Are you looking for a few good investment ideas? If so, you might want to consider putting your money into franchise stocks.
Entrepreneur magazine just released its Franchise 500 ranking for the year, the magazine’s 41st since the first edition appeared in 1980. Unsurprisingly, the largest category in the 2020 rankings is food, accounting for more than one-fifth of the Franchise 500.
Who wouldn’t want to get their hands on a McDonald’s (NYSE:MCD)?
It’s a license to print money. Well, according to the Franchise 500, McDonald’s comes in third place behind only Taco Bell and Dunkin Donuts, which is number one on the list with more than 13,000 stores worldwide.
However, unless you’re prepared to fork over the $1.3-$2.2 million investment to open a McDonald’s, it’s probably much easier to participate in the franchise’s growth by purchasing a few hundred shares of MCD stock.
Publicly-traded companies own six of the top 10 franchises on this year’s list. Go farther down the list and you’ll find plenty of possible options.
Here are my 10 franchise stocks to buy now.
Franchise Stocks to Buy: McDonald’s (MCD)
As I mentioned above, McDonald’s ranked 3rd in the 2020 Franchise 500. Over the past 52 weeks, it’s delivered a total return of 17.2%, 840 basis points less than the Morningstar US Market Index.
The company had a reasonably strong year in 2019.
However, the fact that it had to fire CEO Steve Easterbrook in early November for having a consensual relationship with an employee was a big blow to the company. Easterbrook had done an excellent job growing its online and delivery business. Since taking over in March 2015, MCD stock delivered returns double the S&P 500.
“You can make a very strong argument that Easterbrook was the best CEO in the restaurant industry,” said Michael Halen, a Bloomberg Intelligence analyst who covers the restaurant chain.
On January 29, McDonald’s reported Q4 2019 earnings that exceeded expectations, with adjusted earnings per share of $1.97 from $5.3 billion in revenues and 5.9% global same-store sales growth.
Thankfully, for McDonald’s shareholders, the company has a deep bench. Chris Kempczinski, the former head of its U.S. division, was quickly appointed to replace Easterbrook.
Well-run companies have a plan B.
McDonald’s has a trailing-12-month free cash flow of $5.2 billion.
Planet Fitness (PLNT)
Planet Fitness (NYSE:PLNT) was ranked 7th in the 2020 Franchise 500. Over the past 52 weeks, the stock delivered a total return of 38.0%, more than 12 percentage points higher than the Morningstar US Market Index at 25.6%.
Planet Fitness is one of the largest and fastest-growing franchisors and operators of fitness centers in the U.S. and Canada. A typical Planet Fitness gym encompasses approximately 20,000 square feet filled with purple and yellow fitness equipment for cardio, circuit-training, and weight training.
As of the end of September, Planet Fitness had 1,899 gyms in the U.S., 14.1 million members, in 50 states, Canada, Mexico, the Dominican Republic, and Panama. In 2018, Planet Fitness opened 211 new locations, accounting for approximately 20% of the year’s new store openings.
William Blair analyst Sharon Zackfia believes it has enough prospective growth to open 4,000 stores in the U.S., more than double its current total.
In the third quarter ended September 30, Planet Fitness generated $44.3 million EBITDA from its franchise segment, almost three times the EBITDA from its corporate-owned stores.
While the fitness industry tends to run hot and cold, PLNT is the best option when it comes to publicly traded fitness clubs.
Planet Fitness has a trailing-12-month free cash flow of $120 million.
Berkshire Hathaway (BRK.A, BRK.B)
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns Dairy Queen, which was ranked 16th in the 2020 Franchise 500. Over the past 52 weeks, BRK.B stock has delivered a total return of 11.5%, less than half the Morningstar US Market Index.
If it weren’t part of one of America’s greatest companies, I wouldn’t be nearly as interested in laying down a bet on the ice cream franchise. However, it’s hard to resist Warren Buffett and his boatload of cash.
Berkshire Hathaway paid $585 million for Dairy Queen way back in 1997. Dairy Queen shareholders wise enough to take $26 in Class B stock instead of $27 in cash are sitting on a 10.8% compound annual growth rate, more than double the S&P 500.
Dairy Queen’s contribution to the top- and bottom-line at Berkshire might be a small one, but it’s one of the tastier investments owned by America’s largest holding company.
Berkshire Hathaway has a trailing-12-month free cash flow of $21.8 billion.
Hilton Hotels (HLT)
Hilton Hotels (NYSE:HLT) owns several different hotel brands that it franchises. One of those brands, Hampton by Hilton, was ranked 30th in the 2020 Franchise 500. Over the past 52 weeks, HLT stock has delivered a total return of 50.0%, double the Morningstar US Market Index.
According to Hilton’s Q3 2019 results, the Hampton by Hilton brand had 2,173 franchised hotels in the U.S. alone, providing 213,100 rooms for weary American travelers. In total, all of Hilton’s brands have 5,209 franchised hotels with 712,445 rooms in the U.S. and elsewhere.
In 2018, Hilton transitioned to an asset-light business model that’s reliant on franchise fees. Approximately 75% of its fee income comes from franchisees. In the past decade, Hilton has grown its management and franchise fees by 11% compounded annually.
To illustrate its asset-light model, the company has a pipeline of 379,000 rooms. The company’s investment is just $230 million compared to $50 billion from third-party owners. Growing its rooms around the globe by 93% between 2007 and 2019, its current pipeline will deliver even higher returns on investment than past development because it’s not investing nearly as much of its capital into hotel construction.
Hilton has a trailing-12-month free cash flow of $1.3 billion.
Snap-on (NYSE:SNA) manufactures and sells tools to vehicle service technicians in the U.S. and elsewhere. Its 3,500 franchise vans visit auto repair shops every week. In the third quarter, Snap-on’s tool group had sales of $385 million, which accounted for 43% of its $902 million in total revenue.
The Snap-on Tools franchise was ranked 30th in the 2020 Franchise 500. Over the past 52 weeks, SNA stock severely underperformed, generating a total return of 3.6%, well below the Morningstar US Market Index.
The company is in the middle of taking strategic actions in all three of its operating segments, including its Tools Group, to generate savings, boost margins, and reignite growth. It plans to do this by enhancing the franchise network, working on its relationships with repair shop owners, and expanding into emerging markets.
It’s a work in progress.
However, trading at less than 13 times forward earnings, and generating trailing-12-month free cash flow of $590 million, the iconic name in tools is worthy of consideration for value investors.
ReMax Holdings (RMAX)
ReMax Holdings (NYSE:RMAX) was ranked 40th in the 2020 Franchise 500. Over the past 52 weeks, it’s delivered a total return of 2.6%, significantly worse than the Morningstar US Market Index at 25.6%.
The fact ReMax stock has performed so poorly in the past year has something to do with its financial results.
In the three months ended September 30, 2019, ReMax’s revenues increased by 30.4% to $71.5 million, a result aided by the acquisition of Marketing Funds, a group of advertising funds run by former ReMax CEO and co-founder Dave Liniger. Excluding the purchase, revenues fell by 2.5%. On the bottom line, its adjusted net income was $18.5 million, 5.6% lower than a year earlier.
So, why invest in this real estate franchising stock?
ReMax has a trailing-12-month free cash flow of $62 million. Based on its enterprise value of $996 million, it has a free cash flow yield of 6.2%, very close to the 8% minimum yield value investors use to gauge how cheap a stock is.
With one of the best names in residential real estate, this is one value play worth considering.
The Joint Corp. (JYNT)
The Joint Corp. (NASDAQ:JYNT) owns the Joint Chiropractic, a chain of chiropractic clinics across the U.S. It was ranked 78th in the 2020 Franchise 500. Over the past 52 weeks, JYNT stock has delivered a total return of 103.4%, double the Morningstar US Market Index.
The growth opportunity for the company is tremendous. At the end of September, it had 488 clinics open in the U.S., 430 of them franchised, with the remainder company-owned. It estimates there is enough of a market to open more than 1,700 across the country.
In the past decade, the company’s system-wide sales have grown from $1.3 million in 2010 to $220 million in 2019, a compound annual growth rate of 77%. In 2019, it opened 71 new franchised clinics, up from 47 a year earlier. Even if it accelerates that store-opening growth, it will take more than a decade to build out its national footprint.
Clinics open for more than 48 months grew same-store sales by 19% in 2019. Those open for 13 months grew same-store sales by 25%. More importantly, the company went from an operating loss of $395,444 in the first nine months of 2018 to an operating profit of $2.1 million, a sign the business model is gaining traction.
The company has a trailing-12-month free cash flow of $4.7 million.
Winmark Corporation (NYSE:WINA) owns several franchise brands, including Once Upon a Child, which was ranked 110th in the 2020 Franchise 500. Over the past 52 weeks, WINA stock has delivered a total return of 29.3%, 370 basis points higher than the Morningstar US Market Index.
In addition to Once Upon a Child, it also operates Plato’s Closet, Play It Again Sports, Style Encore, and Music Go Round franchises. At the end of September, 1,255 franchise locations in the U.S. and Canada with Plato’s Closet having the most at 482 and Once Upon a Child a close second with 386 locations.
In the first nine months of fiscal 2019, Winmark grew its royalties by 7% to $38.2 million. However, the company’s leasing business, which leases business equipment to middle-market companies and extends small loans to small businesses, saw its revenues fall by 15% to $12.7 million.
Farther down the balance sheet, it had an operating profit of $32.2 million, 1.9% higher than in the same period a year earlier. Once the company reignites growth in its leasing business, WINA stock will move even higher than its current $200 share price.
It’s a diamond in the rough.
Winmark has a trailing-12-month free cash flow of $34.2 million.
Alimentation Couche-Tard (OTCMKTS:ANCUF) is one of the largest operators of convenience stores and gas stations in the world. Its Circle K franchise was ranked 174th in the 2020 Franchise 500. Over the past 52 weeks, its stock has delivered a total return of 28.6%, 300 300 basis points higher than the Morningstar US Market Index.
Although based in Montreal, Canada, it now generates 69% of its revenue from the U.S., another 19% from Europe, and the remaining 12% from Canada. Its 16,066 stores serve approximately nine million customers each day, with 65% of the transactions are convenience-store products only, 25% are fuel alone, and 10% are a mix of both.
Since 2004, it has made 60 acquisitions adding more than 10,000 locations to its global footprint. As a result, it’s gained a reputation as being one of the best integrators of acquisitions in the convenience store industry.
At the moment, Couche-Tard is trying to acquire Caltex Australia, an operator of convenience stores and gas stations in Australia, for $5.8 billion. Caltex believes it’s worth more. The discussions are ongoing. If successful, it would be the company’s first acquisition in the Asia/Pacific region.
Couche-Tard is in the fourth year of rebranding all of its stores to the Circle K franchise.
Alimentation Couche-Tard has a trailing-12-month free cash flow of $12.0 billion.
FirstService (NASDAQ:FSV)is a leader in outsourced property services in the U.S. and Canada.
It has two operating segments: FirstService Residential, which manages residential communities, and FirstService Brands, which provides essential property services. One of its franchises is CertaPro Painters, which accounted for 22% of the operating segment’s $2.2 billion in 2018 sales.
Although it has more 1,800 franchisees across North America, its royalty revenue accounts for just 20% of FirstService Brands’ annual revenue. Its company-owned operations generate the lion’s share.
CertaPro Painters was ranked 238th in the 2020 Franchise 500. Over the past 52 weeks, FSV stock has delivered a total return of 25.4%, two basis points less than the Morningstar US Market Index.
FirstService has a trailing-12-month free cash flow of $40 million.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.