Is it Time to Buy Into This Small Confectionery?

With shares of Rocky Mountain Chocolate Factory (NASDAQ:RMCF) trading around $10.50, is RMCF a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for the Stock’s MovementChocolate

With a market cap of about $63.77 million and a 3-month average trading volume of just 21,759, there’s not a lot of action for this Colorado-based confectionery. The company reported second quarter fiscal year 2013 earnings on October 12.

Revenue came in at $7.7 million, a 2 percent increase from a year earlier, attributed to higher sales of factory products, higher sales from company-owned stores, and an increase in royalty and marketing fees. Same-store sales at franchises increased 1.1 percent compared to 2011. The company has posted eight consecutive quarters with same-store sales increases.

Perhaps most notably, franchise fees decreased 75.4 percent, as there were just two openings.

As an interesting point, the company operates three locations in the United Arab Emirates.

H = High Quality Pipeline

The company manufactures over 300 different premium chocolates as well as frozen yogurt. Aside from the Rocky Mountain Chocolate Factory brand, it co-brands with Cold Stone Creamery and Aspen Leaf Yogurt. Among those who like chocolate, the company has a good reputation.

E = Equity to Debt Ratio is Close to ZeroRocky Mountain Chocolate Factory Logo

Rocky Mountain Chocolate Factory’s debt-to-equity ratio of 0.00 looks pretty good in any light, particularly compared to competitors like Hershey (NYSE:HSY), which is sitting at 1.87.

Rocky Mountain Chocolate Factory has $3.76 million in cash, and no debt. Hershey has $589.78 million in cash, and $2 billion in debt.

Having no debt is a pretty sweet spot for the company to be in, but that cash only works out to about $0.62 per share.

T = Technicals on the Stock Chart are Steady

As of October 25, 2012, the stock price is 9.16 percent below its 20-day simple moving average, or SMA; 10.60 percent below its 50-day SMA; and 5.82 percent below its 200-day SMA.

Since the beginning of 2012, the stock price has been in an upward trend, gaining almost 22 percent this year to date, and over 17 percent year over year. The stock is slowly, but steadily, recovering from a crash between 2008 and 2009.

E = Earnings Are Increasing Quarter over Quarter

Yearly revenue has been increasing since 2010, while EPS has remained flat for two years. The quarterly trend suggests that the company’s third and fourth quarter are the best for revenue.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in thousands 31,878.2 28,538.7 28,436.5 31,128.0 34,626.9
Basic EPS ($) 0.76 0.60 0.58 0.62 0.62

(Fiscal year is March-February.)

Quarter Aug 31, 2011 Nov. 30, 2011 Feb. 29, 2012 May 31, 2012 Aug. 31, 2012
Revenue ($) in thousands 7,575.8 8,279.9 10,133.3 9,658.2 7,729.8
Basic EPS ($) 0.15 0.12 0.21 0.17 0.13

T = Trends Support the Industry in which the Company OperatesKid Eating Chocolate

Premium chocolates and confectionery can be a surprisingly competitive market. As the company’s stock price reflects, as the economy got worse after 2008 and consumers tightened their fiscal belts, they also tightened their pants belts. Premium chocolate floats near the top of the “non-essential” spending list.

However, with the United States economy recovering — consumer confidence is, technically, on the rise — we can expect to see spending on things like chocolate increase. The company’s continuously increasing same-store sales is a sign of this. On the down side, America is only 11th place in the world for chocolate consumption, only consuming 11.64 pounds a year per capita.

On the plus side, chocolate is sexy, and according to some studies, chocolate eaters are leaner than average.

Conclusion

Chocolate is a wonky industry. Rocky Mountain has seen pretty steady success despite some economic hardships, and it seems to be playing its cards right. It keeps its store openings to high foot-traffic locations such as shopping malls, and keeps its debt low.

Locations in the Middle East is an interesting development, and could pan out either way. A growing middle class and something of a trend toward Westernization could see chocolate consumption in the region climb, and establishing brand loyalty early could go a long way.

That being said, use your gut. The answer here comes down to your investing style. Rocky Mountain could be a Buy for the long-run, as it shows slow but steady growth without running on debt, and an ROI only 1 percent below Hershey. But if you’re an investor who wants to make their money work hard — and who doesn’t? — it’s more likely a Wait and See. 

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