Planet Fitness (NASDAQ:PLNT) announced on Jan. 11 that it would pay $800 million to buy its largest franchisee. The move adds more than 100 locations to the fitness chain’s global footprint. Planet Fitness is one of the largest publicly-traded franchise stocks listed on a U.S. stock exchange.
When I worked in the mutual fund business years ago, there was a saying that it was better to buy a mutual fund provider’s stock than the provider’s mutual funds. I don’t know if the same adage applies to the franchise industry.
What I do know is that many large U.S. public companies operate franchise businesses. Planet Fitness is but one of them.
According to the International Franchise Association, franchise businesses account for more than 5% of the U.S. gross domestic product. Further, one of 12 Americans working in the private sector works for a franchise.
They’re a big deal.
To make money from franchising without actually having to do the work, here are seven of the top franchise stocks to buy now.
- Franchise Group (NASDAQ:FRG)
- Driven Brands Holdings (NASDAQ:DRVN)
- McDonald’s (NYSE:MCD)
- Rollins (NYSE:ROL)
- Winmark (NASDAQ:WINA)
- Valvoline (NYSE:VVV)
- Goosehead Insurance (NASDAQ:GSHD)
Franchise Stocks to Buy: Franchise Group (FRG)
Franchise Group can best be described as a franchise conglomerate. It owns and operates several franchise brands, including The Vitamin Shoppe, Pet Supplies Plus, American Freight, and Sylvan Learning.
Interestingly, even though the company got its start in 1997 as Liberty Tax Service, it sold the division to NextPoint Financial (OTCMKTS:NACQF) in July 2021 for $289 million in cash and stock.
The company seeks to buy franchised and franchisable businesses in healthy verticals possessing strong cash flows and margins. By growing free cash flow, it’s able to grow the dividend it pays to shareholders.
Revenues of its various franchises total $4.1 billion in the 12 months ended June 2021. In the latest quarter ended Sept. 25, its revenues were $828.8 million, 54.1% higher than a year earlier. On the bottom line, it had an operating income of $54.8 million, more than double its operating income a year earlier.
Year to date, it has development agreements in place to add 153 new locations. Through the first nine months of fiscal 2021, it opened 124 new stores.
In 2022, it expects to generate $4.45 billion in revenue, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $450 million, and non-GAAP earnings per share (EPS) of $5. It expects to cut its debt by $600 million in 2022 to $1.1 billion.
Dividend investors will like its 5.2% yield.
Driven Brands Holdings (DRVN)
You better get Maaco stock.
Driven Brands is the parent company of automotive service brands such as Maaco, Meineke Car Care Centers, Take 5 Oil Change, 1-800-Radiator, and Carstar. It operates over 4,300 centers in 15 countries and services more than 50 million vehicles each year.
Driven went public in January 2021, selling 31.8 million shares at $22, well above its pre-IPO price range. As a result of underwriters exercising their over-allotment, the company’s net proceeds of $791 million.
The company was taken public by its Atlanta-based private equity owner, Roark Capital. Post-IPO, Roark owns 73% of the business.
How big is Driven?
Its system-wide sales for the latest 12 months through Q3 2021 were $4.3 billion. Approximately 81% of its locations are franchised. The opportunity is significant. It estimates the automotive car care industry is worth $325 billion annually. It has less than 5% market share.
Except for a dip due to Covid-19, Driven’s had nearly 14 consecutive years of same-store-sales growth. It generates about half its sales from retail customers and the other half from commercial customers.
Its long-term plan is to grow revenues and its adjusted EBITDA in the low double digits and adjusted net income in the mid-to-high teens. Not only does it plan to grow organically, but it also likes to buy businesses that it can scale.
In early January, it announced the acquisition of Auto Glass Now for $170 million. The acquired company has more than 75 auto glass repair shops in the U.S.
Driven expects it to generate $85 million in fiscal 2021.
I couldn’t write about franchise stocks and not put the largest U.S.-based franchisor by systemwide sales on the list. The Golden Arches didn’t invent franchising, but they certainly made it better over the years.
When you invest in MCD stock, it’s not about hitting home runs; it’s about singles and doubles. Sometimes, its total return numbers can look a little underwhelming. For example, its 10-year total return through Jan. 27 is 11.31%, 323 basis points less than the entire U.S. market. By comparison, Jack in the Box (NASDAQ:JACK) has a 16.58% total return over the same period.
McDonald’s reported Q4 2021 earnings on Jan. 27. It missed analyst estimates as a result of rising costs. Analysts were expecting revenue of $6.03 billion and $2.34 EPS. MCD delivered $6.01 billion in sales and $2.23 in EPS. However, year-0ver-year earnings jumped 30% while comparable sales growth was higher than expected in both the U.S. and globally.
Overall, business looks good in the year ahead, as it expects to open 1,3o0 new stores in 2022, 3.5% higher than in 2021. It expects to have U.S. unit growth for the first time in several years.
And heck, analysts like it. Out of the 30 covering MCD stock, 20 rates it a buy.
Franchise Stocks to Buy: Rollins (ROL)
Rollins’ stock had been performing well until the beginning of 2021. Ever since then, the global provider of pest services has been on a bit of a roller-coaster ride. ROL might be an excellent time to buy with it down almost 20% over the last 12 months.
Now, before you run out and buy Rollins stock based on the fact it provides franchise opportunities for several of its pest control brands in both the U.S. and abroad, just remember that its franchising revenues aren’t a big part of its business.
No matter, it’s a well-run business that consistently delivers. As its investor relations page points out, it’s delivered 23 consecutive years of revenue growth, it’s grown its annual dividend by more than 18% over the past 17 years (dividend growth is usually a sign of earnings and free cash flow growth) and has more than 900 locations and franchises around the world.
According to its 10-K, at the end of December 2020 it had 143 Orkin franchises worldwide, 79 Critter Control franchises, and nine Australian franchises. On Page 19 of its 10-K, it says that franchising revenues account for less than 1% of its overall revenue. However, those revenues did manage to grow 5.6% from the previous year.
I would suggest that the company uses the franchise program as a profitable way to advertise the Orkin name. Who hasn’t seen an Orkin truck running about town? Some of those could very well be one of its franchisees.
Rollins recently reported its Q4 2021 results. While free cash flow for the year fell 10.9% to $367.8 million, it has a healthy 15.2% margin. However, revenues increased by 12.2% to $2.42 billion, while its adjusted net income jumped 25.4% YOY to $335.5 million.
The business never goes out of style.
I consciously chose to avoid putting too many food-related franchise stocks in this article. They make up the bulk of franchising. If you want to bet on restaurants, the Invesco Dynamic Leisure and Entertainment ETF (NYSEARCA:PEJ) is a good place to look. But I digress.
Winmark is the holding company for its various franchises that specialize in resale items. Its banners include Plato’s Closet, Once Upon a Child, Play It Again Sports, Music Go Round, and Style Encore. Thanks to its business model, it’s recycled more than 1.36 billion items since 2010.
If you’re a dividend hound, Winmark paid a special dividend of $7.50 a share on Dec. 1, 2021. That’s on top of its regularly quarterly payout of 45 cents. However, because its shares trade above $200, it yields less than 1%.
The company finished fiscal 2021 with more than 2,800 franchise territories across all five of its brands in the U.S. and Canada. The resale market is expected to be a hot commodity in 2022. Estimates put the future value of the global resale apparel market at $77 billion by 2025.
Winmark and its franchisees expect to play a large role in the resale market. In 2021, Once Upon a Child opened its 400th franchise in Douglasville, Georgia. The banner is Winmark’s second-largest store count behind Plato’s Closet at 488 at the end of September 2021.
Despite being down 14% so far in 2022, WINA looks ready to go on a run.
As a kid, I used to send letters to companies, asking them to send me stickers. I vividly remember my Valvoline stickers.
From 1949 through 2017, Valvoline was owned by Ashland Global Holdings (NYSE:ASH). The company took Valvoline public in September 2016, selling 30 million shares at $22. In May 2017, Ashland completed its spinoff of Valvoline, distributing 170 million shares to shareholders, who received 2.745338 shares of Valvoline for one share of ASH stock.
Since the separation, Valvoline’s business has continued to grow, in part from its franchising business.
The company operates through two segments: Global Products, which hawks its motor oil, and Retail Services, where its more than 1,600 service centers provide oil changes and other automotive care.
In November, it reported its Q4 2021 results. Global Products experienced a 20% increase in full-year sales while its Retail Services saw revenues increase by 38%. Overall, the company’s revenues increased 27% to $3.0 billion. On the bottom line, its adjusted EPS rose 37% to $1.95. Its same-store sales increased 21.2%.
But you better buy it soon. The company is accelerating its plans to separate the two businesses.
“Following a comprehensive review of strategic alternatives by the Valvoline Board of Directors and executive management, we believe that a separation of our business segments will create significant and sustainable value for our shareholders, employees and other stakeholders, and will best position the Retail Services and Global Products businesses for continued long-term success,” said chairman Stephen F. Kirk in an Oct. 12 press release.
In this case, you get to own two excellent businesses for the price of one.
Franchise Stocks to Buy: Goosehead Insurance (GSHD)
In August 2020, I included Goosehead on a list of 10 small-cap stocks ready to become large caps. I argued that the smallish, Texas-based independent personal lines insurance agency had what it took to continue growing.
It was up nicely through October 2021. However, since then, it’s lost more than 50% of its value, trading below its August 2020 share price.
The funny thing is, the business hasn’t gone bad. In fact, it continues to grow. On Jan. 24, the company released preliminary financials for its fourth quarter and fiscal year. Highlights included 29% revenue growth for fiscal 2021, a 45% increase in total written premiums to $1.56 billion, and total franchises increased by 47% to 2,151.
Not bad for a company whose stock is in retreat.
The company’s November 2021 presentation highlighted some of the accomplishments of its franchise business. For example, since 2017, its franchise channel has grown premiums at a compound annual rate of 56%. Interestingly, the average age of its franchise agents is 41, 14 years less than the industry average. Lastly, of the company’s $37.2 million in core operating revenue in Q3 2021, franchise agents accounted for 46% of it, with corporate agents accounting for the rest.
As of September 2021, its total premiums for the trailing 12 months were $1.44 billion. Auto insurance accounted for 40%, homeowners (56%), and other personal lines for the remaining 4%.
With hundreds of new agents expected to take some time for their revenue to kick in, investors can expect Goosehead’s revenues to continue to grow in 2022 and beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.