Cake Box look tasty with prices at long-term lows

I love a quality stock as much as I love a good cake pun!

Cake Box (CBOX) may not be an obvious example of a quality stock given its tumultuous year which has seen the shares tumble to long-term lows.

But with the dust starting to settle, Cake Box’s asset-light franchise model is starting to look attractive.

The egg-free cake company has a network of around 185 standalone shops and 35 supermarket and shopping mall kiosks – generating plenty of cash and robust levels of growth.

We believe Cake Box has a sufficient sustainable competitive advantage and a long enough runway to generate very high long-term returns.

Annus horribilis

For Cake Box, 2022 has been an absolute stinker…

The identification of “an erroneous £2m entry within the cash flow statement” by a finance blogger in mid-January, alongside historic errors in stock control caused the shares to plummet 62% in less than two months.

This shambolic reporting led to a boardroom shakeup which saw Cake Box co-founder and CFO Pardip Dass step aside in March after 10 years at the company.

Cake Box then moved to appoint David Forth as interim CFO and the highly experienced Michael Botha of the Domino’s Pizza franchise as permanent CFO from April 2023.

Cake Box said it expected full-year profits to be “significantly below current market forecasts” due to rising cost pressures across the group.

The reporting scandal and profit warning has left Cake Box’s share price some 67% lower year-to-date.

And whilst catching falling knifes in never something we advocate at AIM Investor, we are starting to see some green shoots of recovery.

Interim results indicate bad news is baked in

Last week, Cake Box released a surprisingly upbeat set of interim results in which it said it had begun to see a recovery in sales numbers.

“Whilst the Board remains cautious in light of the uncertain economic climate and the unpredictability in consumer spending, the Group’s current trading is on track to achieve full year market expectations” he added.

The market responded in bullish fashion with the shares posting their biggest intra-day gain in over two months, indicating that the bad news may now finally be baked into Cake Box’s share price.

Competitive advantage and cashflow make Cake Box a buy

If we start to assume that the dust has settled and Cake Box can move on from the horrors of 2022, what’s left is a high-quality stock that’s trading on at an eye-catching valuation.

Cake Box have a five-year average Return on Equity (ROE) north of 20% and a 5-year average gross profit margin greater than 30%.

This indicates that Cake Box has a sustained competitive advantage and that it can effectively deploy shareholder capital to generate growth at attractive rates.

Cake Box also offer an attractive dividend, which is well covered by future earnings. A forward dividend yield of 5.99% and dividend cover of 1.58 (FY23) make Cake Box one of the standout income plays on AIM.

And with the shares bouncing from an area of long-term support created by the IPO and 2020 lows, we believe the time is right to buy a slice of Cake Box.