Forget Freshii Inc.: Buy Cara Operations Ltd. Instead

After Freshii Inc. (TSX:FRII) lost 35% in single day of trading, investors scurrying for the exit ought to replace it with one of Canada’s largest restaurant operators.

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I never gave Freshii Inc. (TSX:FRII) much of a chance when it went public last December, suggesting that the company’s valuation should be no higher than $300 million.

It went public January 31 at $11.50 per share for a $360 million valuation — 20% higher than the maximum I thought investors should be willing to pay.

However, after the restaurant operator delivered a reasonably sound quarterly report in March, its first as a public company, I was a little more optimistic that it was headed in the right direction.

I still thought investors were better off buying a stock like Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR), whose size made it a much less risky proposition than Freshii.

Then, on September 26, Freshii announced that its expansion plans were being significantly scaled back from as many as 160 new stores in fiscal 2017 down to as few as 90. On the surface, this seems like the company didn’t do enough planning and hiring to accommodate the projected number of store openings.

Investors, faced with two possibilities — it either underestimated its needs or it doesn’t know what it’s doing — chose the latter, knocking its stock down 35% in a single day’s trading.

If you can afford to lose some money, a speculative bet on its stock might be at hand at $5 and change. However, if you need the funds to retire on, I’d suggest you forget Freshii and consider Cara Operations Ltd. (TSX:CARA) instead.

Here’s why.

Cara is profitable

I believe that most investors should only buy stocks in companies that are making money. That’s because the game is already rigged against the little guy, so it’s best to improve your odds of preserving your capital by going with profitable businesses like Cara.

In the first six months of fiscal 2017, Cara had an operating EBITDA of $85 million — 40% higher than in the same period a year earlier on total gross revenue of $178 million. The increase was a result of profitable growth in both its company-owned and franchised locations across the country.

Cara’s free cash flow over the latest 12 months is $98 million, leaving plenty to pay out $25 million in annual dividends, making it a safe dividend play yielding 1.7%.

It’s diversified

Not only does Cara own the Swiss Chalet and St. Hubert rotisserie chicken brands, but it also operates 14 other concepts, including Harvey’s, Montana’s, Milestones, New York Fries, and much more.

Freshii offers just the one brand, while Cara has an entire team of brands ready to step in and get the job done when one or more of them isn’t performing up to plan. Cara is the power of many.

Valuation

Cara went public at $23 a share on April 1, 2015. Today, more than two years later, it’s trading at the same price it did back then. Yet its annual gross revenues are almost 2.5 times larger than they were in fiscal 2014, the year before it went public, and its operating EBITDA in the first six months of 2017 is the same as what it was for all 12 months in fiscal 2014.

Anyway you slice it, Cara’s stock is a better deal than it was when it went public.

It might not be opening as many stores as Freshii or making massive acquisitions, like Restaurant Brands, but it’s holding its own in a very competitive marketplace.

That should count for more than $24 a share.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no positions in any stocks mentioned. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC.

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