Today I’m headed down under to the land of the koala bear, Billabong, and Crocodile Dundee. Our pick is a growing baked goods franchise that went public last June at a buck a share. Now trading around $1.50 a share, Retail Food Group (RFG) is making things happen in the world of donuts, pastries, gourmet breads and specialty coffee. At present, the company offers two franchise opportunities to would be entrepreneurs – Donut King and bb’s Café – with most of the growth coming from the donut chain.

Franchising can be very lucrative if done well and requires significantly less capital expenditures than owning the stores corporately. The downside to such an arrangement is you must have excellent quality control in the field to ensure franchisees are meeting company standards. That’s easier said than done. Many a franchisor has failed miserably at this task. In fact, this lack of control led Starbucks (SBUX) to own a majority of its outlets despite the added financial burden. Both formats can be successful but like any business, the devil is in the details.

In December, the company made a play for Brumby’s Bakeries, a 300-store bread retailer in Australia and New Zealand. Brumby management originally rejected Retail Food Group’s offer but on Monday they accepted the latest bid of $3.40 a share. The acquisition doubles the number of franchised outlets the company oversees in Australia and New Zealand, provides a third brand offering for potential franchisees, and allows the company to control its costs more effectively while increasing the number of managers in the field. The end-result is a food service powerhouse, and a profitable one at that.

Here are the Top 5 reasons to like the stock:

1. Coffee and Donuts – a great cash flow business that never will go out of style despite what the health freaks say.
2. When you add in the Brumbies acquisition, fiscal 2007 net revenues should be approximately $40 million with $11.8 in earnings. That translates to $0.16 per share. At its current price of $1.50, you have a p/e of 9.4 and a price to sales of 2.7. These are both excellent.
3. The average transaction increased 5.1 percent at Donut King and 5.7 percent at bb’s Café in 2006.
   
4. The company is opening 25 outlets per year without the Brumbies acquisition. In addition,management is focusing on multi-unit ownership, building stronger better financed franchisees.
5. The company’s stock pays a $0.0625 dividend, currently yielding 4.2 percent.

For all you Panera Bread (PNRA) and Tim Horton’s (THI) believers out there, open your eyes to the opportunities that exist beyond our borders. Retail Food Group is building a beautiful business down under and there’s money to be made in them their hills.

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