Best Of The Best - A High Quality Growth Stock For Troubled Times?

12th Mar '20 by Jack Brumby

12 comments 4750 reads

No doubt most investors are feeling bruised as a result of what is proving to be a pretty ferocious stock market drawdown. Even good companies are getting hammered.

Such conditions do provide long term opportunities, though, as Mr. Market presents us with new prices every day. Those good companies are just as high quality as they have ever been, it’s just now they are cheaper than they were a couple of months ago. Now more than ever it’s important to identify the best stocks to invest in because the odds are we will get chances to buy at good prices.

On first glance, Best Of The Best (LON:BOTB) shows some signs of having what it takes to be a long term winner. It has a clean balance sheet. Its revenue and profits have been growing consistently for years. It has a QM Rank of 98. It generates consistently strong returns on capital and chucks off cash, which is reinvested in growth opportunities or returned to shareholders. The founder still runs the company and owns nearly 50%.

These are promising early signs.

It looks like there will be significant disruption to certain parts of the economy as a result of measures to prevent the spread of Coronavirus. I imagine a lot of Leisure & Travel companies are registering some pretty steep like-for-like revenue drops right now, for example. Other companies will be less affected by these measures, and this is where there might be some opportunities.

The key driver of growth for BOTB is its evolution into a purely online host of weekly skill-based competitions. I think this could make it reasonably well insulated from the challenges other parts of the market are facing.

The story so far

Ever since 1999, car enthusiast and BOTB CEO and founder William Hindmarch has been busy building a cash generating machine - and, with a market cap of just £37m, I reckon there is still plenty for BOTB to aim for.

The group’s core business is in running car competitions. Once upon a time you would find them in airport terminals and shopping centers but the world has changed and now these competitions are online.

There is a lot to like about this company from a financial and shareholder perspective. A well run operation is one thing though. What makes BOTB interesting now is that it has a big…

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Anthony Beater

12th Mar '20

A very sensible analysis of an unusual, small company. I note the possible difficulty that could arise when needing to sell when the Market is volatile. Now is the time to watch and wait.

Toppy007

Less footfall through airports as a result of the virus.

realbernie

Revenue is almost 100% online now

john652

Hello Jack, nice piece as always & coincidentally i put in a resting order @ 320 today. The price ran away a little while ago, but 320, who knows with this market.

abtan

Hi Jack,

Best Of The Best (LON:BOTB) is one of the few shares that I have held through the recent events, as I think it should be fairly insulated and, if anything, receive a small boost from people staying at home and happy to spend a few £s/EURs/etc....

However, one thing that concerned me from the last results was that online growth of 30% from the previous 2 years actually slowed to 13% in H1 FY20 (and that follows a sequence of several periods of downward growth starting from 2017-18 H2: 53%, 49%, 19%, 13%).

That's quite a drop.

For what it's worth, I still think the company is undervalued, even with such low growth rates.

Cheers

Jack Brumby

13th Mar '20

Cheers Anthony, I agree that the lack of liquidity could be the big drawback for a lot of investors. I'm personally looking for "buy and hold" type investments where getting in and out is less of a concern. In that regard, I think there are some promising signs from £BOTB.

I'd like to get a better picture of the size of the competition market that BOTB can grow into, and how good its competitors are. A key part of the company's attractiveness, for me, will be the scale of its growth prospects, which I would like to do a bit more work on...

Thanks abtan, much appreciated. I saw the slower HY20 top line growth but, given the double digit profit growth and management's track record, I provisionally gave it the benefit of the doubt.

I did not see that it was following on from lower H219 revenue growth... Certainly something to monitor and be aware of.

Is this a temporary dip, or is this Best Of The Best (LON:BOTB) reaching a ceiling? I'm minded to think the former, for now. Management says that it is growing into a much larger addressable market, although I haven't seen any solid market data and want to scope this out a bit more.

bryans1311

I shared my current watchlist with a friend who fairly recently became interested in the markets following the launch of new trading apps like Trading212 and Freetrade. (Yes, I know I should’ve taken that as signs of a frothy market!).

Below is his reply to me. Apologies for the lack of eloquence, I wanted to leave it unedited... But I do think it is a fair piece of scuttlebutt that has put me off for now.

“I wouldn’t buy BOTB.
I used to play that shit when they were the only ones doing it. People got pissed off as it’s basically spot the ball. But it’s not a true win.
You pick a dot where you think the ball is and they have a panel of celebs or football experts who decide between the three of them where they think it is. The closest to their dot wins. Not the closest to where the actual ball is.
It’s a shit system and people have sussed it out. But more importantly the market is flooded now with more companies doing the same thing but with a raffle ticketed system so everyone actually has a fair chance of winning. Tickets on the other sites are limited to so many per person. 7 Days Performance is the one I use now. But there are many others with Celebs off Love island and Towie etc promoting them now.
Just my opinion.”

Hi Bryans,

Thats very interesting, and quite blunt, what I dont like abut BOTB is that they might sell 100 tickets or 1000, and you never know if the prize is proportional to the revenue & therefore the casino's 'take'. So quite easy to feel the odds are against you, 7 day performance limit the tickets and show you how many sold, so you can work out their take & rough profit and. decide if thats 'fair enough'. I have a lowboy order in, but I dont like the business model enough to make it a long term hold.

AnonymousUser542644

I'd just flag, that the online growth comps were very tough over the last 2 halves, and now start to ease. And the numbers are not truly like-for-like above as have the regulatory regime change part way through.

What's interesting in my eyes is that the market can now look to see growth re-accelerate again at the top line given airport revenue is now basically gone. So it's pure online and the growth should significantly accelerate from the around 6% group growth in the first half of the year.

If this company can sustain, let's say 8-9% organic growth for 5 years (in reality think they can do 10-15% - the market is significant and they have clearly the best position product-wise and financially), then a 15x multiple is really not expensive at all, so totally agree with you Jack. The financial quality metrics are very strong and should really justify a strong premium multiple (20+).

In terms of competition, there are definitely competitors but they're very small. Don't think a comparison between Rightmove and On the Market would be an unfair analogy (not saying this is as high quality as RMV!). Can tell very simply from the arrange of products you can enter into. That moat is valuable IMO and having the bigger marketing spend helps you build out that moat greater over time.

It's pretty much now just a case of them chucking marketing spend into the funnel to maintain strong growth. The number of users they must have is likely a tiny fraction of their total potential user market and easy wins to go after in terms of mobile conversion rates etc. And we know the company is in good shape at the moment with building momentum. I can't see any coronavirus impact here either.

Simple question for me; Revenues here were around £15m last year. Can this grow to £30m? I don't see what the constraint on that would be. And with operational gearing and multiple expansion, that would be pretty clear upside. End game I imagine is that they sell the company and the raft of customer details to a larger player, however far in the future that will be. Forecasts out there by Finncap look conservative (as they have proven to be historically)

Tortoise investor

21st Mar '20

7 Days Performance looks rubbish - it is more expensive and a tiny number of options. Are there any serious competitors to Best Of The Best (LON:BOTB)? That's an important Q

Johnsy

4th Jul '21

The price now has halved to 1620p. A bargain, or might it be another Patisserie Holdings, as earnings manipulation risk is rated as high.

Best Of The Best - a high quality growth stock for troubled times?

The story so far

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Jack Brumby

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