BAB, INC. (BABB) stock intrinsic value fair value estimate & owner earnings analysis

BAB, Inc. franchises Big Apple Bagels and My Favorite Muffin bakery-cafes, and sells Brewster's coffee and SweetDuet frozen yogurt as add-ons inside those stores. It owns no stores. It earns a 5% royalty on franchisee sales (about $2.0 million a year), plus vendor rebates, licensing fees and gift-card income (about $0.3 million). It also runs a marketing fund for franchisees that passes straight through and makes no profit. At May 31, 2026 there were 60 franchised and 3 licensed units in 18 states, mostly in the Midwest, with 5 more under development. The company has no debt and about $2.2 million of unrestricted cash. The central fact about this business is a long, slow shrinkage of the store count offset by rising sales per store. Franchised units fell from 85 at the end of 2016 to 60 at the end of 2025. Over the same years system-wide sales rose from $35.5 million to $41.1 million, as weaker stores closed and the survivors raised prices and added online ordering and delivery. Royalties rose from $1.73 million in 2017 to $1.98 million in 2025. Management also cut head-office costs (excluding the pass-through marketing fund) from $1.76 million in 2017 to $1.58 million in 2025. Operating profit rose from about $460,000 to $722,000. Earnings. We measure the cash the business generates for owners after all running costs, including rent on its Deerfield, Illinois office (the lease runs to March 2030) and full income taxes. On that basis the business earned about $0.065 to $0.074 per share in each of fiscal 2023 to 2025. We exclude interest earned on the cash pile from earnings and count the surplus cash separately, so it is not counted twice. We anchor on about $0.073 per share, the middle of those three years. They are the first years in which the company paid full cash income taxes; earlier years were sheltered by old tax losses and so overstate what the business earns today. The 2020 pandemic year, when system sales fell 14% and profit roughly halved, is left out of the level and used instead to shape the cautious case. What changed. Our previous estimate did not deduct the headquarters rent and included interest on cash in earnings, so its figures are not comparable to these. In the business itself, the company's general counsel, a senior executive costing about $190,000 a year, retired on November 26, 2025. Payroll fell $50,000 in the first quarter of fiscal 2026 and $28,000 in the second, partly offset by higher outside legal fees and the hiring of Brian Evans as chief operating officer in December 2025. First-half 2026 operating profit rose to $400,000 from $348,000, and royalties grew 1.8%. We therefore start the coming year at about $0.078 per share, up from 2025, because of this dated cost saving, not because we expect the system to grow. Base case, $1.20 per share. About $0.99 of this is the business and $0.21 is surplus cash; there is no debt. The store count keeps shrinking about 2.5% a year, between the faster pace of 2016 to 2021 and the slower pace of the last two years. Sales per store grow about 3% a year, in line with the recent record. Head-office costs rise about 1.5% a year but continue to flex partly with the size of the system, as they have. That keeps profit roughly flat for ten years at about $0.077 to $0.078 per share. After that the system keeps slowly shrinking and profit fades over the following decades; we assume no new brands, acquisitions or franchise growth, because nothing in the filings points to any. Bear case, $0.54 per share. About $0.33 is the business and $0.21 is surplus cash. A recession of the 2020 kind cuts royalties 14% in one year and 7% the next, and pushes three extra weaker stores to close. After that, stores close about 4.5% a year, faster than in any period on record, and sales per store grow only 1.5% a year. Profit drops to roughly $0.044 per share and keeps eroding, and the business stops earning anything for owners after about 14 years. With no debt and a large cash balance, the company would not fail; owners would be left mainly with the cash and a few years of shrinking dividends. Bull case, $2.01 per share. The five units under development and steady openings bring net closures down to about 1% a year. Sales per store keep growing about 3.5% a year, close to the 2023 to 2025 pace. Head-office costs stay as tightly controlled as they have been. Profit climbs to about $0.12 per share by year ten, then grows slowly as the larger, healthier system persists. What could make us wrong. The two biggest uncertainties are how fast stores close and how fast sales per store grow. If stores close at the long-run 3.6% a year instead of 2.5%, the base case falls to about $0.93. If sales per store grow only 1.5% a year, it falls to about $0.83. If both happen, it falls to about $0.70. Leadership is a real risk. The chief executive, Michael Evans, is 69 and has run the company since its founding; the chief financial officer is 74; and an independent director is 78. Bringing in outside replacements at market pay could lift costs: if head-office costs grew 2.5% a year instead of 1.5%, the base case would be about $1.03. Mr. Evans owns about 20% and the retired general counsel about 13%. A shareholder rights plan that discourages anyone from acquiring more than 15% without board approval was extended again in November 2025, so a sale of the company cannot be counted on. The company has not repurchased shares, and its cash has grown from $0.7 million in 2014 to $2.2 million. Margin-of-safety price, $0.55. We are confident in the earnings level: three consecutive full-tax years land within a narrow band, the accounts are simple and audited, and there is no debt. The plausible worst case is a recession on top of faster closures and a difficult leadership handover; the business would survive it, because it owes nothing and holds cash worth about $0.21 a share. The realistic downside is a slow wind-down in which owners collect cash plus a declining dividend. We are least sure about the pace of closures, growth in sales per store, and succession costs; even if both of the first two prove wrong, the shares look worth about $0.70. The shares trade thinly, so recognition of value could take many years. In the meantime, the business generates about $0.075 a share in cash each year and has paid most of it out, recently $0.04 to $0.06 a year. At $0.55, cash earnings run about 14% a year relative to that price, with dividends of about 8% to 10% of it. From $0.55, the base case implies well over a 20% annual return within five to six years. In the cautious case, the cash on hand plus a few years of dividends account for most of that price. Above that level, the cautious case would leave a clear chance of falling well short of a 20% return.