MTY Food Group: A Strategic Buy Amid Undervaluation and Catalysts

MTY Food Group Inc. (TSX: MTY), a global leader in franchising and foodservice operations, has emerged as a compelling investment opportunity despite recent sector headwinds. With a robust balance sheet, discounted valuation metrics, and strategic catalysts aligning for long-term growth, the stock presents an attractive entry point for investors seeking resilient compounders. Let's dissect the case for MTY as a strategic buy.

Balance Sheet Resilience: Strong Liquidity and Manageable Debt

MTY's financial health stands out. As of February 2025, the company maintained $68.8 million in cash and a revolving credit facility of $900 million (partially drawn at $573 million), ensuring ample liquidity. Long-term debt sits at $712.7 million, a modest reduction from prior quarters, while free cash flow (FCF) grew 18% year-over-year to $43.5 million. This FCF growth, driven by lower interest payments and operational efficiencies, underscores MTY's ability to service debt comfortably.

The company's conservative leverage ratios—supported by a disciplined capital allocation strategy—mitigate risks. Management's focus on reducing corporate store counts (now 256 vs. over 300 in prior years) and prioritizing franchising (which requires less capital) further strengthens balance sheet resilience. Franchise locations now account for 96% of its 7,047 total units, leveraging third-party capital and minimizing MTY's direct financial exposure.

Valuation Discount: Undervalued by Stockcalc WAV Metrics

MTY trades at a significant discount to its intrinsic value, according to Stockcalc WAV (Weighted Average Valuation) models. This metric, commonly used in Canadian equities, factors in earnings, cash flow, and growth prospects. Current estimates suggest MTY's Stockcalc WAV is 20% higher than its current stock price, indicating substantial upside potential.

The disconnect between fundamentals and valuation is partly due to near-term headwinds, such as a 1.5% same-store sales decline in Q1 2025. However, this dip was partially attributed to a leap-year distortion and regional weather impacts, with management forecasting stabilization in Q2. Meanwhile, system sales rose 2.5% to $1.36 billion, signaling underlying demand resilience.

Growth Catalysts: Buybacks, Dividends, and Operational Efficiency

MTY's shareholder-friendly policies are a key growth lever. In Q1 2025 alone, the company repurchased $13.8 million worth of shares and paid a $0.33 quarterly dividend, returning a total of $21.5 million to investors. With FCF per diluted share rising to $1.87 (up from $1.52 in 2024), there's ample room for further buybacks and dividend hikes.

Geographic diversification also buffers against regional risks. 57% of locations are in the U.S., 35% in Canada, and 8% internationally, reducing reliance on any single market. Meanwhile, management's focus on operational cost-cutting—including reducing corporate store counts and optimizing supply chains—aims to stabilize margins. The Food Processing segment, which saw a 7% revenue jump to $38.2 million, exemplifies MTY's broader diversification beyond franchising.

Addressing Risks: Debt, Mall Exposure, and Tariffs

Critics may flag MTY's debt levels and mall exposure. However, the company's $43.5 million FCF and aggressive store rationalization (e.g., closing 102 units in Q1) signal proactive risk management. Additionally, franchised locations are less tied to declining mall foot traffic, as many operate in high-traffic corridors or suburban centers.

Tariffs remain a concern, but MTY is countering with domestic sourcing initiatives and menu adjustments. Management has also guided for lower capital expenditures in 2025, freeing up cash for debt reduction and shareholder returns.

Conclusion: A Compelling Long-Term Play

MTY Food Group checks all the boxes for a strategic investment: a resilient balance sheet, undervaluation relative to its Stockcalc WAV, and catalysts like buybacks and operational efficiency. Near-term risks—same-store sales dips, mall exposure—are already reflected in the stock price. With a dividend yield of ~1.5% and a five-year average FCF growth rate of ~10%, MTY offers asymmetric upside for investors with a multi-year horizon.

Investment Advice: Consider accumulating MTY shares at current levels, with a target price of $55–$60 based on normalized FCF and peer valuations. Monitor Q2 same-store sales trends and FCF growth for confirmation of recovery. This is a stock to hold for the long haul.