One of the cheapest stocks in our Acquirer’s Multiple, Small & Micro CapStock Screener is Flanigan’s Enterprises, Inc. (NYSEMKT:BDL). With a market cap around $46 million, few investors have ever heard of this great nano-cap.

Flanigan’s Enterprises, Inc. (Flanigan’s) operates a chain of full-service restaurants and package liquor stores in South Florida. The company operates package liquor stores under the Big Daddy’s Liquors name, which offer private label liquors, beer, and wines; and restaurants under the Flanigan’s Seafood Bar and Grill service mark that provide alcoholic beverages and full food service. The company operates 26 units consisting of restaurants, package liquor stores, and combination restaurants/package liquor stores; owns 1 adult entertainment club; and franchises 5 units comprising 2 restaurants and 3 combination restaurants/package liquor stores. The company was founded in 1959 and is headquartered in Fort Lauderdale, Florida.

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Flanigan’s flies under the radar of most institutions simply because of its size and its thinly traded shares. In fact, there are no analysts currently covering the company.

A quick look at the company’s share price over the past twelve months shows the stock has risen 34% to $25, just 7% off its 52 week high.

(Source: Google Finance)

Latest Results

Flanigan’s recently released its FY 2016 and Q4 2016 results. The company reported total revenue for the thirteen weeks ended December 31, 2016 increased $1.3 million or 5.21% to $26.6 million from $25.3 million for the thirteen weeks ended January 2, 2016 due primarily to increased menu prices and increased restaurant traffic. In February 2016 Flanigan’s increased certain menu prices for its bar offerings to target an increase to its total bar revenues of approximately 3.0% annually. At the same time the company increased certain menu prices for its food offerings to target an increase to its total food revenues of approximately 3.7% annually.

Growing Revenues

A quick look at the company’s revenue track record over the past few years shows that Flanigan’s has a five year annual growth rate of 7.8%. While this is great, at the same time the company has grown its book value per share by 11.5% and its operating income by 20%.

To understand how this small company achieves these growth rates its important to understand the licensing agreements within the business. At first glance, Flanigan’s appears to be just another restaurant franchise, but a closer look at the company’s SEC filings show that it’s anything but.

A quick look at the company’s latest 10-Q below shows that Flanigan’s owns 15 units, but it’s the company’s Limited Partnership operated businesses that demonstrate the real strength of its business model.

(Source, Company reports)

Flanigan’s currently has eight units that are operated under Limited Partnership Agreements (L/P Agreements).

Limited Partnership Financial Arrangement

Here’s how the company explains the limited partnership agreements in its latest 10-Q:

We manage and control the operations of all restaurants owned by limited partnerships, except the Fort Lauderdale, Florida restaurant which is owned by a related franchisee.

In general, until the investors’ cash investment in a limited partnership (including any cash invested by us and our affiliates) is returned in full, the limited partnership distributes to the investors annually out of available cash from the operation of the restaurant up to 25% of the cash invested in the limited partnership, with no management fee paid to us.

Any available cash in excess of the 25% of the cash invested in the limited partnership distributed to the investors annually, is paid one-half (½) to us as a management fee, with the balance distributed to the investors.

Once the investors in the limited partnership have received, in full, amounts equal to their cash invested, an annual management fee is payable to us equal to one-half (½) of cash available to the limited partnership, with the other one half (½) of available cash distributed to the investors (including us and our affiliates).

As of December 31, 2016, limited partnerships owning five (5) restaurants, (Surfside Florida, Kendall Florida, West Miami Florida, Pinecrest Florida and Wellington Florida), have returned all cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. In addition to receipt of distributable amounts from the limited partnerships, we receive a fee equal to 3% of gross sales for use of the service mark “Flanigan’s Seafood Bar and Grill”.

So basically, Flanigan’s receives 50% of all of the distributable annual cashflows from its L/P operated restaurants where investors have received all of the cash they originally invested plus, a fee equal to 3% of gross sales for use of the service mark “Flanigan’s Seafood Bar and Grill”.

To understand the positive impact of the L/P agreements on Flanigan’s revenues, the company reported the following:

Restaurant Food Sales

Comparable weekly restaurant food sales for Company owned restaurants only was $651,000 and $620,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 5.00%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $597,000 and $563,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 6.04%.

Restaurant Bar Sales

Comparable weekly restaurant bar sales for Company owned restaurants only was $184,000 and $177,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 3.95%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $205,000 and $200,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 2.50%.

What this highlights is just how much revenue Flanigan’s is able to generate from its L/P run operations as opposed to a typical franchise royalty fee.

Consider the following from franchise.org:

“Most franchises charge franchisees a royalty based on a percentage of gross sales.  The average is 6.7 percent, however, the percentage varies by type of industry, from 4.6 percent for restaurant and hotel franchises to 12.5 percent for personnel services franchises.  Some franchise systems use a percentage range that can allow for unique business units and others use a more complex formula, such as a sliding percentage scale that adjusts downward as unit revenues rise or is set lower for new units.”

To summarize, Flanigan’s receives 50% of all of the distributable annual cashflows from its L/P operated restaurants where investors have received all of the cash they originally invested plus, a fee equal to 3% of gross sales as compared to a typical franchise royalty based model that returns 4.6% for restaurants. That’s a great business model.

Company Owned Property

In addition to its very smart L/P agreements the company has also shown it’s very prudent when it comes to managing the real estate component of its business. While Flanigan’s operations are conducted primarily on leased property the company also owns approximately 70,000 square foot of real estate and several parcels of real property including:

(i) a 10,000 square foot stand-alone building located in Fort Lauderdale, Florida that was purchased in December, 1999

ii) a 4,600 square foot stand-alone building located in Hallandale, Florida that was purchased in July, 2006

(iii) a 4,120 square foot stand-alone building in Hollywood, Florida constructed in November, 2003, upon real property acquired in September, 2001

(iv) a 4,500 square foot stand-alone building located in Hollywood, Florida that was purchased in October, 2009, and the vacant parcel of real property adjacent which was purchased in February, 2015

(v) a 4,600 square foot stand-alone building located in Fort Lauderdale, Florida that was purchased in August, 2010

(vi) a 5,100 square foot stand-alone building in North Miami, Florida that was purchased in November, 2010, and the two parcels of real property adjacent which were purchased in December, 2012

vii) a 23,678 square foot two building shopping center in Miami, Florida that was purchased in November, 2011

(viii) a 6,400 square foot building in Fort Lauderdale, Florida that was purchased in February, 2014

(ix) a 6,000 square foot stand-alone building in Fort Lauderdale, Florida and the vacant real property diagonally adjacent that was purchased in October, 2015

While it’s difficult to estimate the current value of Flanigan’s entire property portfolio, what’s worth noting is that the company has purchased these properties without being over-leveraged, maintaining debt levels between $10 million – $12 million since 2012.

The Whale’s Rib

Since January, 2006, Flanigan’s has managed “The Whale’s Rib”, a casual dining restaurant located in Deerfield Beach, Florida. The company paid $500,000 in exchange for its rights to manage the restaurant. The restaurant is owned by a third party unaffiliated with Flanigan’s. As part of the deal the company receives 50% of net profits from the operation of the restaurant. For the fiscal years ended October 1, 2016 and October 3, 2015, The Whale’s Rib generated $442,000 and $500,000 of revenue, respectively for provision of management services.

While the company has stated it does not have a new “Flanigan’s Seafood Bar and Grill” restaurant in the development stage, it is attempting to expand “The Whale’s Rib” restaurant concept that it manages in Deerfield Beach, Florida through the opening of a new restaurant in Miami, Florida. The company has the authority to open new restaurant locations using ‘The Whale’s Rib” concept, including its trademark, through a license arrangement with the owner. It’s likely that Flanigan’s will use its limited partnership ownership model for new “Whales Rib” locations.

Family Operated Business

One of the other important aspects of Flanigan’s is that on February 14, 2017, the company had just 1,858,647 shares of common stock. Of the total shares outstanding almost 70% are owned by insiders and two 5% stakeholders. This explains why the company is so thinly traded with daily average volumes of just over 1000 shares per day.

A quick look at the company latest Proxy Statement shows that the Flanigan’s  is what is termed a “controlled” company. That means that the Board of Directors has determined that Flanigan’s is a “controlled” company as defined by the NYSE MKT and SEC rules since more than 50% of its issued and outstanding common stock is owned by its Chairman of the Board of Directors and his immediate family, including through revocable and irrevocable trusts established by its former Chairman, Joseph G. Flanigan, for his children and grandchildren, and other officers and directors of the company.

This amount of insider ownership keeps larger investors away and helps to protect Flanigan’s from institutional shenanigans. It also serves the company well in terms of its ability the manage the company prudently.

Strong Balance Sheet

Behind the financial strength of Flanigan’s lies its very strong balance sheet and ability to generate free cash flows. A quick look at the company’s balance sheet below ending December 2016 shows that the company had cash and cash equivalents of $12.1 million and total debt of $11.8 million. Debt levels are easily manageable when you consider the company’s free cashflows below. Flanigan’s has successfully grown its cash reserves through its operations from $7 million in September of 2013 while maintaining debt levels between $10 million – $12 million over the same period.

Fiscal Period (Amounts in Millions) Dec16
Cash And Cash Equivalents 12.1
Current Portion of Long-Term Debt 1.8
Long-Term Debt 10

(Source, Company reports)

Loads of Free Cash Flow

When you combine the company’s strong balance sheet with its significant amounts of free cash flow, you start to get an idea of the financial strength of this great little nano-cap.

A quick look at the company’s trailing twelve month cash flow statements below shows Flanigan’s generated $9.4 million (ttm) in operating cash flow. At the same time, the company had just $2.2 million (ttm) in capex, which equates to $7.2 million (ttm) in free cash flow. With a current market cap of $46 million that means Flanigan’s has a FCF/Price yield of 16% (ttm).

Fiscal Period (Amounts in Millions) TTM Dec16 Sep16 Jun16 Mar16
Cash Flow from Operations 9.4 2.7 2 1.4 3.2
Capital Expenditure -2.2 -0.7 -0.4 -0.5 -0.6
Free Cash Flow 7.2 2 1.6 0.9 2.7

(Source, Company reports)

Valuation

In terms of the company’s valuation. Flanigan’s has a current market cap of $46 million, and with total debt approximately the same as the company’s cash and cash equivalents, when we factor in $7 million for minority interests that means Flanigan’s has an Enterprise Value (EV) of $53 million. With $7.2 million (ttm) in free cash flow, that means the company has a FCF/EV Yield of 14%.

We favor EV over market capitalization as it includes additional liabilities–like debt, preferred equity and non-controlling interests–if you were to purchase the entire company. EV is calculated as:

Market Cap + Preferred Equity + Non-Controlling Interests + Total Debt – Cash and Equivalents.

With an Enterprise Value (EV) of $53 million and Operating Earnings* of $7 million (ttm), that means Flanigan’s is currently trading on an Acquirer’s Multiple of 7.67 or, 7.67 times Operating Earnings*.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

With a FCF/Price Yield of 16% (ttm), a FCF/EV Yield of 14% (ttm) and an Acquirer’s Multiple of 7.67, or 7.67 times Operating Earnings*, that places Flanigan’s squarely in undervalued territory.

Summary

Flanigan’s is a great little nano-cap. The company has maintained a solid five year annual revenue growth rate of 7.8% while at the same time growing its book value per share by 11.5% and its operating income by 20%.

In addition to its successful company owned operations, Flanigan’s is able to generate significant revenues through its Limited Partnership Agreements (L/P agreements) as opposed to a traditional franchise royalty fee.

The company has also shown it’s very prudent when it comes to managing the real estate component of its business. While Flanigan’s operations are conducted primarily on leased property the company also owns approximately 70,000 square foot of real estate and several parcels of real property, while maintaining low levels of debt.

Flanigan’s has a very strong balance sheet, and solid free cash flows. The company is thinly traded, with daily volumes around 1000 per day, and protected from large institutions due to its size and its approximately 70% ownership from family insiders and two 5% stakeholders.

In terms of Flanigan’s valuation. The company is currently trading on a FCF/Price Yield of 16% (ttm), a FCF/EV Yield of 14% (ttm) and an Acquirer’s Multiple of 7.67, or 7.67 times Operating Earnings*. Add to this the company’s P/E of 15, its P/B of 1.56 and its P/S of 0.44 and Flanigan’s remains squarely in undervalued territory.