Four Corners, Inc. (FCNE): Tremendous Value!

Four Corners, Inc. (FCNE) sells supplies for the charity bingo market in Texas. FCNE is a small company with a market cap of just over $20m. Bingo is not a particularly exciting industry, but it’s also not volatile or overly competitive. Proof of these facts can be found at the top of FCNE’s income statements. In the last five years, revenues have only grown at a compounded rate of 5%. However, management has done a superb job of reducing costs and managing cash flows. Over the same 5 year period earnings and free cash flow have grown at annualized rates of 28% & 14% respectively. As one can imagine, Charity Bingo is a low capital intensity industry. As a result, FCNE generates copious amounts of free cash flow year after year. Given the nature of the industry, FCNE is a very high-margin business. Gross margins are consistently above 45%, and operating margins have stayed above 40%. 

Here’s a quick visual view of FCNE's low CAPEX needs, as well as their operating cash flows. It’s fascinating that CAPEX continues to decrease. Certainly, such a trend in CAPEX has proven beneficial to free cash flow as operating cash flows have been fairly stagnant.

Many corporations of FCNE’s size & cash flow profile, have a bad reputation for hoarding cash, allowing it to build on the balance sheet, where it wastefully accumulates for years. Fortunately, FCNE is not such a company, in fact, they are the polar opposite. Management has liberally returned cash flow to shareholders through dividends throughout the years. In 2021, FCNE paid out $2.5m in dividends, up from $1.7m the prior year. That is $0.20/share of annual dividends. Based on FCNE’s closing price today of $2.05/share that is good for a gargantuan dividend yield of 9.76%. For such a fantastic management team, they don’t communicate much with shareholders. As such, no dividend policy has been explicitly stated, leaving the future rates of payments a mystery. But as the old adage goes “actions speak louder than words”. And management’s are deafening.

In addition to the massive dividend yield, the stock sells at 8x earnings and 4.7x earnings net of cash. Such multiples leave the question of future growth largely immaterial. As long as revenues & earnings don’t fall off a cliff, the investment risks are low. I believe the likelihood of profits deteriorating to be incredibly low - FCNE wasn’t even operating at full potential in 2021 as they were hurt by bingo hall shutdowns due to COVID-19. But the biggest piece of evidence pointing towards more growth is the killer results FCNE reported for the 1st quarter of this year. Revenues and Pre-Tax earnings grew 20% & 32% respectively y/y. Of course, it would be unwise to expect a similar rate of growth for the rest of the year. But the successful results in the 1st quarter give me confidence that 2022 will be another year of growth. Evidently, the market is on a completely different page than I am given its valuation. The doubt the market has about FCNE’s growth prospects is also ignorant of the exceptional returns on equity that FCNE has historically generated. Over the last 5 years, FCNE never had an ROE lower than 15%. On average ROE has been an exceptional 37%. The fact that FCNE employs essentially no debt, makes this feat all the more impressive. 

In the long term, the biggest risk to FCNE’s earnings power is the possibility that Texas legalizes gambling. Presumably, this would divert a fair amount of people away from bingo. But it's important to keep in mind that there have been recent attempts at pushing this legislation through, and so far to no success. I have no idea what the odds are of such legislation passing and when. But I believe there is a substantial margin of safety built-in at present prices. For $2.05 per share, you are getting a free cash flow yield of 11%, and a fat dividend yield of almost 10%, all for only ~5-7x likely 2022 earnings. On top of that, you get ownership in a high-margin business that earns incredibly high returns on equity without any significant leverage. I believe the fair value for this business is at least $3.75 per share, but more in the realm of $4.

As always this is not investment advice. do your own DD before investing in any security and understand the extra risks inherent in investing in microcaps. Disclosure: I own shares of FCNE.

Thanks for reading! Let me know what you think!