagels (102 stores). These cafes offer fresh-baked bagels, a variety of cream cheese spreads, specialty coffees, soups, sandwiches, and salads. The company expects to open over 1,000 new stores in the next three years, with up to 665 by year-end. BOSTON CHICKEN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %> is the majority stockholder. FINANCIAL FACTS Income Statement 12-month sales: $56.1 million
12-month income: $14.3
12-month EPS: $0.44
Profit Margin: 25.5%
Market Cap: $476.4 million
Balance Sheet*
Cash: $0.2 million
Current Assets: $11.4 million
Current Liabilities: $12.7 million
Long-Term Debt: N/A
(*As of Apr. 20, 1997)
Ratios
Price-to-earnings: 31
Price-to-sales: 8.5
HOW COULD YOU HAVE SEEN IT COMING? In addition to TMF Edible, short-sellers in the AOL Fool message folder have been warning investors of an impending flood from the start, providing a lesson that would do Peter Lynch proud: a great product doesn't always make for a great investment. Learn the financials before you invest. The aggressive numbers quoted last fall by Einstein underwriter Montgomery Securities (FY97 earnings estimate of $0.55 per share, long-term growth around 50%) translated into a generous YPEG of $27 1/2. But what about increased competition? What about the company's business model? WHERE TO FROM HERE? Analyst estimates now call for earnings per share (EPS) of $0.62 per share for FY97 and $0.84 for FY98. That gives us an attractive PEG of 0.67 and a dynamite YPEG valuation of $31. But the shorts offer good reasons to doubt these numbers. They're predicting more trouble ahead. Since the company has sold most of its stores to franchisees, overall revenue comparisons are misleading. Still, the composition of those revenues raises questions. That's because the majority of Einstein's revenue comes from dubious or unsustainable sources. In the first quarter of FY97 -- a 16 week quarter, no less -- the company produced sequentially flat earnings of $0.15 a share, a penny above estimates. Of the $16.7 million in revenues, $5.3 million came from interest on the money Einstein has loaned to franchisees but has, to a large extent, borrowed itself. Another $9.3 million came from royalties (5% of a franchisee's gross revenues) and initial franchising fees. These franchising fees are one-time gains that continue to flow in only as long as Einstein keeps expanding. In 1996, they accounted for 61% of revenue. The shorts argue that without growth in royalties, the business model is flawed, as Einstein is currently losing money on actual operations. Recently, the company did raise $125 million in a debt offering to finance more store openings, so explosive growth should continue for a while. On the other hand, Quality Dining's recent decision to dump the Bruegger's operations it acquired only a year ago raises questions about whether there's really money in bagels after all. And public filings show that Noah himself has been selling shares, perhaps to put money into his ark before the stock gets too far underwater. -Louis Corrigan ([email protected])
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