There’s money in cakes. Egg-free cream ones to be precise. And I know that because Cake Box (LSE: CBOX) has an operating margin running just above 19%.
The franchise retailer and cake maker has a growing store base across the UK. And the overall business is delivering some impressive quality indicators, such as the figure for return on capital at almost 30%.
Expanding at pace
The business model works. And the directors have been rolling out the expansion strategy at pace. According to today’s half-year results report, the company had 174 franchise stores in operation by 30 September. And that’s up from 139 a year earlier.
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In the first six months of the current trading year, there was also a “successful” trial of seven kiosks in Asda, which could augur well for the potential future growth of the business. Such diversification reminds me of the approach followed by fast food company Greggs.
These days, we can find a Greggs outlet at railway stations, motorway service areas, airports, retail parks and just about everywhere that people gather. The company’s expansion strategy has taken the business well beyond the high street. Perhaps Cake Box can pull off a similar trick in the years ahead. But the Cake Box concept is focused on a narrower product range than Greggs, so it may not.
Cake Box specialises in making crafted and personalised fresh cream cakes for purchase on demand or ordered in advance from its stores or online. By contrast, Greggs sells a range of savoury and sweet foods as well as hot and cold drinks.
Chief executive Sukh Chamdal has “confidence” the business will meet full-year expectations and progress further in the years ahead. City analysts expect earnings to surge by around 43% in the current trading year to March 2022. And they expect a further uplift worth about 13% the following year. But of course, such outcomes aren’t certain. Operational challenges could arise to derail those forecasts.
More than just robust recovery
But today’s interim figures show revenue rose by almost 92% when compared to the challenging equivalent period in the depths of the pandemic last year. And earnings per share shot up by just over 116%. The directors slapped an extra 35% on the interim dividend.
But those advances represent more than just a robust recovery. If the forecasts prove to be correct for the full year, earnings will have risen by more than 50% since 2019, before the pandemic.
If investing was just about identifying a great business, this would be a no-brainer stock for me. But a big part of the process involves buying shares when valuations make sense.
With the share price near 393p, the forward-looking earnings multiple is near 26 for the trading year to March 2023. And expected dividend yield is around 1.9%. That’s not a cheap valuation, but I think the company has earned its rich rating.
However, an elevated valuation adds risks for investors and I could lose money on the stock if the valuation falls because of any operational setback or other reasons.
Nevertheless, I reckon the growth story has the potential to run for years with this one. So I’m inclined to buy the stock now to hold for the long term.
