Stock Sonar

Red Robin (NAS:RRGB) — mrkt cap $100mm; Price $6.5; EV/EBITDA 3.7

SPECULATIVE POSITION INITIATED. Red Robin is an overly indebted U.S.-based casual diner with roughly 500 restaurants located predominantly on the west coast. We passed on this name late last year but have recently had another look given the stock is down 45% YTD on higher-for-longer rate outlooks (RRGB debt costs are variable) and an overall challenging environment for restaurants as consumers shift spending to grocery stores. In November of last year, we spent time with the CFO discussing their “back to roots” strategy. New management has done away with Virtual Brands, discounting, and lack of investment. The company is guiding for 65mm EBITDA for FY 2024, with about ~30mm of that going to capital expenditure and ~22mm going towards interest payments. Sale-leasebacks will continue to reduce debt this year and are in part responsible for lower EBITDA targets (additional lease expense). We think highly of management and they have taken appropriate steps to improve RRGB. Given the recent sell-off, the risk/reward skew is attractive, and we are happy to initiate a position.

Zillow (NAS:Z) — mrkt cap $11.1B; Price $47.9; EV/EBITDA NA

PASS. Zillow has ambitions to become the housing super app. The name sold off ~16% after a seismic news event dropped in the real estate world (NAR Settlement 418mm). To summarize, buyers’ agents’ commission will likely have to negotiate fees directly with the buyer instead of being entitled to a commission on the sale. This will totally upend the way buyers’ commissions are currently paid. Roughly 65% of Zillow’s revenue is generated from buyers’ agents. Zillow generates leads, and agents pay monthly fees to receive these leads. Zillow generates additional revenue from their Rentals and Mortgage segment. And although they exited iBuying (instant buying), they have partnered with Opendoor as a risk-free way to reenter this market. We think there could be significant impacts to the ruling that have yet to reflect in Zillow’s stock price, and we will be patient, waiting for a better opportunity. (After any significant news event, we take a fresh look at names that are impacted – this is a good example).

Vimeo (NAS:VMEO)  — mrkt cap $937mm; Price $5.58; EV/EBITDA 22

PASS. VMEO was founded in 2004 and is a niche alternative to Youtube. It caters to high quality content creators, businesses, and Youtube outcasts (either they have been kicked off the platform or convert people to Vimeo given the lower revenue share). Users that upload videos pay Vimeo with different tier subscription plans as Vimeo does not serve advertisements. Although its TAM is limited, VMEO has a robust business model and generated positive cash flow in 2023. We will wait for a pullback in price before considering a position.

Clearfield Inc (NAS:CLFD) — mrkt cap $409mm; Price $26.80; EV/EBITDA 5.6

MORE RESEARCH NEEDED. CLFD manufactures fiber optic management, protection, and delivery products. CLFD has targeted rural fiber optic developers who are poised to take advantage of the $42B of BEAD funding from the IIJA bill. Because of this, penetration of fiber optic to US households is set to increase to 85% by 2028 vs 50% today. Although industry tailwinds are there, and CLFD is optically cheap (CLFD has more than 100mm in cash with no debt due to a timely secondary offering when its share price was $100), more work needs to be done to assess CLFD’s advantages over peers. Otherwise, revenue growth will occur without corresponding FCF conversion.

Red Robin (NAS:RRGB) — mrkt cap $141mm; Price $9.15; EV/EBITDA 4

PASS. Red Robin is a U.S. based casual diner with roughly 500 restaurants located predominantly on the west coast. We spent an hour with the CFO discussing the nuances of their “back to roots” strategy. The new management team is doing away with Virtual Brands, discounting, and lack of investment. They believe past strategies have moved Red Robin away from what its brand stands for: Americana, fun, and family. In addition, almost all marketing spend will now be digital. The company is guiding for 75mm EBITDA in 2023 with about ~40mm of that going to capital expenditure and ~25mm going towards interest payments. This doesn’t leave a lot of FCF leftover however if the company can succeed in stabilizing and growing topline there is ample operational leverage in the model and the re-rating would be significant. We believe management is taking all the right steps but given the intensity of the competition and the pressure the category is under we will pass for now until there is more progress.

Cato Corp (NYSE:CATO) — mrkt cap $140mm; Price $6.83; EV/EBITDA NA

EXIT. We have exited this position down 9%. Cato operates in around 1270 strip-mall locations and specializes in selling fashionable, value-oriented clothing for plus-sized women. Although the company profitability is slightly worse than we currently believed, it is trading close to its cash value and given its liquidity position it will be able to support its 10% dividend for quite some time- more than enough for a good retailer to return to profitability. The primary reason we are exiting is that Cato did not meet the standard for escalation to a core position and we are seeing enough opportunities where having extra portfolio liquidity is helpful.