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Geoff Gannon June 17, 2020

BAB (BABB): This Nano-Cap Franchisor of “Big Apple Bagel” Stores is the Smallest Stock I Know of That’s a Consistent Free Cash Flow Generator

This might turn out to be a shorter initial interest write-up than some, because there isn’t as much to talk about with this company. It’s pretty simple. The company is BAB (BABB). The “BAB” stands for Big Apple Bagel. This is the entity that franchises the actual stores (there are no company owned stores). Big Apple Bagel is a chain of bagel stores – mostly in the Midwest – that compete (generally unfavorably) with companies like Einstein Bros Bagels, Panera Bread, and Dunkin’ Donuts. The company owns certain other intellectual properties like: a brand of coffee (Brewster’s) served in its stores (which Andrew tells me is terrible, I haven’t had a chance to taste the coffee myself), “My Favorite Muffin” (a muffin concept similar to Big Apple Bagel), etc. But, the cash flows seem to come mainly from royalties paid to BABB by franchisees in proportion to the sales they make. Like other franchised businesses, the company also maintains a marketing fund that is paid for by franchisee contributions.

Why am I writing about this business? Because I think it may be literally the smallest stock I’m aware of that is a legitimate and decent business. The market cap is closer to $4 million than $5 million. Insiders own some stock. So, the float is even less. And the investment opportunity is limited no matter how willing you are to accumulate shares because there is a poison pill. No one can acquire more than 15% of the company’s shares no matter how patient they are. So, as of the time I’m writing this, that would mean that the biggest potential investment any outsider could make in this company would be about $650,000. Realistically, it’s unlikely any fund or outside investor could manage to put much more than half a million dollars into this stock. And it’s entirely possible management would not be happy to see even that much being put into this stock (since that’d be more than 10% of the share count).

So, this is a very, very limited investment opportunity. And yet: it is a real investment opportunity. This is a real business. You can travel the country eating at each of these franchised locations. You can call up the owners of the franchised stores and talk with them about the business. You can read 10-Ks on this company going back a couple decades. The company is an “over-the-counter” stock. But, it isn’t dark. It files with the SEC. That’s very unusual for a company with a market cap of less than $5 million. Public company costs are significant. This company would be making more money if it was private. Management costs are also significant here too. The CEO, general counsel, and CFO were paid: $250,000, $175,000, and $120,000 (respectively) last year. That adds up to $550,000.

They own 33% of the stock. I mention this because if we compare the value of the stock they own to the value of the salaries they draw – it’s true …

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Geoff Gannon June 8, 2020

Dover Motorsports (DVD): Two Racetracks on 1,770 Acres and 65% of the TV Rights to 2 NASCAR Cup Series Races a Year for Just $60 million

I mentioned this stock on a recent podcast. This is more of an initial interest post than usual. It’s likely I’ll follow this post up with one that goes into more detail. Two things I don’t analyze in this write-up are: 1) What this company will look like now that it is once again hosting races at Nashville (in 2021) and cutting back races at Dover. 2) What the normal level of free cash flow is here. I discuss EBITDA. But, I think normalized free cash flow is the far better measure. And I don’t discuss that at all here. Finally, I haven’t dug deeply into NASCAR as a sport to get enough of a feel for whether it is durable and likely to increase or decrease in popularity in the years ahead. This is critical to analyzing the investment. And it’s the next logical step. But, this write-up was already getting long. So, better to do a deeper follow-up later and stay at the more superficial level for this first analysis.

Dover Motorsports is a $60 million market cap New York Stock Exchange listed company. It has two classes of stock. The super voting shares are owned by Henry B. Tippie (the now over 90-year old chairman). That leaves about $30 million worth of float in the common stock. Enterprise value is similar to – maybe a bit lower than – the $60 million market cap. As of March 31st, 2020 – the company had $5 million in cash on hand. Liabilities are generally stuff like deferred revenue (cash received that’ll be earned when a race is hosted later this year). The one exception is a bond issue I’ll discuss in a minute. The balance sheet shows about $4 million in liability related to that bond issue. The reality is that there could be another $10 million owed on those bonds. Or – as seems more likely now – the company could invest in some cap-ex instead and even that $4 million liability might go away. Why is that?

The liability is tied to bonds issued by the Sports Authority of Wilson County, TN. These bonds were issued as part of the funding of the Nashville Superspeedway. It’s a racetrack about a 40-minute drive from Nashville that was built by Dover Motorsports 20 years ago. The racetrack is big. It was originally on 1,400 acres of owned land, now down to 1,000 acres of land that hasn’t been sold off. It’s also – if you look at a list of where NASCAR and non-NASCAR races are held – much more in line with NASCAR type tracks in terms of the construction of the track (concrete), its length (1.33 miles), and the amount of seating. However, the track had never held a NASCAR Cup Series (think of this as the “major leagues” of U.S. auto racing) race. Without hosting such a race, it never made money. And, in fact, it hasn’t been operated in any way for close …

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