Programming note: we’re doing something a little different this week with a deep dive on Yelp. If you like this type of content, let us know in the comments.

Introduction

Yelp is one of the least covered mid-cap companies, and the reason is simple: It’s perceived as a boring company. Although that statement isn’t far from the truth, there’s also a lot to learn from it.

Yelp was founded 2 decades ago (in 2004), by Russel Simmons and Jeremy Stoppelman, two former PayPal employees and today it’s one of the leading sources of user-generated reviews and ratings for businesses.

How it started is definitely a unique story. Stoppelman caught the flu and struggled to find online recommendations for a local doctor. So, it started as an email-based referral network. Users would e-mail requests for business recommendations to friends, who could reply with their suggestions. The responses would be collected and organized to create a user-generated database of users.

The name “Yelp” was chosen as a combination of “yellow pages” and “help”, and it is a great choice, given it is short, memorable, easy to spell and many were already familiar with yellow pages. However, having a good name wasn’t enough, and the company struggled to scale beyond close family members. The reason was simple – Not many were enthusiastic about answering e-mail referral requests.

However, the founders noticed that the “Real Reviews” feature, which allowed users to write reviews anytime they wanted, without anyone requesting them, was used often. So, in 2005, they rebranded, raised $5m in funding, and the beginning of the growth started. Only 4 years later, in 2009, Google offered to acquire Yelp, but the two parties didn’t reach an agreement. The rumours are that Google offered $500m, while Yahoo offered $1 billion, which Google refused to match.

The company continued its expansion outside of the US and became a public company in 2012. Today, its market cap is ~$2.5 billion and it’s one of the largest crowd-sourced local business review sites. With $262 million of TTM free cash flow the stock is valued at around 10x FCF.

How Yelp Makes Money

As customers share their experiences through reviews, Yelp becomes a gold mine (if data is considered to be gold). This has allowed the company to develop a few different revenue streams over time:

1. Advertising (~95% of all revenue)

2. Transaction-based (~1% of all revenue)

3. Other (~4% of all revenue)

1. Advertising & Business-page products

With all the traffic to their website, Yelp has a range of advertising products, that provide the ability to deliver targeted advertising to large and high-intent audiences. High-intent is the key characteristic. There are two key advertising products:

• CPC Advertising (“Yelp Ads”) – Performance-based ads

• Multi-location Ad products – A range of ad products, designed for multi-location advertisers, including: Showcase Ads, Spotlight Ads and Yelp Audiences. The company also provides a first-party attribution solution (“Yelp Store”) which provides insights into how Yelp Ads drive physical store foot traffic.

In addition, Yelp offers business-related products:

Any business has the ability to create a free account and claim a Yelp page for each of their business locations. Once claimed, it can update its listing information and has the option to purchase certain packages that offer features, such as:

• Removing competitor ads from the business’s page

• Update listing information and select photos to highlight on the page through a slideshow feature

• Verified license indicating that Yelp has verified the business’s trade license and confirmed it as in good standing as of a certain date

• A portfolio that showcases the work or services offered

• Yelp Connect, offering a channel to market new offerings, or communicate business updates to their customers.

• Nearby jobs – providing businesses with the ability to see a dynamic feed of job quote requests in their area of business.

2. Transactions

Yelp facilitates transactions between consumers and businesses, primarily through partner integrations. The largest partner is Grubhub, which allows consumers to place food orders for pickup and delivery through Yelp.

3. Other Revenue

In addition, Yelp is able to monetize via the following products:

Yelp guest manager – A subscription-based suite of front-of-house management tools for restaurants, nightlife and certain other venues. The tools provided include online reservation, a waitlist management solution, as well as seating and server rotation management tools.

Yelp Knowledge – Offering local analytics and insights, through partnerships with companies such as Sprinklr and Chatmeter.

Yelp Fusion – Enables developers to build products that include Yelp’s high-quality content and data. Partners include Apple, which makes the content available through Apple Maps (and Siri), as well as auto manufacturers like Audi AG and BMW. The typical license agreement is multi-year, with rates determined based on type and volume of usage.

Other partnerships such as content licensing and allowing 3^rd party data providers to update and manage business listing information on behalf of businesses.

Key Metrics

There are many metrics that the company discloses. Let’s have a look at them one by one.

Cumulative reviews (in millions)

The growth in reviews is definitely impressive and one of the reasons why individuals go to Yelp. However, I’ll argue that the cumulative reviews isn’t the metric to follow.

There’s a threshold above which, an additional review doesn’t add additional value. One doesn’t feel more comfortable buying a product with 3,500 reviews than buying a product with 3,000 reviews. In addition, having a cumulative metric will always seem impressive, as the number will always go up.

Instead, a better metric would be # of reviews per year. This chart paints a different picture:

Although this could seem worrying, a case can be made that this metric also doesn’t add much value. As humans, a lot of our experiences are repetitive. If you go to a restaurant, and you really like the food, you might give a good review and visit it again. However, when you visit it again, there’s no point in sharing the same review again, unless, of course, your experience was significantly different. Having repetitive experiences would lead to fewer reviews, assuming the # of users is stable.

Active claimed business locations (in millions)

The # of active claimed business locations continues to go up, which is great. Yelp is the place to be for anyone starting a business.

Paying advertising locations (in millions)

However, the number of paying advertising locations hasn’t been growing over the last 4 years.

So, although there are more businesses on the platform, there aren’t more businesses that are paying to advertise. The company benefited a lot from the pandemic and is now experiencing somewhat of a normalization.

Ad clicks & CPC (Cost per click)

Yelp doesn’t report the ad clicks or CPC, but the company does report the change YoY. If 2017 = 100, here’s how both of these metrics have changed over the last 4 years:

Over this time period, the Ad clicks is up 3.7% per year (25% in total), while the CPC is up 5.6% per year (38% in total). However, as of 2019, the number of Ad clicks has been going down, which could indicate that future growth can only be expected by an increase in cost per click. Therefore, the average annual growth would be below 6%, assuming the CPC can grow at the same pace. So, it’s important to note that the advertising revenue isn’t the safest. In difficult times, especially when there’s a recession, companies reduce their marketing spend, as consumers are spending less.

Historical Financial Performance

The company’s revenue has been growing and its gross margin is above 90%, as its direct costs are limited to:

• Website infrastructure (hosting and employee costs for the infrastructure teams)

• 3^rd party advertising fulfillment costs and;

• Credit card processing fees.

It’s operating margin has been growing over time, and now stands at 9%. Part of this is due to economies of scale, and part of it is due to the company’s commitment to be fully remote, as of 2022. That allowed a reduction of office footprint and lower workplace operating costs.

Although the margin has been increasing recently, there’s still a lot of room for improvement and the journey to profitability is on its way.

This is a great example of a company that can utilize economies of scale. The number of employees has been growing at a lower rate than its revenue, leading to higher revenue per employee.

Competition

A crucial part of valuing Yelp is considering its competitive environment. One can argue that it competes with Google Reviews, TripAdvisor, Craigslist, Airbnb, OpenTable, Angi, Resy, and even TikTok and Instagram.

These are not new competitors, so Yelp’s performance is based on the current competitive environment. The question is – Can there be such a change, that would significantly impact Yelp’s business model? Currently, the only risk I see is CPC pressure.

Acquisitions

The company occasionally engaged in acquiring smaller companies with the average purchase price being $50 million. Since becoming public, they’ve used less than $500 million on acquisitions, one of which (Eat24), was sold to Grubhub.

Stock Repurchase Program

As of September 30^th, 2024, the company’s board of directors had authorized the company to repurchase up to $1.95 billion of its common stock. Out of that, $393 million remained available. Given the company’s market cap of $2.5 billion, one might expect that this led to a significant reduction of shares outstanding. Since 2017, the number of shares outstanding is down by only 17%, and the main reason for that is share-based compensation.

One interesting observation is that the company repurchased the least amount of shares during 2020, when the share price was the lowest.

Additional Information

In addition to what has been discussed so far, there are some other factors worth consideration…

Astroturfing

As yelp has been growing, fake reviews, known as “astroturfing” became more frequent. A study from Boston University came to the conclusion that the percentage of fake reviews rose from 6% in 2006, to 20% in 2014. To combat this, Yelp has its own proprietary algorithm, that the New York Attorney General Eric T. Schneiderman said was the most aggressive out of the crowd-sourced websites he looked into. Yelp has been criticized for not disclosing how the filter works although, if revealed, it could contain hints on how to defeat it.

Alleged unfair business practices

There have been allegations that Yelp has manipulated reviews based on participation in its advertising programs. Many business owners have said that Yelp salespeople have offered to remove or suppress negative reviews if they purchase advertising.

Several lawsuits have been filed against Yelp, and each one has been dismissed by a judge before reaching trial.

Business Insider investigation

In November 2020, Business Insider shared a report, that highlighted allegations of a high-pressure sales environment, with claims that sales representatives employed aggressive and sometimes misleading strategies to meet targets. These practices reportedly included pressuring businesses to purchase advertising to mitigate the impact of negative reviews. Additionally, the investigation shed light on ethical concerns within the company, such as heavy drinking and inappropriate behavior among staff. These revelations raised questions about the company's internal ethics and the pressures faced by its employees.

Jeremy Stoppelman’s Reddit AMA

Back in November, 2013, Jeremy Stoppelman decided to do an AMA on Reddit.

Almost all of the questions were negative, such as the following one:

A significant portion of his responses were downvoted, and some of them by a big margin, such as this one:

The following comment was one of the most up-voted:

Of course, this AMA was quite a long time ago, but it’s worth mentioning.

Valuation

Here’s what a bull-case looks like:

Read more

• A growing silicon carbide (SiC) business led AEHR to be treated as a pure play on electric vehicle adoption — which has put the stock on a roller-coaster ride over the past four years.

• Despite a rising stock price, Q4 earnings don’t look impressive. But commentary from Aehr (and around the industry) suggests SiC applications can extend far beyond EVs.

• There is a key question here: where are the customers?

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Aehr Test Systems Pops After Earnings

Aehr Test Systems , a manufacturer of test and ‘burn-in’ systems for chipmakers, has substantial exposure to the development of silicon carbide (SiC) chips used in electric vehicles. It’s been SiC that has driven recent growth and future optimism over the past few years, making Aehr more of an EV pure-play than its technology might suggest. Right now, AEHR seems the epitome of the broader trend in the space.

AEHR has now doubled in just three weeks. That includes a 22% gain on Wednesday, after revenue in the fourth quarter of fiscal 2024 (ending May) declined 26% year-over-year. Quite clearly, investors are either trying to skate to where the puck is going, rather than where it’s been — or traders are simply taking yet another stab at risky and volatile plays. AEHR is certainly the latter: shares are still down 22% so far this year, and off more than 50% since early October.

As with the space as a whole, there’s a way to see AEHR as both a potential short — nearly 20% of shares outstanding were sold short before the release — and a solid long. The skeptical response to earnings is that nothing here looks quite that impressive. The outlook for fiscal 2025 of “at least” $70 million in revenue did beat what appears to be a two-analyst consensus estimate of ~$68 million (per Koyfin) — but that outlook also implies just 6%-plus growth on top of a 2% increase in FY24.

In fact, on an organic basis guidance appears to forecast a decline in revenue in FY25. On Wednesday, Aehr announced an acquisition of another test and burn-in player, Incal Technology, which is having some early success in artificial intelligence. On the Q4 call, chief executive officer Gayn Erickson said Incal would contribute about $1 million per month in revenue. With the acquisition not yet closed, ~$10 million of the $70 million is coming from Incal, suggesting organic growth as weak as -10%.

All told, there are three reasons why AEHR rose 20%-plus on Wednesday, and bears would likely dismiss all three. First, the “strong” top-line guidance came from an acquisition; the organic outlook actually looks close to disastrous: at least $60 million from legacy Aehr against consensus of $68 million. (Margin guidance appears a bit soft as well.)

Second, the Incal acquisition almost by definition can’t account for a $111 million increase in Aehr’s market cap on Wednesday; Incal accepted just $21 million for the business1. Notably, that implies a price to revenue multiple under 2x; AEHR’s EV/revenue, pro forma for the deal and even assuming ~$75 million in FY25 revenue, is currently almost 8x2. It’s hard to see Incal accepting such a lowball offer if its technology is truly innovative in such a growing industry, though Aehr did say in its earnings release that the deal opens up a ~$100 million annual opportunity.

There is another piece of news that might have amplified the optimism: Aehr announced a $12.7 million order for its WaferPak™ contactors. That, too, bears would likely dismiss — and even see as further confirmation of the bear case.

The EV Bull Case For Aehr

Read more

• Generative artificial intelligence and other trends are driving up forecasts for U.S. power demand. In theory, that should be a huge positive for utilities.

• However, the market hasn’t reacted much: the major sector ETF has returned barely 11% over the past year.

• The case isn’t as simple as you might think, but there’s a path for multi-year, double-digit returns from the sector.

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Power Demand Will Rise

At the moment, it seems to be a unanimous opinion that U.S. power demand is going to rise. In an April report, Goldman Sachs forecast 2.4% annualized increases in power demand through the end of the decade, up from a 20-year rate of about 0.5%. Data centers are the largest drivers, but not the only one:

source: Goldman Sachs

Utility NextEra Energy , the owner of Florida Power & Light along with a large renewables business, isn’t quite as optimistic. But NextEra still sees 1.6% annualized growth over the next two decades, with a clear step change from recent demand levels:

source: NextEra Energy 2024 Investor Day

Consultancy GridStrategies reviewed filings with the Federal Energy Regulatory Commission (FERC) and calculated that the five-year cumulative load growth forecast across the U.S. has nearly doubled, to 4.7% from 2.6%. When the report was written in December, the firm noted that higher outlook was “likely an underestimate”, given that the more recent the update, the greater the forecasted demand.

Of course, we’ve seen the equity market price in this growth, with names like Eaton , Quanta Services , and nVent Electric soaring (to name just a few). And we’ve seen publicly traded companies — most notably the ‘hyperscalers’ like Amazon and Microsoft — plan for hundreds of billions of dollars in annual data center capex over the next decade. Given that a single data center has electricity usage approximately equal to that of 50,000 homes, that trend alone is going to be material to overall demand.

Certainly, efficiencies within the data center themselves (from liquid cooling, for example) can offset some of this growth. (As more than a few observers and industry participants have noted, AI itself can be used to lower the power requirements it requires.) But given that this isn’t just an AI story — data center growth will continue even for non-AI applications, manufacturing growth should continue to rise, EV penetration will increase, etc. etc. — it does seem like the case for a step change in power demand at this point is relatively solid.

The one caveat, of course, is a recession, which can have significant effects. In 2009, electricity demand dropped 4.2% in the U.S., the biggest fall in at least six decades.

Some Utilities Have Already Roared

That optimism, however, doesn’t seem to be priced into U.S. utility stocks. XLU has rallied sharply off October lows. But taking a longer view, that recovery is not that substantial; even on a total return basis, the ETF is below 2022 highs:

source: Koyfin

Forward earnings multiples haven’t changed materially (with one exception we’ll get to momentarily), and look relatively reasonable on an absolute basis as well:

source: Koyfin

But investors have already priced this thesis into a couple of utility plays. The third- and fourth-best stocks in the S&P 500 year-to-date, behind Nvidia and Super Micro Computer , are Vistra and Constellation Energy . Independent power producer NRG Energy is 13th.

All three are clear AI power plays. Each owns nuclear assets; each can provide the electricity — and importantly, the clean electricity — demanded by the hyperscalers as they build out their AI datacenters.

Here, the market is clearly pricing in increased demand and, likely, higher prices as well. All three stocks have more than doubled over the past year. VST in fact is the best performer in the index over that span, ahead of SMCI and NVDA.

Yet in the rest of the sector, investors seem to have mostly shrugged. The 11.5% gain in XLU over the past twelve months isn’t bad, but it’s not much better than the long-term returns (9.5% annualized for the previous 20 years). By our estimates CEG and VST alone probably account for ~five points of that gain.

How Do Regulated Utilities Benefit?

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• The sum of the parts case for DK still looks attractive even with weakness in the company’s key asset.

• External risks have been mitigated for MITK, but slowing first-half growth has sparked investor concern.

• NOMD is cheaper than it was when we recommended it last year — yet earnings are higher. At less than 10x free cash flow, the company simply needs to hit guidance to drive solid upside in the stock.

This week, we return to three ideas from 2023 that still look attractive here in 2024 — even if the characteristics of the respective bull cases have changed.

The SOTP Risk For Delek

Back in January 2023, we took a long look at the dangers of “sum of the parts” bull cases. In many cases, the discount that exists on paper continues to exist in practice1 and the perceived upside doesn’t materialize;

So when we recommended refiner Delek US Holdings in April of that year, we were careful to highlight the risks. At the time, Delek had a market cap of $1.57 billion; its stake in midstream MLP Delek Logistics was, on paper, worth $1.67 billion.

The big concern was that crack spreads would lead to sharply lower refining profits. Those spreads indeed narrowed amid post-pandemic normalization:

source: Delek 10-K, 2023

As a result, profits have been pressured. Q4 Adjusted EBITDA was down 71% year-over-year; the figure declined by nearly half in the first quarter.

The other issue is that Delek Logistics stock has faded: it’s declined 18% since we recommended Delek2. About two-thirds of the decline came in March, when the company priced a secondary offering of units well below market (and indeed modestly below Thursday’s close). That fade has cost Delek about $300 million in paper value, nearly 20% of its market cap 15 months ago.

And yet, to some degree, the performance of Delek over the past 15 months does support the original bull case. The stock still has returned nearly 10% including dividends, or about 7.8% annualized. That’s terrible in the context of the roaring S&P 500. But its not awful considering that something closer to the bear case than the bull case has played out3.

The Continuing SOTP Case For Delek

Delek’s market cap is almost exactly where it was last April, at $1.6 billion4. The value of its stake in Delek Logistics is no longer greater than its market cap, but it’s substantial: $1.37 billion at Thursday’s close.

What has changed, however, is the Delek balance sheet. At the end of 2022, net debt excluding Delek Logistics (which is consolidated into Delek’s financials) was $559 million. The figure after Q1 2024 was just $152 million.

And so the non-logistics part of Delek still seems to be valued at a ridiculously low level. Enterprise value is about $350 million (the $200 million in market cap above the value of the DKL stake, plus net debt excluding Logistics). Trailing twelve-month EBITDA is $437 million. Delek’s refining and retail business thus are trading at less than 1x EBITDA.

There’s in fact a case that the retail business, with $47 million in trailing twelve-month EBITDA, pretty much covers the $350 million EV: majors Murphy USA and Casey’s General Stores trade at about 12x, while Delek’s retail business alone is valued at 7.4x. That leaves the refining business — with $390 million in TTM Adjusted EBITDA, less corporate costs — available for free.

The Risks And The Reward

Of course, “for free” is a common part of SOTP cases. And there are some pretty clear risks here.

Among them is management. Chief executive officer Avigal Soreq took over in June 2022, and has added new executives (including the Chief Commercial Officer and Chief Technology Officer) since then. As we noted last year, Soreq and other executives promised to work on narrowing the SOTP discount; on the Q1 2023 call, the CEO told an analyst, “We have a line of sight that is going to be very accretive to both DK and DKL. And I'm sure that you're going to be very happy.”

A year-plus later, there really hasn’t been any progress. There’s been a lot of vague talk about doing something with DKL, and in fact the company highlighted the unit offering at the subsidiary as an accomplishment, despite the decline in DKL shares:

source: Delek US Holdings Q1 2024 earnings release (author highlighting)

It does seem like Delek’s mid-term plan is to find an owner for a larger part of DKL, which would allow the company to deconsolidate the subsidiary. Whether that necessarily moves the needle is unclear: it’s not that difficult to do the math above, and a brief search on X shows a number of funds making the same SOTP case.

Meanwhile, operational improvements clearly have occurred at the company’s three major refineries, but there’s also been a number of hiccups that have kept the company from hitting a mid-$5 per barrel cost target, planned now for the end of the year. There’s definitely a sense that, overall, Delek isn’t moving fast enough or efficiently enough to capture the paper value of the various businesses, or to drive cost improvements at the refinery level5.

But there are signs of progress. After Q1, Delek floated the idea of selling the retail business; the company has engaged an investment business to evaluate alternatives there. Meanwhile, the marketing business posted an awful first quarter, with a $65 million EBITDA loss. There should be room for improvement there, as management’s unofficial guidance in the past has been profits in the unit.

It’s not necessarily stunning that management isn’t moving quickly. As is often the case with SOTP valuations, there isn’t necessarily an easy path to unlocking value. Delek can’t just sell its now-72% stake in Delek Logistics for the market value and send the cash back to shareholders. Delek Logistics’ MLP status adds tax complications as well.

Overall, though, there’s enough potential reward. Refinery stocks are doing well, as the lower rate of electric vehicle adoption (and strong demand for air travel) has mitigated concerns of a peak in demand:

source: Koyfin; chart of VanEck Oil Refiners ETF

There are an absolute ton of variables here, ranging from natural gas prices (a key input cost, and thus beneficial at the moment) to spreads (normalizing) to broader oil prices.

Still, the value on paper is such that it doesn’t take that much for management to unlock it. That might be through a major move with DKL, or with retail, or simply by driving continuing free cash flow. Executive Vice President of Operations said after Q1 that he believed mid-cycle EBITDA was $750-$800 million for the entire company; including DKL and its debt, that values Delek at likely under 5x EBITDA6. Refiners are cheap on an EV/EBITDA, but midstream and retail multiples suggest that blended figure is simply too low.

Given that Delek has still provided some returns with little movement, there still seems to be a solid risk/reward here. It’s not clear exactly what management will do, or when it will move, but there clearly is something coming. It already has taken some patience, and may require some more, but we still believe DK has a catalyst on the way and, eventually, a big move up.

Mitek Systems: Risks Go Down, And Up

Mitek Systems is up 13% since our bull call in January 2023, but of late has been dead money: shares are actually down 14% over the past year. A poor response to fiscal Q1 earnings in April is the primary catalyst; Mitek again reiterated its full-year guidance after the Q2 release in May, but investors seem unconvinced.

source: Koyfin

Readers may have noticed the odd cadence of the quarterly releases, but that is a big part of the story here. Mitek spent two years dealing with delayed financials, but has finally caught up with no apparent sign of significant misstatements.

That was one of the major concerns facing MITK at the time of our call. Another was patent litigation by USAA, which had sued several financial institutions over the use of patents covering check capture technology. Mitek and USAA both claimed to have invented the technology; though the two companies settled their own litigation in 2014. One clear risk has been that USAA will turn its sights back on Mitek eventually.

There, too, there is good news. As Mitek leadership noted last year, five USAA patents already have been invalidated, which brings some of the major judgments into question. The risk of a patent war remains, but seems mitigated. Were Mitek an eventual target, one imagines the suit would have been filed by now.

The idiosyncratic risks thus seem relatively muted. What seems to be spooking the market of late is a notable slowdown in growth. Mitek’s deposits business, based on that check capture technology, had been a steady double-digit grower, but first-half fiscal 2024 revenue is down 14%. Mitek did have a one-time $7 million boost in Q1 2023, and a record Q2, so comparisons matter, but even in that context growth has clearly slowed. And so the worry is that the secular decline of the check is catching up with Mitek, which to date has offset that decline with pricing power and growing market share for mobile check capture versus physical deposit.

Meanwhile, the company’s Identity verification business, built largely through acquisitions, has also stagnated. First-half revenue is up less than 2% year-over-year, after 17% growth last year.

And so the case relative to where it was almost 18 months ago seems like a mixed bag. The worries outside the business seem less pressing; but now the concern shifts to the business itself.

The Case For MITK

All that said, at its core the bull case for MITK is not terribly different from what it was early last year. The promise still comes from a deposits business that seems undervalued, along with optionality from the efforts in ID verification.

As we noted last year, Mitek basically has a monopoly in check capture. And that leads to enormous profit margins. The company is guiding to non-GAAP operating margins of 30% to 31% this year — even with the ID verification business forecast to be unprofitable. That guidance gets adjusted EPS to about 75 cents per share, implying a P/E multiple of about 15x7. Given losses in verification, the multiple assigned to the check business is even lower; even adding back stock-based compensation (~$15 million this year, though that figure may be somewhat elevated), P/E is a little over 20x.

For a monopoly business that is still guided to drive growth (excluding last year’s one-time boost, management expects revenue to rise 12% for the full year), that multiple is too low. Meanwhile, the ID verification business, despite its stumbles, offers some interesting promise. The rise of generative artificial intelligence is making scams more common and more complex; Mitek’s biometric solutions offer a potential defense. Mitek is seeing particular interest in its Check Fraud Defender product, and growth there should offset some declines in legacy products. The move to segment profitability also augurs a step up in margins and profits in fiscal 2025.

Along with Q2 earnings, Mitek did, somewhat surprisingly, fire its CEO. The explanation from the board is that the company needed new leadership after several years of basically crisis management; it’s an explanation that seems at worst reasonable.

That CEO, Max Carnecchia, did resign from the board earlier this month despite promising to stay on through the appointment of his replacement. That might suggest some disagreements over strategy and capital allocation, particularly given that the board announced a $50 million buyback program alongside the Q2 release. That program is material in the context of a $525 million market cap, but more importantly it cements the idea that Mitek isn’t out looking for more acquisitions8.

On the whole, then, MITK looks exceptionally intriguing. There’s hope for support for the stock from the buyback, an undervalued monopoly business in deposits, and potentially secular tailwinds in ID verification if the company can improve execution there. As it was early last year, this remains a name that can easily provide triple-digit upside in a blue-sky scenario.

NOMD Looks Like An Even Better Buy

In March 2023, we called out European frozen food manufacturer Nomad Foods as a contrarian yet defensive play. To date, the call hasn’t worked; even with dividends (initiated this year), NOMD has posted total returns of -4.6%.

For the most part, the case is exactly the same. U.S. investors clearly are skeptical toward both growth and margins, and 2023 results seem to show why. Adjusted earnings per share declined 4.2% year-over-year to €1.61; perhaps most notably, volume/mix plunged 9.5%; Nomad meanwhile took a whopping 14.4% in pricing.

But that environment is normalizing. Inflation in the euro zone has come down sharply. Processed food, alcohol, and tobacco saw an incredible annualized inflation rate of 13.4% in May 2023; that figure now is under 3%. Nomad is forecasting a benefit from volume/mix in 2024, along with adjusted EPS growth of 9%-12%. There’s some benefit in there from share buybacks, but the outlook still implies modest EBITDA margin expansion as well. A solid Q1 report — NOMD rose 5% after the print — seems to support that guidance.

But with NOMD stock down since our call, the stock now looks even cheaper. At the midpoint of guidance, shares are trading at under 9x adjusted EPS and less than 10x free cash flow. That’s for a business still growing, and detailing aggressive plans to retake market share after focusing on margins during the heavily inflationary environment.

As we noted last year, this is a solid management team that’s been wise about capital allocation. After building heavily through M&A before the pandemic, it’s focused on optimizing operations during and after it. Although NOMD hasn’t been a strong stock, the results of the business have been solid:

source: Koyfin

There’s certainly the risk of another shock in Europe, and it’s possibly stocks in the region simply stay cheap. Investors spent literally decades waiting for Japanese stocks to rally after investors wrote that market off. But NOMD can be aggressive with buybacks (it bought back €7 million in shares in Q1, and we’d expect more as the year rolls on). Any growth at this valuation eventually leads to upside.

The sell-side remains optimistic, with an average price target above $24. That’s in the ballpark where we were last year — and it’s where we remain today. This is a stock that, properly valued, should have at least 20% upside: 12x $2 in 2025 adjusted EPS gets total returns near 50%. All NOMD needs to do is to keep executing, and change investor perception.

As of this writing, Vince Martin is long Delek US Holdings. He has no positions in any other securities mentioned, but may initiate a position in NOMD in the near future.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Investors appear unimpressed with the all-stock merger between Primo Water and privately-held BlueTriton: PRMW shares have dropped modestly since the announcement.

• Some caution makes sense: the tie-up looks great on paper, but there are underlying concerns and risks.

• Meanwhile, the merger between Six Flags and Cedar Fun looks attractive and set to complete.

• For that deal, concerns are more obvious. But there are echoes of our successful bull call on SIX from 2022. Buying ahead of the merger might still work out.

  ---

This week, we update a pair of companies we’ve covered in the past, both of which are executing big all-stock mergers that will make them the leaders in their respective industries.

The Case For Post-Merger PRMW On Paper

On Monday morning, water delivery company Primo Water announced it was merging with privately held BlueTriton, the owner of bottled water brands including Poland Spring, Deer Park, and Ice Mountain. PRMW initially spiked 12% on the news. It finished Tuesday modestly down from where it closed on Friday.

The market’s skepticism toward the deal comes despite what looks like an attractive case for the merger on paper. Pro forma for the tie-up, the business looks relatively cheap, at under 9x EBITDA and in the range of 13x normalized free cash flow1.

The quantitative argument for the stock rests in large part on the appropriateness of those multiples. When we recommended PRMW, we noted the challenge of finding peer comparisons, and that challenge remains — even for the expanded business.

But ~8.5x EBITDA does seem a little too low. BlueTriton was created through the acquisition of Nestle’s North American waters business, for which a pair of private equity firms (Metropoulos & Co. and One Rock Capital Partners) paid $4.3 billion. Disclosures from the merger press release cite 2021 Adjusted EBITDA of $531 million, suggesting Nestle sold for about 8.1x EBITDA. Meanwhile, at Friday’s close, PRMW traded right at 10x 2024 EBITDA guidance, with a high-teens multiple to normalized free cash flow.

Simply using a blended multiple on the Nestle deal and PRMW’s pre-merger valuation suggests the combined business should be trading at just shy of 9x2. But bulls — and executives of both companies — no doubt would argue that the Nestle exit multiple shouldn’t really apply. When Nestle sold the business, it was underperforming significantly, and the entire category was still struggling from pandemic-driven restrictions. Under new ownership, the business has grown Adjusted EBITDA at a 24% annualized rate, which suggests both a recovery in the category and a revitalization of the former Nestle brands.

Meanwhile, the history of PRMW’s own valuation suggests a double-digit multiple. The current Primo Water was created when Cott paid ~15x EBITDA for the former Primo business, which at the time was trading at ~12x. A deal last year to sell Primo’s international business went off at 11x.

Each turn in multiple expansion is worth about 18% to the current PRMW stock price, so if an investor believes the correct multiple is 9.5x or better, the stock is a relatively easy buy here. PRMW shareholders get another ~5% in returns from pre-close dividends3, juicing total expected returns easily past 20%. Coming at the stock from a P/FCF perspective gets to the same sense: if an investor simply believes the business will grow at all post-2025 (and there are some deleveraging benefits that can help), that means the multiple should get closer to the mid-teens, which too suggests mid-20s upside (even before the boost from dividends).

The Argument For The Deal

The numbers, then, suggest the investment case actually is somewhat simple. If an investor likes the deal, PRMW is a buy.

And there is a lot to like here. The tie-up creates a water giant in North America:

source: BlueTriton/Primo merger presentation

Given concerns about U.S. water infrastructure, in particular, that positioning seems wise long-term. Bottled water is already a huge category — about $25 billion in 2023, per data cited in the merger presentation — and it’s one that should post growth above that of the beverage market going forward. The combined company may well have a better go-to-market playbook given the ability to cross-sell across channels, or to use regionally strong BlueTriton brands (Zephyrhills in Florida, Poland Springs in the northeast) for Primo’s legacy home delivery business.

Primo management is staying on to run the combined company, which too seems like a positive. Following an activist effort last year, Primo’s execution under new chief executive officer Robbert Rietbroek seems to have improved notably; full-year guidance was raised after Q1, and PRMW came into last weekend at an 18-year high4. BlueTriton, meanwhile, does seem to have fixed the acquired brands to at least some degree. Chairman and interim CEO Dean Metropoulos cited investments in IT and operations, along with improved efficiency since the merger. The historical data cited in the merger press release suggests BlueTriton improved EBITDA margins by 460 basis points (13.6% to 18.2%) in just three years.

On its face, then, PRMW looks like a relatively strong buy. The valuation is low, both businesses seem to be on an upswing, the long-term outlook is solid and management (Metropoulos will stay on as non-executive chairman) has performed well. It doesn’t require heroic assumptions to project a four-year double here: $2.0 billion in 2028 Adjusted EBITDA (~8% annualized growth off the trailing twelve-month base, pro forma for cost synergies) at a 10x multiple less ~$3.5B in net debt (assuming $1 billion in paydown/share buybacks) should do the trick.

A Lot Can Go Wrong

Yet there are a few concerns in owning PRMW, all of which relate to a simple fact of the merger: PRMW shareholders are now part of the exit strategy for Metropoulos and One Rock.

In that context, the impressive multi-year growth after the Nestle sale might look a little different. Dean Metropoulos cited investments behind the business as improving recent profit margins — but that’s not usually the private equity playbook. Indeed, in Metropoulos’s famous investment, the purchase of Hostess Brands out of bankruptcy, costs and the workforce were slashed soon after the deal.

It’s certainly possible that BlueTriton’s EBITDA margins are at or near a peak. That’s particularly true because packaged foods companies, for instance, were able to use the cover of high inflation to actually improve profit margins in 2023, though that ability has faded of late. And, of course, the P-E owners were highly incentivized to make the business and its profit margins look as good as possible at about this point in the process, which would allow a few years of public market ownership (whether via a merger like this or an initial public offering) before an eventual exit.

If margins are about as good as they’re going to get, that’s an issue going forward, given that BlueTriton accounts for about two-thirds of pre-synergy EBITDA. A business like this that slows to low- to mid-single-digit EBITDA growth (if not worse) isn’t going to see that multiple expansion that underpins the fundamental case.

In the meantime, as even Metropoulos admitted on the conference call, BlueTriton’s P-E owners are probably going to be selling off shares of the combined company. He said the firms would be “careful and measured in how we phase out over the next few years”. Here, too, the Hostess playbook is of interest. Metropoulos took Hostess public via a SPAC (special purpose acquisition company) merger that closed in late 2016; his firm exited their investment just under four years later.

Beyond ownership, there are strategic questions. Creating a giant in water sounds logical on its face, but the two companies aren’t necessarily complementary. Primo’s business and investment case was based in part on taking market share from the single-use market in which BlueTriton mostly plays, with consumer preferences for both price and environmental impact5 a factor. And there’s the question of why Primo needed to dilute (no pun intended) a solid turnaround story driven in part by the efforts of an activist investor last year.

To be sure, these risks are somewhat vague, and perhaps unfair. But Hostess stock was basically dead money in the years after its merger (though it rallied sharply post-2020, and was taken out at $34.25, more than triple its merger price and more than double the level at which Metropoulos exited), and the Primo-BlueTriton tie-up looks quite similar. It wouldn’t be surprising to see history repeat, and in that context, the market’s tepid reaction makes some sense.

The Six Flags-Cedar Fair Tie-Up

Since we recommended shares of Six Flags back in August 2022, SIX stock has gained 38%. But the trade took some patience (which I personally didn’t have; I exited at a much smaller profit). More than two-thirds of the rally has come in the last nine trading sessions.

The big news for SIX, of course, is the pending close of the all-stock merger between Six Flags and fellow theme park operator Cedar Fair, L.P. . The deal will create a nationwide giant with 27 amusement parks, 15 water parks, and multiple other properties:

source: Cedar Fair/Six Flags merger presentation

But, oddly, the rally came into the announcement (which arrived on Tuesday morning), not necessarily after it. Given that the U.S. Department of Justice investigated the merger, the rally makes sense; it’s simply the timing that appears odd.

Whatever the cause, both stocks still look relatively intriguing as they merge into a new company, named Six Flags Entertainment Corporation. Combined, the companies have a market cap of about $5.5 billion; net debt post-Q1 is about $4.75 billion, putting the new Six Flags’ enterprise value at just over $10 billion. At the time of the merger, management guided for Adjusted EBITDA of ~$1.2 billion, implying an EV/EBITDA multiple in the 8.5x range. That’s relatively reasonable given where the stocks have traded of late:

source: Koyfin

And it’s actually quite a discount to where valuations sat before the pandemic:

source: Koyfin

Free cash flow numbers actually look much better. When the merger was announced, the companies cited trailing twelve-month free cash flow (including ~$200 million in synergies) of $830 million. That’s about a 7x multiple, which unsurprisingly is well below pre-pandemic levels as well. Fundamentally, the new company still looks quite cheap, even after the big rally of late.

The ‘Premiumization’ Strategy

Somewhat ironically, those multiples are quite similar to those assigned to SIX when we called it out nearly two years ago. At the time, the stock traded at about 8.5x EV/EBITDA and 11x free cash flow, though the latter multiple dropped toward the 7x range when looking at the late 2010s average. And our case for SIX rested in part on the fact that those multiples, even for a leveraged business, provided a fairly reasonable margin of safety. Meanwhile, upside seemed achievable, as CEO Selim Bassoul rolled out a “premiumization” strategy that would lower attendance and improve pricing. Our thesis was reflected in the title: “It Doesn’t Take Much For This To Get Better”.

At least on the Six Flags side of the merger, that case was vindicated. The premiumization strategy hasn’t really worked as hoped. Bassoul made brief national waves in 2022 by saying his parks had become a “cheap day care center for teenagers”, thanks to discounted season passes. The plan was to get fewer guests who would pay more for a better experience (one that presumably involved many fewer of those teenagers).

The problem is the plan hasn’t been calibrated quite correctly: Six Flags has sharply increased per-capita spend ($61.03 total in 2023 against $42.37 in 2019), but a 32% plunge in attendance has more than offset that improvement. As a result, revenue is down over the five years, and Adjusted EBITDA is off about 12%; Bassoul already has reversed his strategy somewhat.

Yet, to our original point, valuation was such that it didn’t take much to get better. Despite relatively poor execution, SIX has still modestly outperformed the S&P 500 (and crushed the Russell 2000) since our call.

The Case Sounds The Same

An investor can build a case for the ‘new’ Six Flags on similar principles. Valuation is attractive. There is some value in the real estate and the overall asset base using replacement value, which Six Flags (in 2019) estimated at $500 million-plus per park. There still isn’t any significant competition. In most places, Six Flags and Cedar Fair are far and away the only option in town. At 8.5x EBITDA and 7x free cash flow, there’s some protection here in the asset base. Even using perhaps more conservative multiples — that exclude the projection of $80 million in post-merger revenue synergies — EV/EBITDA is ~9x and P/FCF ~7.5x.

New management may help as well. Bassoul is becoming executive chairman of the new company, and I imagine SIX shareholders aren’t terribly upset by that. Shareholders, by a slim margin, voted against executive compensation for 2023. Cedar Fair CEO Richard Zimmerman will keep the same position in the new Six Flags, and recent history suggests that’s a good thing, as Cedar Fair seems to have executed better. Attendance was lower in 2023 than in 2019, by about 4%. But per-capita spend jumped 26% over the period, driving revenue up. Margins have been an issue, admittedly: 2023 Adjusted EBITDA was up less than 5% from 2019 levels.

The question — which is not dissimilar to those asked in 2022 — is precisely what’s going on in these businesses. On a combined basis, trailing twelve-month Adjusted EBITDA is lower than it was in 2019. Many observers have pointed out the weakness in regional theme parks relative to Disney , whose revenue increased 24% between fiscal 2019 (ending September) and FY23, with operating margins expanding over the period.

Is the weakness in the regionals a sign of changing consumer tastes? Is it execution? Bassoul had an excellent run at Middleby , but that was a very different business and strategy (essentially a roll-up of foodservice equipment manufacturers). Or are Cedar Fair and Six Flags, to some extent, post-pandemic losers, with travel spend still being targeted to bigger, longer-distance (Europe, Disney, etc.) trips rather than one-day runs to the nearest theme park?

To be sure, at this point there’s an awful lot of history to suggest that these businesses have some sort of structural problem:

source: Koyfin

Both stocks are well below their 2010s peak, as well as their levels at the end of 20196. Neither business has grown materially during a time when macroeconomic factors would appear favorable.

But, as was the case for SIX in 2022, it doesn’t take that much for this to get better. There are options around real estate monetization, which an activist urged Six Flags to consider last year. It’s possible regional parks benefit from a trade-down in spending away from the bigger, more expensive travel seen over the past three years. Execution no doubt can improve; management of both companies are talking up generative artificial intelligence and self-serve kiosks as a way to lower costs and boost margins. Deleveraging can lower interest expense and increase the equity slice of enterprise value, even if that EV doesn’t move all that much.

More broadly, it does seem like these should be good businesses: insulated from competition, not quite as cyclical as investors might think (in 2009, Six Flags revenue dropped 11% even as the company was going bankrupt; Cedar Fair’s revenue fell only 6%), and serving a very real market of often-enthused customers.

But as far as investors are concerned, they simply haven’t been good businesses. Ten-year total returns in FUN are 47%; in SIX, less than 4%. Many investors will see that history and presume it will continue — and they might be right. Still, this is a deal that makes sense, and if the new Six Flags can find a way to finally improve execution and deliver on its promises, this is a deal that can provide explosive upside. There is a reason why investors have bid SIX and FUN up over the past two weeks, and even after the rally there’s hope more buyers will come along.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Celsius began its journey as a public company with multiple red flags, but it has grown to be a legitimate player in the energy drink space.

• A sharp sell-off has been driven by data showing revenue deceleration for the product and the category.

• Social media posts are also to blame. Negative sentiment has soared causing some investors to panic sell.

• But it’s worth taking a step back here. With overseas growth still to come, it’s too early to write off Celsius.

Read more

Read more

• The stunning firing of Gildan’s CEO in December boomeranged quickly: a successful proxy battle led to the removal of the entire board, and the CEO’s reinstatement.

• The recent history of GIL — including ten years of relatively sharp underperformance — raises questions of why major shareholders fought the termination so aggressively.

• Yet the longer-term history, and the struggles of peers, suggest Gildan may, again, have the right man for the job.

• An aggressive plan seems likely going forward. After years of being mostly dead money, GIL is going to move. The question is whether management’s leveraged bet pays off.

Read more

• We take a look at three of the market’s best stocks; Nvidia, Eaton and Eli Lilly.

• The rally in NVDA continues to be incredible — but the performance of the business is unprecedented.

• ETN was one of the first AI plays to take off, and now looks like it might be one of the first to flatten.

• Eli Lilly shares a concerning parallel with another one-time pharma darling. But there’s an NVDA-like path for the rally to keep going.

In the second half of the 2010s, the debate over Salesforce.com stock essentially boiled down to valuation. Salesforce was the first major cloud play, a consistent 20%-plus grower, and the epitome of the argument that SaaS (software-as-a-service) revenue was “better than first-lien debt”1. Investors could disagree over the precise trend of revenue growth going forward or the ability of competitors to take share, but there was no legitimate argument over the quality of Salesforce.com as a business.

In terms of the stock price, however, there was a legitimate argument. Following the first quarter fiscal 2020 earnings release, CRM traded at 55x the high end of full-year adjusted earnings per share guidance. That multiple even understated the case: the exclusion of stock-based compensation accounted for nearly two-thirds of that adjusted EPS.

Adjusting for the impact of dilution, CRM traded at about 150x earnings. Even forecasting consistent bottom-line growth going forward, there was a valid fundamental case that Salesforce.com was an excellent business, but an unattractive stock.

To what extent that bearish argument has been vindicated in the nearly five years since depends on an investor’s perspective:

source: Koyfin; chart since 6/5/2019

CRM has been a good stock, returning over 12% on an annualized basis, but investors would have done better elsewhere in large-cap tech.

In other words, even for excellent businesses, valuation does still matter. And so at a time when a number of excellent businesses have seen soaring price tags, it’s worth checking in on their valuations.

Nvidia

We should have been more confident. Just under a year ago, we thought Nvidia shares looked attractive. Since then, shares have gained about 150%, adding ~$1.4 trillion or so in market capitalization.

What’s interesting twelve months later is that our analysis isn’t all that different. Then, as now, it’s easy to dismiss the rally as “having gone too far” or driven by an overhyped attitude toward generative AI. But then, as now, NVDA’s valuation doesn’t look all that ridiculous when investors look forward.

Coming into the Q1 release, the Street saw FY25 adjusted EPS at $25.40. That figure likely comes up a couple of percentage points: the Q1 revenue beat (and strong Q2 guidance) seems to suggest a top-line hike is needed, while other aspects of guidance around gross margin and operating expenses appear basically in line.

So NVDA is basically trading at a bit under 40x this year’s earnings. That’s roughly where the stock was a year ago after annualizing the outlook for fiscal Q2. That’s a big multiple, but not huge in the context of what the company is accomplishing:

source: X (f/k/a Twitter)

The risk remains the same: not necessarily that the equity market has overhyped AI, but that its customers have done so. Two weeks after last year’s Q1, we noted the eerie similarity between NVDA and Cisco at its March 2000 top. Cisco stock plunged from that top because demand dried up; Nvidia stock has kept gaining because its demand seems to be accelerating.

At some point, that is going to change. The question becomes how big, and how valuable, Nvidia is once that point arrives. Certainly, the same multiples now look much less attractive than they did twelve months ago. But — in a theme that will repeat among these names — this is not a case where the fundamentals are disconnected from reality (as was the case for so many stocks in 2021, for instance). The valuation does make some sense. But after this rally, an investor has to believe that Nvidia can become the world’s most valuable company and stay there. Given what has happened over the past year, that’s hardly a far-fetched scenario.

Eaton

Power equipment manufacturer Eaton plc has been a very good stock for a very long time. During the 2000s, ETN posted total returns right at 10% annualized, while the S&P 500 Total Return Index was negative 9%2. The stock outperformed the index again over the following decade.

So far in the 2020s, ETN has been a great stock again:

source: Koyfin

ETN was probably the first beneficiary of the “generative artificial intelligence is going to need a lot of data centers, and data centers are going to need a lot of power” trade. That trade has since expanded much further, and even into utilities3.

But Eaton has been probably the biggest winner. As Brooke Sutherland of Bloomberg noted earlier this month, Eaton has added $100 billion in market capitalization since the end of 2019. The company is now worth more than Boeing :

On its face, the rally looks a bit too much. Eaton did raise full-year guidance after its first quarter earnings release, but the outlook doesn’t seem that impressive. Eaton sees organic revenue growth of 7% to 9%, and adjusted earnings per share of $10.20-$10.60. The high end of the latter range suggests a 16% increase year-over-year.

Yet shares now trade at about 31x that $10.60 figure, 25x analyst estimates for Adjusted EBITDA, and almost 40x free cash flow. Those are enormous multiples for an industrial — even Eaton.

Three Concerns For ETN

One obvious problem for ETN — and perhaps a surprise given the stock is up 70% just since September — is that it’s not actually a huge AI play. Per management, about 14% of 2023 revenue came from what it calls the “data center/AI channel”. Eaton now expects that channel to grow ~25% annually in 2024 and 2025, with growth continuing beyond that point, but we’re still talking about maybe a ~400 basis point growth to top-line rates going forward. That’s material in the context of Eaton’s history but it doesn’t make the stock the most obvious or natural AI play out there.

To be sure, investor (and management) optimism isn’t just centered on generative AI:

source: Eaton Q1 earnings presentation

AI is being layered on top of a generational boom in domestic construction, thanks to government stimulus and ‘reshoring’, among other trends boosting the ~70% of revenue that comes from electrical products and services.

But these trends, of course, are cyclical. It might be both a long and huge cycle, but current tailwinds don’t necessarily represent a step-change in the company’s uber-long-term prospects (in the way that AI potentially could be). And in theory a cyclical stock should see its multiple compress as we head toward the peak.

If that peak isn’t until 2030, perhaps the stock is fine. If the peak arrives much sooner because genAI is overhyped and government priorities change, ETN likely isn’t fine. The remaining portion of the business — aerospace, legacy automotive, and eMobility (electric vehicles and charging) — isn’t large enough to move the overall needle.

Finally, there’s the margin question. Eaton’s margins have improved nicely from pre-pandemic levels:

source: Koyfin

But that pace almost certainly slows. Gross margins, though expanding, are still only about 37%. Barring a huge increase in pricing power or a shift to higher-margin products, margin expansion is going to be more difficult as time goes on.

And in that context, the fundamental math starts to weaken. ~12% bottom-line growth over a decade would get EPS to ~$33 or so; put on a low-20s multiple and ETN stock doubles. But even with a (presumably) increasing dividend, that’s annualized returns still shy of 10% in a scenario that looks solid from here (and, notably, a scenario where there’s likely minimal interruption to any of the drivers of the current optimism toward the stock).

The sell-side seems to agree: depending on the source, the average analyst price target is now modestly above or modestly below ETN’s Wednesday close of $336. The rally here isn’t illogical, but it does seem like there are more intriguing ways to play the megatrends that have driven Eaton stock so strongly over the past couple of years.

Eli Lilly: Does History Repeat?

This chart seems to have come from one of the winners of the dot-com bubble:

source: Koyfin; chart from 1/1/1995 to 12/31/2009

But in fact, it’s not a tech stock: it’s Pfizer . PFE traded like a tech stock in the second half of the 1990s, thanks to the 1998 launch of Viagra and its co-promotion of Lipitor — still the highest-selling prescription drug of all-time.4

This chart does look at least a little similar to the beginning of the previous chart, doesn’t it?

source: Koyfin

The parallels are intriguing: both Pfizer and Eli Lilly benefited from the launch of drugs that were not only blockbusters but reached into the broader culture. Both stocks rallied at a time when the market as a whole was soaring, raising questions of whether the underlying fundamentals warranted such a move, or if generalist investors were simply piling into a ‘hot’ stock.

One notable distinction has been in just how much value has been created. In the second half of the 1990s, Pfizer’s market cap rose a little over $100 billion. Over the past five years, Eli Lilly’s equity valuation has increased by more than $600 billion.

Most of that increase seems to have come from the company’s GLP-1 agonists, Mounjaro (indicated for diabetes) and recently launched Zepbound. That’s obviously not the whole portfolio, but there are some “patent cliff” concerns among the best sellers. Trulicity, Lilly’s biggest drug in 2023 ($7.1 billion, or more than 20% of the total) comes off patent in 2027, while Jardiance ($2.74 billion, ~8% of revenue) follows the next year.

At the least, Mounjaro and Zepbound, along with any successors in the group, need to generate something like $1 trillion in revenue to justify owning Eli Lilly here. That’s perhaps not quite as crazy as it sounds. The two drugs did $2.3 billion in Q1 even with intense supply shortages. Analyst estimates for peak revenue generally seem to clear $50 billion. Given a patient population that likely stands in the hundreds of millions globally, even with competition from Novo Nordisk and other major pharmas that are playing catch-up, that number (at least from an order of magnitude perspective) is probably not that far off.

What’s interesting about LLY here — and perhaps a reason for caution — is that the stock gives generalists a chance to play. It’s incredibly difficult for someone without a pharma background to find an edge in diversified large-cap names. The amount of research required on not only approved drugs, but the pipeline (along with competitors on both fronts) is daunting, and the average generalist probably should have little confidence in that analysis anyhow5.

But in the case of Lilly and Novo, the GLP-1s are simply so critical to the bull case. And the rate of adoption by consumers and, critically, the length of adoption by consumers is probably going to come down to factors that aren’t really captured by FDA trials. How severe are the side effects? How important is the lost weight from a physical standpoint? A lifestyle standpoint?

We pretty much know the drugs will work, and we can assume with some certainty that future versions will work better (and potentially with less side effects). It’s everything after that — what reimbursement looks like, how willing consumers are to try and stay on the drugs, how politicians react — that is up for debate. And that’s a debate that takes place on the turf of thematic specialists rather than pharmaceutical ones.

From here, the rally looks like too much: forced to choose, I’d rather be long NVDA and short LLY than the other way around6. Novo and Lilly combined have added more than $1 trillion in market cap in five years mostly from a single class of drugs. Even if those drugs are huge, culture-changing, and wind up crushing Lipitor’s ~$150 billion in cumulative sales so much success is already priced in.

Between politicians, regulators and competitors, it’s difficult to see that much value eventually making its way to shareholders. And for LLY and NVO to outperform, GLP-1 profits need to be stronger than the market currently predicts.

After all, that is what happened for Pfizer. Lipitor indeed became the best-selling drug ever, and Viagra changed the culture. And across the 2010s, PFE stock including dividends returned negative 24%. It wouldn’t be stunning to see the same thing happen to LLY and NVO.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Perion came to the public markets in 2006 as a low-quality business with a questionable business model.

• The company began an effort to move into more stable and more attractive areas of the online advertising market — with some success.

• But the legacy business has been crushed in 2024. Changes by a key partner led full-year guidance to be slashed.

• There may be an opportunity here — but trust is key.

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Right now, shares of adtech play Perion Network are down 61% year-to-date. They trade at about 2.5x the midpoint of 2024 Adjusted EBITDA guidance. That’s the cheapest multiple in the sector, and one of the cheapest in the market. But, historically, it’s not that unusual:

source: Koyfin

Perion has been here before. Long-running concerns about the company’s business model have led investors to see significant risk in its Search segment, and significant question marks elsewhere.

Perion is now the 12th-worst performance in the entire market among companies with a market cap above $300 million. Risks are real. But echoes of the late 2010s are considerable, and equally worth noting: from 2016 lows to 2023 highs, PERI rose nearly 20x.

It’s difficult to pound the table too strongly. The valuation is attractive, but concerns about management, capital allocation, and performance in the business beyond Search all create concern. One interesting question, however, is to what extent those current concerns are being magnified by the company’s missteps in the past.

source: CodeFuel/Perion

A Questionable History

Perion began as a company called IncrediMail, founded in Tel Aviv, Israel, in 1999. Reportedly inspired by a scene from the 1996 film Mission Impossible (one founder would later say that origin story was only “partially true”), IncrediMail became the inventor of the emoticon.

IncrediMail ran on a ‘freemium’ model, and earned revenue by selling advertising and driving search engine queries on Google (now part of Alphabet ) and Yahoo. The company went public in 2006, and in 2011 (after its founders had stepped down) IncrediMail looked to diversify its revenue streams. That year, the company acquired photo sharing platform Smilebox, after which it renamed itself Perion (which derives from the Hebrew word for productivity). In 2012, Perion bought Sweetpacks, a developer of apps and downloadable content, including a messaging service.

There were a couple of problems with the portfolio, however. One was that Perion was operating relatively niche products against Big Tech players. Unsurprisingly, IncrediMail and Smilebox both would lose out to offerings from Google and other ‘Big Tech’ players like Microsoft and Facebook. IncrediMail was shut down in 2020, and Sweetpacks no longer seems to exist. Smilebox remains in business, but is immaterial even for a business with a ~$600 million market capitalization1.

The bigger issue, however, is how Perion monetized its products. The downloaded applications often wreaked havoc on a user’s operating systems, with Perion fond of resetting the default search in a web browser (allowing it to then monetize those searches). A Bloomberg Television segment from 2013 noted that IncrediMail was “virtually impossible to uninstall”2; indeed, the legacy of Sweetpacks seems only to be the endless, still-live, posts from users trying desperately to get it off their computers.

Unsurprisingly, Google was not particularly thrilled about its search business being associated with questionable tactics. The search giant instituted a series of policy changes to eliminate the toolbar installations and default search resets relied on not just by Perion/IncrediMail, but the likes of AVG, Blucora and other major players.

In response, Perion tried to diversify (Google was ~70% of 2012 revenue) by signing a supply agreement with Microsoft’s Bing, and executed a massive reverse merger with Conduit, another developer that too was one of the bigger offenders of the era.

Neither tactic worked. Microsoft instituted basically the same changes, and the Conduit deal was a disaster. By 2015-2016, PERI was (as it is now) one of the cheapest stocks in the market, precisely because investors thought the business was headed for disaster. Until the pandemic arrived, that prediction seemed mostly on point:

source: Koyfin

Perion Goes Upmarket

In response, Perion spent the second half of the 2010s trying to be a better business and, perhaps as importantly, trying to prove to investors that it was a better business. At the end of 2015, the company announced the acquisition of Undertone for $180 million. Undertone developed so-called “high impact” digital advertising (think higher-quality, more dynamic, and often interactive), a notable step-up from Perion’s legacy business.

The deal didn’t actually work out: the rise of programmatic advertising commoditized the industry and disrupted Undertone’s business. In 2017, Perion took an impairment charge of $86 million, nearly half the acquisition price. But the assets acquired did provide a base for Perion to develop a legitimate business beyond search.

More acquisitions followed to augment that base. In 2020, Perion added Content IQ, the developer of a platform for digital publishers. The 2021 purchase of Vidazoo moved Perion into video monetization, and late last year the company purchased Hivestack, a programmatic digital out of home (DOOH) platform.

Even a small, not-particularly-successful deal from 2015, the $13 million purchase of MakeMeReach, turned into a social media marketing business renamed Paragone.ai. The search business re-focused on CodeFuel, serving third parties instead of the previous owned-and-operated apps like IncrediMail. Perion moved into Connected TV (CTV) advertising, and launched an audio ads offering that attracted Pep Boys and Albertsons as customers.

A new chief executive officer, Doron Gerstel, came on board in 2017, and added to the sense that this might be a different Perion. And the effort worked, both in terms of the business and the stock price.

Adjusted EBITDA was $29 million in 2017, and $169 million in 2023. Meanwhile, PERI without exaggeration was one of the best stocks in the market. From 2018 lows to 2021 highs, the stock was this close to being a 20-bagger:

source: Koyfin

Even at the highs, PERI wasn’t that expensive: the EV/EBITDA multiple peaked at about 10x in 2023. But in a adtech space where investors still have worried about competition from Big Tech, not to mention pending privacy changes from Google and Apple , that multiple was not a substantial outlier.

At the very least, it was a multiple that suggested Perion was a real business. That was a departure from the stock’s treatment for most of the 2010s.

Search Bites Again

But, as it turned out, Perion can’t quite escape its history. The company has built a business beyond search, but Microsoft still accounts for 34% of total revenue in 2023; search as a whole drove 46% of revenue.

PERI got thumped after 2024 guidance. But the big plunge came last month. Perion announced preliminary results for Q1, which cited “a decline in Search Advertising activity”. More importantly, adjustments instituted by Microsoft appear to have crushed pricing, and certainly crushed Perion’s outlook:

• Revenue: $860-$880 million at 2/8/24; cut 31% at the midpoint to $590-610 million at 4/8/24

• Adjusted EBITDA: $178-$182 million at 2/8/24; cut 56% (!!) at the midpoint to $78-$82 million

PERI dropped 40% on the release, and hasn’t recovered (the stock has actually lost another ~4% since). Once again, the stock looks incredibly cheap: more than two-thirds of the market cap is in net cash3, and EV/EBITDA at the midpoint of guidance is 2.4x. And, once again, it seems incredibly easy to make the case that the low multiple isn’t enough, because this business is simply too risky to own.

Experience Versus Fresh Eyes

Personally speaking, one of the interesting aspects of the decline is that it highlights the pros, and cons, of having a long history with a stock.

Toward the end of the 2010s, there was a bull case for the stock. Gerstel seemed to be driving improvements in the business, the balance sheet was rock-solid, and the overall digital ad space was growing. But that bull case was a much easier sell to someone who didn’t know the history that well — or at all.

Those who did know that history, myself included, knew Perion as a company whose business model literally had been “distribute apps to older users4 who likely will lack the technical know-how to remove those apps”. Even with a new CEO, and a new business, and seeming downside protection from the cash balance, that perception was nearly impossible to overcome.

Conversely, someone who came to the stock with fresh eyes could, perhaps, see that opportunity more clearly. The risk/reward did seem to favor an investment: Perion might well blow up in a competitive ad space, but if it succeeded the upside was multiples of the stock price at the time. And, of course, Perion did succeed, and to some extent still has: even with the recent plunge, the stock is up 183% since the end of 2016, and +327% from that year’s lows.

There’s obviously an anchoring bias on both sides. Seeing Perion for the first time in 2011 colored the opportunity in 2018. Seeing Perion for the first time in 2018, however, meant seeing a ridiculously cheap headline valuation, with the, shall we say, questionable activities of the past not really relevant to the bull case at the time.

And there was a massive opportunity in the last few years of the 2010s, even for investors who sold too early (or too late). At the same time, a deeper knowledge of the company’s history might well have saved investors here in 2024.

It’s not hard to see in commentary from both investors and executives a rather blasé attitude toward the revenue concentration at Microsoft, and the danger in such a lopsided partnership. (Quite obviously, Perion needs Microsoft far more than Microsoft needs Perion.) But those who had seen the impact of the Google relationship on PERI stock likely had a better sense of the risk. Overall, fresh eyes won but only if they timed it right.

PERI Looking Forward

And after the plunge, this is kind of the same story. PERI again looks ridiculously cheap at less than 3x EV/EBITDA. The downside protection from the cash seems reasonably intact, particularly given management seemed emphatic on the Q1 call that Perion would implement a previously authorized $75 million repurchase effort as soon as possible.

The Search business has taken a huge hit, of course, but there’s still a pretty broad portfolio beyond Search:

source: Perion Q1 2024 presentation

And the sharp cut in guidance itself de-risks the story somewhat at the lower valuation. Simple math dictates that further changes in the Microsoft agreement can’t be that material. Microsoft was 34% of revenue in 2023; if it’s mostly responsible for an expected ~20% decline in total revenue in 2024, its share of total revenue this year is going to be substantially smaller.

In a weird way, Perion’s history shouldn’t really matter anymore: the risk that investors have been dreading for about 15 years has finally played out. We all pretty much knew Search was heading to zero eventually; the debate was really over when that was, how much cash Perion could generate in the meantime, and what it would do with that cash.

And that’s where the debate should be now. Fundamentally it seems to favor Perion. Even if Microsoft revenue goes to zero, PERI is probably trading at a mid- to maybe high-single-digit EV/EBITDA multiple, and at worst mid-teens relative to earnings and normalized free cash flow when backing out net cash.

That’s essentially the 2019 bull case redux: Search is a melting ice cube, but even at a low (or even zero) valuation, Perion as a whole is cheap enough given the strength elsewhere in the business. There’s even a new CEO, as there was five years ago. In August, Gerstel was replaced by Tal Jacobson, an internal promotion. It bears repeating: that 2019 bull case was proven spectacularly correct.

What Exactly Is Going On With Perion?

I personally missed that bull case, because I didn’t quite trust the business. As a result, I’m somewhat cognizant of making the same mistake again. There absolutely is a scenario in which investors are overreacting here. More importantly, it’s not that difficult to look out 14-plus months, to the Q2 2025 report, and see a company that (with some help from easy year-prior comparisons) is returning to growth, and fully focused on building out a broad, unified, adtech platform that can really compete.

Again, the market until recently was treating this like a real business. There are truly intriguing aspects. Management has cited blue-chip customers like Lululemon , Anheuser Busch InBev , and Alberstons, among others. The company’s SORT (Smart Optimization of Responsive Traits) technology aims to drive personalized advertising despite the end of the cookie, and SORT 2.0 is expanding into CTV. Quantitatively and qualitatively (with the caveat that these businesses all have a somewhat “black box” aspect from the outside), it seems like Perion is a significant, legitimate, player in adtech.

But the catch is that, even recognizing that bias, Perion’s Q1 report doesn’t quite add up. The story from management in the preliminary release in April and after Q1 results was that the Microsoft changes begin in the second quarter. This will hit search revenue and, as chief financial officer Maoz Sigron put it on the call, “to a limited extent, a reduction in video activity”.

The problem, however, is that Q1 was a disaster. Perion didn’t give guidance for the quarter, but for the full year (at the midpoint) it projected growth in revenue of 17% and in Adjusted EBITDA of 6%. In Q1, advertising revenue fell 5% year-over-year, driven by video (where Perion has shifted inventory to display); overall Adjusted EBITDA plunged 35%.

Per management, the Microsoft changes didn’t hit the search business in the quarter. Indeed, Search revenue rose 26%. But TAC (traffic acquisition costs) jumped, and margins collapsed — with at least some of the pressure coming ex-Search.

Indeed, it looks like Perion almost certainly would have had to lower its full-year outlook even without the Microsoft changes.

Sigron did say video would bottom after Q2, which likely means the company expected (and expects) a more back-loaded year, but at the very least Perion is playing from behind. And it’s worth noting that normalized EBITDA remains below the ~$80 million guidance for 2024, since that includes a quarter for Search that ended before the Microsoft changes. On a run-rate basis, this is probably closer to a $65-$70 million business at the moment, though to be fair that is still a valuation of about 3x EBITDA.

Trust And The Value Trap/Value Play Debate

There was essentially zero commentary from management after Q1 that explained why the quarter was weak — or even acknowledged that weakness at all. The tone was that the Microsoft changes were a setback, but one that Perion will eventually be able to overcome. That may be true, but if so Q1 was hardly a strong first step in that process.

And the problem is that a stock like PERI at this point boils down to trust in management. The company does have $480 million in gross cash and investments — but no apparent plan to use it, beyond the aforementioned buyback. $200 million-plus comes from equity offerings executed back in 2021; the second in retrospect was a good trade (Perion sold $180 million in shares at $21.50) but remains questionable from a capital allocation standpoint. M&A still seems to be the focus, as has been the case for a decade and a half: Perion last bought back stock in 2009 (it repurchased ~$1 million at March lows), and changed to a firm policy of not paying dividends the following year.

There’s a real sense that the business just isn’t good enough, in terms of operations and in terms of being shareholder-friendly. The ability of Perion to change that perception and regain credibility with investors can drive shareholder returns: Gerstel did exactly that in his six-year stint atop the company. That (along with bottom-line growth, of course) was enough to get PERI’s EV/EBITDA multiple from absurdly cheap to reasonable, and that was a material driver of the 1,800%-plus returns the stock posted in seven years.

History absolutely can repeat here. Simply executing on the buyback would likely put some capital allocation concerns to rest, though a more aggressive policy at this point would be welcomed. (If the company’s own stock isn’t a great investment at under 3x EBITDA, when is it a great investment? And what acquisition can possibly be a better alternative?)

It’s always difficult to jump into these situations in the small- to mid-cap world. Of course, it’s always tempting as well. As PERI shows, the upside can be tremendous if there is a coherent, rational, and realistic strategy for improvement.

That strategy may exist here. But, to be honest, I don’t see it coming out of Q1. That may be the wisdom gained from following PERI for over a decade — or it may be making the same mistake twice.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• A 36% sell-off following the announcement of the long-awaited merger between Uniti and Windstream creates a huge opportunity — on paper.

• But in practice, this type of bull case has rarely worked in recent years, particularly in the cable/fiber space.

• Uniti’s post-merger strategy flies in the face of current market consensus about the future of fiber and expected returns on capital.

• Yet that consensus was completely different just a few years ago; UNIT is likely the best bet on it being wrong again.

Read more

• We update our deep dive on Perficient from this weekend, after reports the company is considering a sale.

• VeriSign stock has plunged. Given exceptional fundamentals, the sell-off seems like an opportunity.

• If VeriSign can grow registry volume, the stock should be a good investment. But that might be easier said than done.

  ---

A Quick Update On Perficient

We pitched IT consulting firm Perficient in our Sunday deep dive. On Tuesday, Bloomberg reported the company had hired advisers and was considering a possible sale. PRFT jumped more than 8% on the report, and is up almost 14% so far this week.

It is good news that the company is in play. But as we wrote on X/Twitter this week, the timing is somewhat curious. PRFT hit a multi-year low last week, and our argument for the stock was that the market was misreading cyclical weakness as secular or competitive pressure. If that’s the case, and if generative artificial intelligence will eventually prove a tailwind for the industry, this seems like the absolute worst time to sell.

That’s particularly true given how steeply PRFT has declined in recent weeks. The stock closed above $72 on February 12th. In this market, businesses can sell, and have sold, well below multi-year highs (PRFT peaked at ~$150 in November 2021), but taking a price seen three months earlier is exceptionally difficult. The issue is $72 represents a 65% premium to the close the day before the Bloomberg report.

So there are basically two explanations here, which lead in completely different directions. The first is that the Perficient board thinks there’s a possibility of a huge premium to Thursday’s close below $49, because it likely will take that kind of premium for shareholders to approve a sale. (The board has no advantage in the vote, either. Insider ownership is exceptionally thin: barely 2% of shares outstanding across all executives and directors.) Based on where the stock has traded, most active investors who bought the stock this year, let alone before that, believe that PRFT is an $80-plus stock (myself included). It should take that kind of offer for the board to even listen.

The bearish interpretation, however, is that the board does think there’s something going on here beyond cyclical weakness, whether that’s risk from genAI or something else. To be sure, given the pace of corporate strategic movements, the decision to explore a sale (which Bloomberg, emphasized was not guaranteed to happen) was likely made with the stock higher than it traded earlier this week.

Even so, after management has spent multiple quarters arguing that the company’s problems are external and cyclical, it would be an obvious red flag if the board thought it was wise to have a strategic alternatives process when its executives themselves are saying the cycle hasn’t turned yet.

For now, the decision seems logical (and, again, far from binding). As the report correctly noted, there are multiple parties with potential interest, whether strategic buyers or private equity. Rivals are positioning for genAI, and as a result may have reached out informally to gauge Perficient’s interest. Private equity funds still have plenty of capital to put to work. As such, a big premium to the current price absolutely is in play.

But between the chart and the fundamentals, PRFT is a classic case where the clear risk is that there is something the bull case simply isn’t accounting for. That risk does seem magnified just a bit here. The simplest thing for the board to do here would be to wait. It remains to be seen whether they’re being proactive to take advantage of an opportunity, or to avoid a risk. We’re still happy betting on the former.

VeriSign: The Best Business No One Is Talking About (Or Buying)

There is a legitimate case that VeriSign , the registry for .com and .net Internet addresses, is one of the best businesses on U.S. exchanges. Its return on invested capital, per a Koyfin screen, is the highest in the entire market, in part because current assets are negative; suppliers fund the business’s capital needs. VeriSign’s net income margins, on a normalized basis and focusing solely on operating businesses, have few peers. The overall margin structure in 2023 looked like this:

source: VeriSign 10-K

It’s not a coincidence that VRSN was one of the first tech buys from Berkshire Hathaway, back in 2013. Berkshire still owns almost 13% of the company.

Meanwhile, this has been a market in which investors have been rewarded for paying up for the best businesses. And yet, for some time now, VRSN has been a dud:

source: Koyfin

The underperformance is all the more stark given that VeriSign has been aggressively repurchasing shares. While VRSN stock is down almost 14% over the past five years, its market cap has declined more than twice as much.

It’s not as if the business has struggled. Between 2019 and 2023, net income rose at a 7.5% annualized clip, thanks in part to a 500 basis point expansion in net margins. Rather, it’s been the multiple investors are assigning to future earnings that has been the problem:

source: Koyfin

Is VRSN Cheap?

21x earnings perhaps isn’t that cheap. And there is a bit of a catch in using a four-year growth rate.

Read more

The Charles Schwab Pitch

We recommended Charles Schwab a little over a year ago. Silicon Valley Bank had just failed, and SCHW had declined 24%.

Our pitch contained 3,400 words, but in essence could be boiled down to just two: come on. Charles bleeping Schwab was not going bankrupt. Yes, as another writer calculated, the company’s tangible common equity was negative, when marking to market its long-term securities. But the mark-to-market losses were driven by interest rate moves, not credit quality. As long as there was no ‘run on the bank (or brokerage)’, the issue was one of earnings, not of solvency.

Over time, that case has been proven mostly correct: including dividends, SCHW has returned 43%. Investors who bought after the open the following Monday (myself included) have done better. But the S&P 500 has gained 32% on a total return basis, and Interactive Brokers has performed marginally better. Another name we floated at the time, regional bank-focused software provider Q2 Holdings has more than doubled1.

source: Koyfin; chart since 1/1/23 (we published March 12, immediately after the steep decline)

It’s been a good call, but with some volatility over the last year. The important question now is if SCHW is still a good call — which basically comes down to the question of whether the stock can recapture its pre-SVB levels.

Did SVB Change Schwab?

Obviously, to fully recover its losses, Schwab needs to do more than just not go bankrupt. The publicity surrounding the failure of SVB accelerated “cash sorting”, in which customers take their cash out of Schwab brokerage accounts (which, still, pay minimal interest) and transfer into higher-yielding instruments (including those offered by Schwab itself).

But as we pointed out at the time, that kind of activity wasn’t unusual in a rising interest rate environment. Importantly, nothing that happened in March 2023 was new. Schwab management knew it was going to face the effects of long-term bets on short-term results, but as lower-yielding paper matured, it would be able to roll those proceeds into higher-yielding alternatives, steadily boosting earnings.

For the most part, that’s played out. Schwab management does appear to have been a bit too optimistic in terms of cash sorting; its forecast for 2025 net interest margin was walked down a bit last year. Since then, however, management has remained optimistic, including through the Q4 2023 and Q1 earnings releases this year. Cash sorting has moderated significantly:

source: Charles Schwab Q1 business update presentation

The capital position is improving, net interest margin is on track, and Schwab sees “significant” further improvements in NIM long-term. A “higher for longer” scenario suggests more help from rates as well.

The bull case now still rests on a point we made last March: really, not that much has changed. SVB probably heightened awareness of cash sorting, but investors in February 2023 were long SCHW because higher rates would significantly boost earnings — eventually. In April 2024, there’s a strong case to own SCHW because…higher rates will significantly boost earnings, only a year or so sooner.

One counterpoint is that, on an MTM basis, the balance sheet still looks unwieldy. We continue to believe that is essentially immaterial. Barring regulatory intervention (highly unlikely) or significant solvency concerns that change customer behavior (even less likely), the issue remains one of earnings, not solvency. And that issue is one that will be fixed over time (unless rates collapse, but that’s not a risk unique to SCHW).

The more concrete concern is that the SVB crisis did change Schwab, if perhaps not in the ways that some bears argue. Customers are more aware of the better rates offered by other brokers, and exist in an environment where moving funds is far easier than it was the last time Schwab went through a rising rate environment. As we’ll discuss shortly, competitors, including another brokerage we recommended last year, have focused on yield in response, and IBKR simply passes nearly all of its interest back to customers.

Meanwhile, management hasn’t looked great over the past year. The huge bet on long-duration bonds can be explained as a hedge against lower rates, which would have further pressured earnings. It can also be seen, somewhat correctly, as an unwise and overzealous acceptance of long-term risk for near-term earnings growth.

With the strength coming out of Q1, we’re not in a rush to sell SCHW. But, admittedly, we are eyeing the door a bit. Schwab simply might not be as good a business as it was, or at least appeared to be, 14 months ago. And if that’s the case, it’s far from guaranteed that the valuation is going to soar past where it traded at the point.

HOOD Rises As Gambling Returns (Right?)

We titled our October pitch for Robinhood “Robinhood Is A Buy (Seriously)”. The “Seriously” was an acknowledgment that many investors saw the business as something not quite credible. As we noted then, a platform not for investment, but for gambling.

But we argued that perception missed the reality. Robinhood did, and does, serve a good number of high-risk traders, but it has a core base of buy-and-hold investors. And it would benefit from the growth in those assets, along with higher rates, which would lead the business to solid bottom-line performance.

Results since then (Q3 and Q4 2023) don’t really seem to support that thesis, or a 74% gain in the stock. Key figures (revenue, monthly active users, Adjusted EBITDA) have flatlined or even declined on a sequential basis. It’s easy to believe that HOOD has simply benefited from the return of crypto optimism and a bull market. That doesn’t seem to be the case, however.

The Robinhood Narrative Changes

Instead, it appears the narrative around Robinhood has changed — no doubt because the company itself is changing. Simply put, Robinhood seems to be growing up. It’s developed a web-based trading platform, offered an aggressive match for IRAs (Individual Retirement Accounts), launched a cash back credit card, and marketed a high yield on cash sweep (at least for members of Robinhood Gold, which costs $5 per month).

Meanwhile, the importance of trading revenue has diminished. Crypto revenue did spike in Q4, but that increase only totaled ~4% of total revenue. With normalized rates, this business suddenly looks very different:

source: author from Robinhood filings and press releases; figure does not total 100% owing to the presence of “other revenues”.

Investors seem to have noticed. HOOD hit a two-year high last month, after the launch of the credit card. Though it’s pulled back since, the market clearly is treating this like a different, and better, business:

source: Koyfin

The near-term question is whether this holds. It’s possible the narrative around HOOD hasn’t yet changed completely2:

source: Koyfin

The obvious mid- to long-term question is whether all of this works. A 3% match on deposits and then a 5% yield on cash combined with zero-commission trading suggest a reasonably long payback period for some newly acquired customers. (A 5%-plus quarter-over-quarter rise in monthly actives in Q4 does suggest some positive early returns, though crypto optimism in the quarter no doubt re-activated a few small-dollar traders as well).

Q1 and Q2 earnings look particularly key here, because they will provide some evidence both of the cost and success of these efforts. It’s worth remembering that the blue-sky scenario for Robinhood when it went public in July 2021 was not just that it would take share from Schwab and Interactive, but that it would expand into the “financial supermarket” role for the younger generation as it grew older and more wealthy.

The reaction of the market over the past several months is that the blue-sky scenario is back in play. It’s up to chief executive officer Vlad Tenev and his team to keep it in play.

Seneca Foods Still Looks Cheap

When we recommended private-label vegetable canner Seneca Foods last year, the stock on an adjusted basis looked absurdly cheap. The big issue was the company’s accounting, which uses LIFO (last in, first out) instead of FIFO (first in, first out). Amid soaring inflation, Seneca was taking huge LIFO charges which impacted reported earnings and inventory3.

Adjusted for those non-cash charges, SENEA was trading for less than 3x earnings and barely one-third tangible book value. The stock’s removal from major small-cap indices (along with a fairly illiquid market for shares) seemed to have driven a steep decline leaving the stock trading, we argued, well below liquidation value.

The stock rebounded quickly, and has managed to drift up after that recovery:

source: Koyfin; chart since recommendation on July 23, 2023

An investor can still build a pretty solid case for SENEA on paper. Making the same adjustments for LIFO, tangible book value is $127 per share; SENEA closed Thursday just below $57. Trailing twelve-month EBITDA, again adjusted for the charges, is $196 million, suggesting an EV/EBITDA multiple of about 5.3x. Normalized free cash flow is probably close to $100 million, though LIFO impacts cash tax payments as well4; that’s a P/FCF multiple likely below 5x.

The Value Problem

But there are a couple of issues here. The first is that inflation is stretching the company’s balance sheet. Even adjusted for LIFO, Seneca is carrying more and more inventory, which requires more and more debt. Net debt as of December 30 was $635 million; the figure four years earlier was $211 million. All of that $424 million jump and then some, comes from a $643 million increase in the company’s inventory (again, on a LIFO-adjusted basis). Inventory has doubled in four years, which appears almost entirely due to cost increases rather than volume rises.

This in turn has led to a big jump in interest expense and quite obviously results in lower returns on assets and invested capital. And with volumes actually down sharply this year (and EBITDA declining), there are some worries about the underlying business as well.

The broader issue is that if SENEA is cheap on paper, it’s not clear what that does for shareholders. The company has made some modest moves toward disclosing LIFO impacts in recent communications (though those communications are slim; Seneca does not appear to have held an earnings call since 2012).

In November, it acquired the Green Giant line from B&G Foods basically for free: it paid $55.6 million, but also received $52.9 million in inventory. Of course, that’s not exactly a bullish endorsement of the industry by B&G, which was happy to exit for just an ongoing license fee.

Financially, the question is what Seneca can do to turn the recent trend around. It simply has to get back to generating some kind of free cash flow and finding a way to better manage inventory. It hasn’t done so yet: Q4 numbers will look better thanks to seasonality, but even with a repeat of the ~$150M liquidation in Q4 FY23 (ending March), the company is still going to burn for the year.

An acquisition is off the table for a number of reasons. Management has talked up repurchases and has bought back $70 million over the past seven quarters, but capital constraints will force the company away from that strategy if the balance sheet doesn’t improve.

The bigger issue is one we’ve highlighted multiple times over the past twoyears: owning difficult businesses ‘cheap’ is not a strategy that has worked all that well over the past decade and a half. This clearly is a difficult business, as seen in Seneca’s results, B&G’s exit, and even plant closures by Del Monte Foods. In July, it was worth owning that business at an absurdly cheap price. It’s harder now, when the price is simply cheap.

As of this writing, Vince Martin is long SCHW. He may exit his position in the near future.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Medical device company CONMED looks like one of the more attractive plays in healthcare. The stock trades at 18x forward EPS despite guidance for 20% growth.

• But short interest suggests the opposite, and centers on a key threat to the business from a major rival.

• Management is emphatic that key products can power through, but early commentary suggests CONMED’s leadership may be underestimating its challenge.

Read more

• French fry business Lamb Weston plunged 19% on Thursday, its largest-ever single-day decline.

• The catalyst was a disappointing earnings report, caused by a poorly-executed ERP implementation.

• The bigger issue appears to be structural: industry capacity is on the way, which may exacerbate already slowing demand.

• History says LW is a buy with EV/EBITDA under 10. But investors have to trust their judgment of what this business actually is.

Lamb Weston seems to be an awfully good business. 13% of fiscal 2023 revenue came from McDonald’s, among the most defensive and most successful businesses in the world. On the supply side, the potato processing industry in the U.S. is essentially an oligopoly, though there’s more competition overseas (about 35% of Lamb Weston’s revenue).

In the market of the last few years, a good business is usually a good stock. In the case of LW, however, it depends on when an investor bought it:

source: Koyfin; total return chart

Following a 19% decline on Thursday — LW’s biggest single-day drop in its seven-plus years on the public market — the stock is modestly below late 2018 highs. But those who bought dips in either late 2021 or early 2022 still have generated alpha despite Thursday’s plunge.

On its face, this week’s decline presents yet another opportunity. But there’s an argument that this time is different.

source: LW investor presentation

Introducing Lamb Weston

Lamb Weston was founded in Weston, Oregon in 1950 by F. Gilbert Lamb (hence the ‘Lamb Weston’ name) and originally focused on pea processing. But Lamb Weston quickly become one of the leading potato processors in the world; the company even invented the “water gun knife” (which cuts French fries by using high-pressure water to push a peeled potato through a slicer).

In 1971, the company landed what remains its biggest customer: McDonald’s. The fast-food industry remains hugely important: in fiscal 2023 the company’s “Global” segment, which includes the top 100 quick-service chains in North America, drove over half of revenue. The Global segment also includes international sales to distributors and retailers (and in FY24 LW transitioned to reporting only North America and International segments), so QSR exposure is less than 50%, but it’s still the key industry for the business. LW also has several retail brands, including Grown in Idaho and Alexia, serves the foodservice industry in the U.S. and Canada, and has small businesses around vegetables and dairy.

In 1988, Lamb Weston was acquired by Conagra Brands (then ConAgra Foods). It’s telling that Conagra kept the business for 28 years, an eternity amid the endless conglomerate-building and -destroying activities across the food industry over the next three decades. But in late 2016, Conagra spun off Lamb Weston, and the transaction has been a success. LW was spun at $34; the stock has gained 151% since, plus dividends. Until Wednesday, Lamb Weston had a higher market capitalization than its former parent.

What Happened On Thursday

On its face, the fact that LW saw its biggest decline ever on Thursday makes some sense. At least relative to Street expectations, Q3 FY24 was far and away the company’s worst report ever:

source: Seeking Alpha

There is an explanation for the miss — somewhat. Management said an ERP (enterprise resource planning) software implementation went poorly, leading to a lack of visibility surrounding inventory at distribution centers. This in turn led to delayed and canceled orders.

The catch is that even by management’s own estimates, the ERP issues don’t account for the entire shortfall. LW said the revenue hit was $135 million, meaning on a ‘normalized’ basis revenue still would have missed consensus by $55 million, or more than three percentage points. That’s a huge miss, given the kind of analyst coverage LW’s biggest customers get.

Similar math looks a little better on the bottom line. LW said Adjusted EBITDA took a $95 million hit in the quarter, with “over half” from the order issues. At $50 million, the after-tax effect would be about 26 cents per share, the entirety of the miss relative to the Street.

Still, even management admitted that part of the issue here is softening demand. And that sense is clearly evident in both Q3 results and Q4 guidance. In Q3, even excluding the exit of contracts and the ERP problems, volumes still fell in the range of 4.5% year-over-year. Q4 guidance contemplates similar performance.

LW Is Starting To Look Cheap

As we wrote up front, LW has been a good investment if you get it at the right price. That right price existed after the late 2016 spin-off, and has returned a few times since. Right now, it seems from a high-level perspective like it might be back again:

source: Koyfin

Valuation isn’t quite as attractive as the chart suggests: EV/EBITDA at the midpoint of updated FY24 guidance is 10.5x1. Still, that multiple is at the bottom of the multi-year range, and P/E multiples tell a similar story.

And where the fundamental case starts to get really attractive is in terms of what Lamb Weston means by “adjusted”. The $95 million in ERP costs (driven both by the implementation and its effects) is included in the Adjusted EBITDA results for the quarter and in guidance for the full year. So is a $25 million non-cash charge to write off excess raw potatoes.

Indeed, the second question on the Q3 earnings call covered precisely this fact, with analyst Andrew Lazar of Barclays positing that one-time costs were lowering FY24 Adjusted EBITDA to ~$1.5 billion from something closer to $1.7 billion. He asked if the latter, higher figure represented a base for growth looking to FY25. Chief financial officer Bernadette Madarieta responded, “You’re absolutely thinking about it correctly.”

So if Adjusted EBITDA in FY24, backing out one-time costs, is ~$1.65 billion, LW is actually trading at ~9.5x EBITDA — essentially its lowest multiple ever. In that model, underlying adjusted EPS is about 80 cents higher2, or about $6.38, and LW is trading at less than 13x this year’s earnings.

That multiple, too, would be essentially the lowest ever — but even the historical comparison misses a key point. Those underlying earnings are coming in a year where the second half seems clearly to be affected by cyclical pressures.

To be fair, investors aren’t necessarily paying 13x trough earnings, but it appears quite obvious they’re not paying 13x peak, either.

Capacity On The Way

To this point, the sell-off seems like an overreaction. Both the ERP implementation and the decline in restaurant traffic are temporary factors. There’s no sign in the quarter of a secular headwind in terms of potato demand. Management argued that the “fry attachment rate”, a nebulously-defined term that describes how often the side is ordered, remained stable in Q3. And the reason Lamb Weston wanted to consolidate overseas subsidiaries is because the French fry continues to make inroads outside the U.S.

But there is one potential source of downside we haven’t covered yet. It, too, was highlighted by a question from Barclays’s Lazar on the Q3 call:

One of the questions I'm getting probably most this morning — frankly, separate from all things sort of ERP related — really has to do much more with your comments around slowing restaurant traffic, at a time when industry capacity is set to start building once again, and what that could portend for pricing going forward…

Lamb Weston’s time as a public company has been in an almost uniformly constructive environment. Capacity across the industry has been tight: at last year’s Investor Day, Lamb Weston said capacity utilization was 100% in 2017 and 97% in 2022. That’s allowed, quite obviously, for pricing strength in a U.S. market with only four real players3.

The bear case for LW has been that the tight capacity has meant the company is overearning. And in 2019, more than a few traders put money behind that bear case. Short interest in LW spiked as high as 7% of shares outstanding, and the winning short idea at the Sohn Conference in May saw capacity increases driving downside:

source: Tariq Barma, Sohn Conference presentation

The short case didn’t work out — but, of course, the novel coronavirus pandemic changed the industry’s trajectory. Capacity expansions were called off, and particularly in 2021 pricing grew even stronger. But now, with normalcy returning, capacity is increasing, and those increases may be coming right into a cyclical downturn in terms of demand.

How Good A Business Is This?

The issue here is not necessarily that LW’s FY25 results are going to take a hit (though that, of course, is a potential near-term risk). Rather, it’s that the long-awaited arrival of some kind of pressure on the industry is going to show that the bear case had some truth all along. Lamb Weston’s spin-off simply happened to coincide4 with an exceptionally benign operating environment. But ‘true’ mid-cycle performance is much weaker.

In essence, the debate after Q3 earnings comes down to the interpretation of this chart:

source: author from Lamb Weston filings. FY24 figures at midpoint of reported guidance ranges

Is this a business that has earned its margin improvement over the past decade thanks to scale, growth in its retail products, and international expansion, with only the post-pandemic environment creating an interruption? Or is it due to what Tariq Barma, the presenter of the LW short pitch at Sohn, called the “myth that LW is a bulletproof staple”?

More simply: is LW even a staple? Or is this actually a commodity business that has only looks like a staple due to favorable competitive and macroeconomic environments?

That’s the debate that has been underneath LW since its spin from Conagra. And, as the earlier chart of EBITDA multiples shows, for the most part the market has given the company the benefit of the doubt. Lamb Weston has been valued by the market mostly as a staple, not a cyclically-exposed commodity business.

The reaction to Q3, however, shows the fear that has been lurking all along. It’s a fear that has popped up on more than one occasion during LW’s time on the public markets. What the past tell us is to buy when the market thinks this is a commodity business, and sell when it think it is a staple. The problem, however, is that given industry and macro dynamics, the past and the future may look very different.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Manchester United stock (MANU) has been on a roller coaster ride due to takeover speculation, but the Glazer family's high asking price has left investors in limbo.

• The club's on-field struggles since Sir Alex Ferguson's retirement have coincided with the rise of rival Manchester City, fueling fan discontent and financial underperformance.

• A new minority investor, Sir Jim Ratcliffe, has taken control of football operations, offering hope for a turnaround.

• We discuss the risks and rewards for an investment in MANU.

As a stock, Manchester United has become an intriguing story. An above-market tender offer that completed in February sent traders scrambling to capture potential upside. Since the close of that offer, however, the stock has seen heavy selling pressure, and touched a 17-month low.

It’s hard not to wonder if trading dynamics, rather than underlying fundamentals, are at play. Those fundamentals are becoming attractive, even acknowledging the difficulty in valuing such a unique business (with no real peer on the public markets).

At the same time, there are long-term impediments to realizing that value. Among them is ownership and performance on the pitch. There is a case for owning Manchester United, but it’s one that requires both patience and some confidence in the team itself.

The Glazer Years

We’ll assume most readers are at least vaguely familiar with Manchester United. The club has been arguably the most successful1 in the history of English football2, with 20 top-flight league titles in its history and three Champions League titles. It’s one of the most popular teams in a global game, and a franchise that Forbes last year estimated was the second-most valuable in all of football, behind only Spain’s Real Madrid.

Yet, as many readers will know, United has struggled in recent years. Under legendary manager Sir Alex Ferguson, United won thirteen Premier League titles in 21 years. Since Ferguson’s retirement, United hasn’t won the league once:

source: TransferMkt.US

The disappointing performance has come alongside a stunning rise by the company’s rival, Manchester City. In 2008, Abu Dhabi billionaire Sheikh Mansour ibn Zayed Al Nahyan bought a majority stake in Man City. Backed by his spending Man City has become the most successful team in England, and perhaps the world. Man City has won five of the last six Premier Leagues (a feat only previously accomplished by Man United itself), and is fighting for another win this year. (United is in a distant sixth place.)

To United fans, the disappointing performance stems from another factor: the club’s 2005 acquisition by American businessman Malcolm Glazer. The purchase was jeered from the start: Glazer was hung in effigy at Old Trafford amid chants of “he’s going to die”. Files from the U.S. Federal Bureau of Investigation, released years later, detailed a number of violent threats made against Glazer at the time.

Glazer passed away in May 2014, but his six children still share majority ownership of the club. United fans are still angry. Protests against the Glazer clan remain fairly common, including a sit-in in October.

source: Getty Images via Goal.com

But for a while last year, it seemed like the Glazers were going to sell. Speculation around the event cheered not only fans of Manchester United, but investors in the stock.

ManU Goes Up For Sale

According to a filing with the SEC, in June of 2022 Manchester United representatives began meeting with American boutique bank The Raine Group about “potential strategic opportunities to enhance shareholder value”. In late November, United publicly announced a strategic alternatives process, with the press release tantalizingly disclosing a sale as a potential outcome.

By February, ten potential bidders had expressed an interest. Sir Jim Ratcliffe, the founder of chemical giant INEOS and reportedly the second-richest person in the United Kingdom, offered $22 to buy out the Class B shares owned by the Glazers. Those shares offer controlling voting power (ten votes per share) and at the time represented ~30% economic interest in the company. “Bidder A” — reported to be Qatari Sheikh Jassim, who publicly confirmed a bid at the time — offered $25 per share to buy out both classes. Seven other investors offered varying forms of minority investments3.

At this point, MANU stock soared. The strategic alternatives announcement sent MANU up more than 60% in a week, as investors clearly saw the potential for a full exit by the Glazers (helping minority shareholders in the process). Reporting around the bids stoked more optimism, with multi-billion pound price tags being thrown around:

source: Koyfin; chart from 11/1/22 to 3/1/23

Raine, who had orchestrated the rushed sale of Chelsea F.C. for $3 billion earlier that year, spent months negotiating with both of the public bidders, along with others who had proposed minority investments. Per the filing, Bidder A eventually withdrew in October after the board requested both financing commitments and equal consideration for both Class A and Class B shares. (It’s not clear which request proved to be the breaking point.) Ratcliffe’s plan to simply buy out the Class B shareholders was rejected. The United board (ie, the Glazers) required either a full sale or a minority investment.

Eventually, Ratcliffe came around to the latter option. He agreed to buy 25% of both the Class A and Class B shares for $33 per share, along with an additional $300 million investment fund, for which he would be compensated in new Class A and B shares at the same $33 per share price.

Importantly for United fans, the agreement gave Ratcliffe control of the club’s operations. Unfortunately, for investors, it was not the full sale for which many had been hoping. MANU now has basically round-tripped:

source: Koyfin; chart since 11/1/22

The most recent sell-off is likely caused at least in part by the tender offer itself. Because the offer wound up being at such a premium to the market, event-driven traders raced into the stock. Once the offer was completed on February 16th, many of those traders were induced to exit their positions as quickly as possible.

The Case Against MANU Stock On Its Own

That dislocation creates the possibility of a buying opportunity. Volume soared in mid-February, and the recent decline is no doubt driven in part by price-insensitive sellers.

But, it’s difficult to get too excited. Fully-diluted enterprise value is 2.43 billion GBP, pro forma for $100 million of Ratcliffe’s direct investment that will take place later this year4. Fiscal 2024 (ending June) EBITDA guidance is for 125 million to 150 million GBP; at the midpoint, that puts EV/EBITDA below 18x.

Whether Ratcliffe’s investment should be considered as a reduction to net debt perhaps is up for debate — the money needs to be earmarked for specific improvements, though those improvements of course can help financial performance — but even adding back that $300 million, EV/EBITDA is about 20x.

Free cash flow numbers look even better. Calculating free cash flow as cash flow from operating activities less capex, free cash flow has averaged over 90 million GBP the last three fiscal years.

But there’s a huge catch on both fronts: amortization. In the case of Manchester United, amortization is “primarily” of registrations: ie, signed contracts with players and managers. The figure is enormous: 173 million GBP in fiscal 2023, with actual payments for registrations totaling 156 million GBP.

Those are obviously very real expenses (it’s in fact somewhat disingenuous in that context for Manchester United to use EBITDA at all), and when accounting for those expenses, this simply is a business that is losing money on a consistent basis.

And in that context, the argument for a short after the Ratcliffe tender offer actually seems rather strong. (Indeed, 8.6% of the float, and 6%-plus of shares outstanding, are still sold short at the moment.) This is a business that, on its own, is losing money. It then initiated a process that might have resulted in a profitable sale of the club as a trophy asset — yet did little but get a minority investment, leaving those minority shareholders almost literally back where they started5.

Looked at solely as a business, MANU indeed looks like a short. The reputation of the Glazers not just with fans, but investors familiar with MANU is exceptionally poor at the moment. There’s more than a little speculation that the process, and the agreement with Ratcliffe, were not done for the benefit of minority shareholders. Rather, the point simply was to get a high ‘mark’ for the business (using the minority investment at $33 per share).

MANU then, has disincentivized financial management (the Glazers still control the business, even if Ratcliffe now controls football operations). So we have a cash-burning business that is underperforming according to its biggest supporters, a reasonable debt load, and a still-heavy valuation. Maybe in theory the business would be worth 4 billion GBP if it were sold — but if it’s never sold, that fact is of little concern to shorts and of little aid to shareholders.

Where Were The Buyers?

But there are two reasons for optimism. The first concerns the likelihood of a sale by the Glazers at some point.

Again, in November 2022 Manchester United stock rose more than 60% in a week simply because the board said there was a possibility of a sale. Quite clearly, the market believed that, before the announcement, there was significant value in the franchise that could be unlocked if and when the Glazers chose to monetize their own investment.

For most of 2023, United’s enterprise value bounced around the $4.5 billion / 3.5 billion GBP range. Experienced, professional investors were betting on Manchester United selling itself in the biggest deal in the history of sport. Not only were they wrong, but they were really wrong. At least per the proxy for the tender offer, Sheikh Jassim was the only person to propose a full takeout of the club — and, in the end, he never even offered satisfactory financial commitments.

This feels quite a bit like “the dog that doesn’t bark”, the classic example of a “negative fact” from a Sherlock Holmes piece6. In May of 2022, Chelsea is sold to a consortium. The final round of the bidding process included three groups, all with some connection to the U.S.. Less than a year later, Manchester United reaches out to multiple parties in a public process…and no one outside the Middle East makes a full offer? The same groups willing to pay $3 billion-plus for Chelsea — in a deal that also included nearly $2 billion in commitments going forward, and a ban on a sale for a decade — had no interest in a ~$5 billion deal for Manchester United (which would have required a ~$25 per share price, nearly double the November level)?

There’s been much reporting about what the Glazer siblings actually want. A Value Investors Club article from April7, recommending MANU on the takeout thesis, pointed to reporting that the six siblings are split over their desire to sell — but in agreement on a price at which they would.

And, again, it was the same firm — The Raine Group — that managed the sales process for Chelsea and the strategic alternatives review for Manchester United. It does seem exceptionally likely that Raine gave the Chelsea bidders information about what price the Glazers would take. It seems likely that information was known among the potential bidders of all stripes. In that context, it’s not a coincidence that the sole proposal for a full takeover came from the Middle East, and from a buyer (reportedly backed by the Qatari government) perhaps not privy to such information.

As a result, the fact that Manchester United didn’t sell in 2024 doesn’t necessarily mean it will never sell. It just, apparently, isn’t going to sell at $25 per share.

Can United Turn It Around?

Admittedly, with MANU at $14, that’s a problem. There seems to be a mismatch, even for a trophy asset, between what the Glazers will accept and what the highest bidder will pay.

Of course, there’s a way to fix that problem: start winning. Winning might fix the financial issues as well.

We can see a sign of this in results for the first half of fiscal 2024. Year-to-date, Adjusted EBITDA has increased 60%, or by about 43 million GBP. The key driver is a huge increase in broadcasting revenue (ie, rights fees paid to broadcast United matches), which has increased by 62 million GBP.

The key difference: this fiscal year, Manchester United played in the top-flight Champions League. The year before, it was in the Europa League.

Being a good club simply matters to the bottom line. Admittedly, as this year’s guidance shows, it doesn’t necessarily fix the bottom line, but it is a start. So is new management: this deep dive from U.S. outlet The Athletic, in December 2023, highlights significant dysfunction across United’s previous leadership.

Ratcliffe’s investment highlights another potential source of improved financials. His $300 million is part of a redevelopment scheme at Old Trafford that could cost as much as 2 billion GBP. United plans to seek government support for the project, and a true multi-use project (as seen at many new American facilities) could add diversified revenue streams for the club.

To be sure, this doesn’t necessarily mean that Manchester United is five years away from generating consistent free cash flow that can support upside in the share price. But that’s not really what is necessary.

What is necessary is a buyer who will finally meet the Glazers’ demands. Manchester United can’t make that buyer appear instantly, but the combination of an improved product on-field (and the subsequent brand enhancement) and a more stable financial picture (as The Athletic reported, United has backed off potential signings in part due to its finances) can make the club far more valuable.

There is absolutely a world in which Manchester United gets the 4 to 5 billion GBP offer investors believed was on the way last year. It’s not a world that exists in 2024 or 2025, but there is an intriguing turnaround play here under Ratcliffe (whose history with INEOS suggests he is a man worth taking seriously).

After so many traders bet on the sales process last year, MANU is now a different bet. It’s a bet on United’s return to glory. Few football fans (or investors) might want to take that bet right now, but Ratcliffe and his team have an opportunity to change that.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Near all-time lows, GoPro stock is more intriguing than some might realise.

• Orion Group Holdings posted a strong quarter which should further strengthen the bull case.

• Chart Industries gained 12% on Wednesday but still isn’t trusted by investors. That’s both the risk and the reward in GTLS.

Read more

Temu and its ‘fast fashion’ counterpart/rival Shein are quickly reshaping the U.S. retail industry. The companies’ hugely aggressive marketing spend may be affecting the online advertising market as well, providing a much-needed boost to giants Apple, Meta and Alphabet. What makes Temu so fascinating is the potential range of outcomes for the business over the next few years.

source: Temu

How Temu Works

Most readers are likely aware of Temu. Pinduoduo launched the platform in the U.S. in early September 2022, and backed it with an incredibly aggressive marketing strategy. The company just spent at least $21 million on ads for this month’s Super Bowl, which informed viewers of the proper pronunciation (it’s ‘teh-moo’). It has a ubiquitous online presence as well: Goldman Sachs has estimated that in 2023 Temu spent $1.2 billion simply with Meta Platforms . That’s part of an overall marketing budget whose estimated size ranges from $1.7 billion to $3 billion simply on digital advertising spend.

Behind the marketing blitz is a relatively simple platform. Temu basically uses its app and website to connect shoppers with Chinese manufacturers, who “drop-ship” exceptionally cheap products directly to consumers worldwide:

source: Temu home page

In the U.S., those manufacturers benefit from an aspect of customs law known as the “de minimis” rule, which exempts packages worth $800 or less from tariffs. This actually provides a competitive edge for Temu: larger retailers do pay tariffs, since they of course are importing goods in larger quantities with values much higher than $800.

Thanks to that regulatory advantage (which exists in other countries as well) and aggressive marketing, Temu’s growth in the U.S. has been breathtaking. By most estimates, the company generated in the range of $15 billion in gross merchandise value1 in 2023, with growth near 100% expected in 2024.

To put that into context, Dollar Tree , which operates over 16,000 stores in the U.S. and Canada, should see FY24 (ending January 2025) sales of about $32 billion. At Forbes in December, Lauren Debter wrote of Temu’s growth that “some say it’s the fastest rise in retail history”.

Is Temu A Fad Or A Trend?

Of course, that doesn’t necessarily mean that Temu is here to stay. Cut-rate prices and aggressive marketing can combine for explosive growth — but not necessarily a sustainable business.

Indeed, we’ve seen something similar recently, in Wish.com, a platform operated by ContextLogic . Wish also offers ridiculously cheap prices on items manufactured in China and shipped directly to overseas customers. And Wish, too, saw explosive growth driven by enormous marketing and promotional spending. The bottom quickly fell out:

source: Koyfin

Indeed, as we discussed on Twitter this week, ContextLogic just sold Wish for a price in the range of zero dollars, and possibly less.

And there are some modest signs that customers are already seeing bit of fatigue with the Temu offering. One in-country report said 2023 GMV was $14 billion, which actually came in modestly below an early-year target of $16 billion. Google searches have declined as well (other than a Super Bowl-driven spike, the negative trend has continued as of this writing):

source: Chartr

There are clear risks to the business model. In a short report on PDD in September, Grizzly Research argued that the Temu app was malware, and noted that the app already was pulled from the Google Store. The company has come under regulatory fire for sourcing products potentially made by forced labor, and running afoul of U.S. law in the process. Even suppliers have concerns.

All that said, the company is giving U.S. consumers what they want: cheap imported goods. A divided Congress may not be willing to simply shut down the app, no matter the justification. (Concerns have been raised, and congressional hearings held, about TikTok as well.) And even reducing the de minimis threshold to $150 (where it was just a few years ago) probably doesn’t affect Temu all that much, given most orders likely come in below that level.

Perhaps most importantly, this is probably not a management team investors should be betting against. Thanks in large part to its strategic focus on smaller cities and the social aspect of its app, Pinduoduo has taken a tremendous amount of market share in China from both Alibaba and JD.com .

This is a company founded in September 2015, which is probably generating more than half a trillion dollars in GMV this year2. The domestic business of PDD is, without exaggeration, one of the most impressive stories in the history of e-commerce. And while management has been reticent about the strategy behind the overseas efforts, one message has been consistent: the business remains in learning mode.

At some point, Temu is going to focus on profitability; it’s not just going to randomly toss good money after bad. Wish clearly did that once its business peaked (and note that it peaked before the arrival of Temu on the scene), in large part because it had no other choice. ContextLogic was Wish. In contrast, Pinduoduo is not just Temu; there’s still a domestic business worth more than $100 billion.

What Temu Means For PDD

PDD stock has soared over the past eighteen months, and incredibly caught up to rival Alibaba in terms of market capitalization:

source: Koyfin

But it’s an interesting question as to how much of the gains in PDD are attributed to Temu, and how much are coming from clear market share gains in Pinduoduo’s home country. And one of the reasons the question is interesting is because there are so many questions about Temu itself.

PDD management has given exceptionally little direct information on Temu’s performance, despite being asked on each of the last four earnings calls3. We know that Temu is being booked as third-party revenue, meaning PDD only recognizes its share of fees from a sale as revenue, rather than the entire sale. But other than that, management has been exceptionally quiet; Temu was mentioned once on the Q3 earnings call and not at all in the Q3 earnings release.

This does seem odd, but PDD management historically has been quite tight-lipped about its domestic business. As Grizzly Research noted in its short report, the company actually has disclosed fewer metrics as it’s become larger, rather than more.

Given that investors are guessing about Temu’s metrics, they’re likely guessing about the platform’s valuation as well. Given that PDD currently has a market cap just shy of $180 billion, it’s hard to argue that Temu has been the primary driver of the recent rally. But the offering no doubt matters.

How much is up for debate. Even the sell side seems conflicted. JP Morgan has projected Temu can drive operating profit of $3.5 billion in 2027; a Goldman estimate cited by Grizzly Research is for roughly $400 million. Bernstein analysts have called the site “a force to be reckoned with globally”. Last month, Morgan Stanley questioned whether growth had already peaked.

Barclays has valued Temu at $50 billion, not terribly out of line with the reported $80-$90 billion valuation Shein is seeking in a potential IPO. JP Morgan’s $3.5B EBIT target for 2027 probably suggests a current valuation in the range of $50 billion, discounted back4. In September, Goldman was at $43 billion for Temu plus cash plus grocery, implying a much lower valuation for Temu itself (likely $10-$15 billion). Morningstar appears to be an outlier: it cited Temu in raising fair value by nearly $100 per ADS5, suggesting the platform is worth in the range of $130 billion.

Can You Short PDD Here?

What’s interesting about the various targets is that they get to one broad conclusion: the way to bet on Temu fading is not necessarily to short PDD. An absolute collapse of Temu does hit the stock, but even bulls see less than 30% of the current market cap coming from the platform. Since we know Temu is running huge losses now, there’s a growth tailwind for PDD on the way no matter what. Either Temu starts to scale and its losses narrow — or it fades and its losses narrow.

And even with those losses, it’s not as if PDD is an expensive stock. Shares trade at 17x forward earnings — with those estimates, again, suggesting a drag from Temu. It’s impossible to precisely quantify that drag, but most reporting suggests the platform is losing ~$2 billion this year, suggesting a $1 billion-plus hit in 2025, likely 10%-plus of estimated EPS.

And so this plan doesn’t quite seem to work:

source: Twitter

Even if a short is right on Temu, that doesn’t necessarily crush the stock. The bigger issue is that this doesn’t seem like a company to bet against.

Again, what Pinduoduo has done in China is incredible. Its performance there is the flipside of the long-running ‘value’ argument for BABA, which looks incredibly cheap for a company still perceived as the ‘Amazon of China’. Many BABA bulls argue that the problem is that investors don’t trust Chinese entities, or that the market is betting on the economy in that country to implode.

Those are factors in the long decline in Alibaba stock. But so is Pinduoduo: it has eaten its rival’s lunch. No less than Jack Ma, Alibaba’s founder, has said as much.

It’s tempting to look at Temu and assume that the model will fade quickly. That there’s no way the business can grow selling a hodgepodge of short-lived products of questionable quality. But no-one thought a company that began as an online fruit seller could ever threaten Alibaba.

That’s exactly what Pinduoduo has done. And that history suggests that Pinduoduo can find a way to create value from Temu — even if the business model, right now, seems to have an awful lot of flaws.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• Adjusted for its leasing business, cash and securities, and the value of its stake in Porsche, Volkswagen is trading at a negative enterprise value.

• Obvious drivers of that valuation (weak performance or poor treatment of shareholders) don’t seem to apply.

• There are a variety of concerns, but none justify the current prices in Volkswagen or Porsche.

• Standard ‘sum of the parts’ risks apply, but it’s hard not to be intrigued here.

Read more

Our recommendation of chipmaker Cirrus Logic last month had two pillars. The first was that CRUS was selling off amid concerns about the company’s heavy reliance on Apple , despite little evidence that the relationship had deteriorated. The second was that Cirrus Logic had the opportunity to jumpstart growth in its business ex-Apple.

In two sessions after Tuesday’s report, CRUS has gained 19%. But it’s really only the first pillar that played out. Q3 crushed analyst expectations, and guidance for the fourth quarter looks solid as well (including on gross margin, suggesting continued pricing power with Apple). As we noted, the worry heading into the quarter, at least based on some headlines, was that iPhone unit sales were heading south, but for now that fear is dispelled.

The second pillar of the case, however, did not materialize in Q3. Overall revenue increased 5% year-over-year, and Apple’s share of revenue actually increased a point to 89%. But the ex-Apple case is a mid- to long-term play, and on that front there was plenty of good news, particularly around the move into laptops.

Cirrus Logic was added to the reference design for Intel’s upcoming Lunar Lake CPU, giving a big leg up in that market. The company got its first win in laptop power conversion as well, and there have been some nice wins in haptics. Cirrus Logic is also in the Apple Vision Pro, which can add to revenue over time.

Those wins add to the sense that Cirrus Logic can steadily expand over time into new markets, since it’s shown success on that front so far:

source: Cirrus Logic Q3 presentation

As yet, those wins haven’t translated into numbers, and even CRUS management isn’t quite sure what those revenue streams are going to look like in fiscal 2025 and beyond. But certainly the quarter strengthens the bull thesis we laid out, and at Thursday’s close of $93, CRUS still has nearly 20% upside to its early April high. If the narrative becomes “Apple is fine, and they can grow ex-Apple”, the gains of the last two sessions absolutely can continue.

Tenable Holdings: Are Shorts Too Tough?

Over the past six months, we’ve recommended fewer short ideas1 (and I’ve had a much lower short exposure in my personal portfolio). Given broad market performance that downshift has been wise, and Tenable Holdings perhaps shows why.

We called out TENB as a short in early December, based on the thesis that the company’s new unified platform, Tenable One, was boosting near-term growth, while growing competitive threats put the longer-term outlook at risk. TENB now has rallied 23% since publication. Quite honestly, it’s hard to see what has driven those gains, other than ebullient sentiment in cybersecurity and in tech more broadly.

Indeed, there is absolutely a scenario in which TENB should have tanked after this week’s fourth quarter release. To our eye, this looks like a bad release — full stop. Tenable is laying off 5% of its workforce, though management framed that more as housekeeping than cost savings. More notably, full-year billings guidance for 2024 suggests 13% growth. On the Q3 call in early November, Tenable (somewhat unofficially) projected a “mid-teens” increase for the year. TENB fell 16% after that release, but gained 5% after Q4, moving to a 19-month high in the process.

source: Koyfin

It does seem like Tenable One is doing well (and figures suggest some acceleration in that product during Q4 after a somewhat stagnant Q3). But an analyst on the call made the same point we made in December: despite management’s positivity about that offering and Tenable’s capabilities more broadly, its growth rates are basically in line with those of direct competitors. Yet TENB stock is still receiving a sharp premium to those peers.

Meanwhile, Tenable has spent several quarters saying that disappointing top-line performance in 2023 was due to macro conditions that were delaying deals (management specifically called out the March failure of Silicon Valley Bank, for instance).

The question with a short like this is whether the thesis is wrong, or just early. We lean strongly towards the latter explanation, and I personally see this is as a better idea than it was at publication. But we also acknowledge that, from the short side, being wrong and being early usually wind up in about the same place.

Coherent: An AI Winner Can Keep Winning

Last April, we recommended Coherent as a value play with exposure to multiple secular trends. COHR is up 84% since then, in large part because the market seems to have come around to that longer-term bullishness:

source: Koyfin; chart of next twelve month EV/EBITDA multiple

The catalyst, unsurprisingly, is artificial intelligence. Coherent said that revenue from its 800G transceivers used in AI and machine learning more than doubled quarter-over-quarter, and neared 10% of total sales.

But there’s more going on than just a broader trend: fellow 800G player Lumentum plunged after earnings this week, and gave pretty minimal color on its performance in the space. It seems like Coherent is taking share, and that business now is big enough to move the needle.

What’s interesting, however, is that the other parts of the Coherent business remain relatively soft, at least from a near-term perspective. We were much more interested in Coherent’s opportunity in silicon carbide substrates, used to develop chips for electric vehicles. That opportunity was validated in October, when a pair of Japanese manufacturers invested a combined $1 billion for just 12.5% of Coherent’s SiC business. But, so far, SiC has been somewhat disappointing. Optimism toward EV demand more broadly seems to be fading, and SiC plays Aehr Test Systems and Wolfspeed are down 42% and 50% respectively, since we recommended COHR.

That said, the $8 billion valuation implied by those investments represents ~60% of Coherent’s current enterprise value, and demand continues to exceed Coherent’s ability to supply SiC substrates and epitaxial wafers. The AI opportunity is big. Coherent’s laser business is nearly one-third of revenue and serves other major trends (think additive manufacturing and medtech).

In that context, valuation hardly seems demanding. That’s all the more true given that, overall, Coherent is probably closer to the bottom of its cycle (like so many suppliers, it’s dealing with the effects of inventory corrections by its customers) than to the top. This has not been a market in which to let go of anything related to AI. That aside, COHR still looks attractive even after a big rally.

NETGEAR: Change Is Good

In July, we called out networking play NETGEAR , which had just become a net net2. The idea in investing in these kinds of names is that the margin of safety is enough that it’s worth it to simply wait for an upside catalyst to occur.

So far, it hasn’t. NTGR is down 2.6% since we published in August. But the asset-based bull case actually has strengthened. Cash is now 72% of the company’s market cap, against 59% in July. Net current asset value (current assets less total liabilities) is up about 4%, while the market cap is down a little over 3%. The balance sheet should get better still: NETGEAR guided for “meaningful” cash flow in Q1.

Shares sold off Thursday after downside guidance, which management attributed to inventory corrections in its own industry. But multi-year performance has been weak; there’s more going on here than just a single quarter. For NETGEAR, something needs to change.

The good news is that something big already has. Last month, the company announced that Patrick Lo, NETGEAR’s founder, chief executive officer, and chairman, would step down. Importantly, Lo is leaving the board, and because of steady stock sales he only owns about 3% of the company. That in turn seems to open a path toward potentially significant changes.

Clearly, recent performance has not been strong enough. Nor has capital allocation: it’s not a good thing that this business has 70%-plus of its market cap in cash. This is not an industry where big M&A is going to be a factor and so the decision to let cash build up on the corporate balance sheet simply doesn’t make a lot of sense. But with fresh leadership (Lo leaves for good in July), there is an opportunity for NETGEAR to improve both operational execution and shareholder returns.

To be sure, that opportunity has existed for some time, yet NETGEAR simply hasn’t capitalized. Networking overall has been a brutally difficult sector, and minimal enterprise exposure only makes that problem worse. The point of owning stocks with these kind of numbers, however, is reflected in the old adage: “take care of the downside, and the upside will take care of itself.” At some point, something is going to change, and that opens the door to significant gains.

As of this writing, Vince Martin is long COHR.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.