Brazil Fast Food Corp.: A Smallcap to Help Satisfy Your BRIC Craving

Brazil Fast Food Corp. (BOBS.OB) is a holding of mine that I purchased back at about $2.40 and recently trimmed my position in half to let it ride. I like the long-term prospects of the stock, but am looking to try and accumulate on further weakness in emerging markets stocks.

Brazil Fast Food Corp. does what it sounds it does. They operate and franchise the 2nd largest chain of fast food storefronts and stands in Brazil (behind McDonalds (MCD)) with over 450 locations, and growing at a good clip. About 60 are company owned, but the remainder are franchised. Though the majority of revenue (~80%), it accounts for only 33% of profits. The real segment of interest is the franchising division, which although it only accounting for about ~15% of sales, accounts for a whopping 66% of operating income. This division is also growing at about 40%, and has the benefit of insulating BOBS from commodity prices and other economic hiccups (they primarily collect franchise fees and royalty revenue).

The stock is trading at about 13 P/E, and operating income nearly doubled last year, thanks in large part to growth int the franchising business (operating income from company owned stores was roughly flat as of first 9 months of 06'). Fast food penetration in Brazil is far behind what it is in the US and other developed nations, and assuming the same trend takes hold as has taken hold in many other places in the world, we can expect continued growth for years to come. Though McDonald's and other fast food giants pose a threat, I am comfortable with BOBS for a couple reasons:

1) Each region of Brazil has varied food preferences, making it difficult to make a popular homogenized menu across the whole of Brazil (as McDonald's and foreign entrants are used to doing). The kiosk franchisee model allows vendors to easily make improvisations to the standard BOBS menu to appeal to their locale clientèle.

2) BOBS already has a very strong position in the market place, and has been able to maintain competitive pricing despite foreign competitor's global scale. They also have a very strong position in the market, and are generally very well known (they provide food for the largest festival in Brazil each year).

I still maintain a strong position, and will look to buy on further weakness.

BOBS 1-yr chart

Disclosure: Author has a long position in BOBS.