Stock Sonar

Zumiez (NAS:ZUMZ) — mrkt cap $349mm; Price $17.64; EV/EBITDA 5.4

We have exited ZUMZ. We discuss our exit here.

Carriage Services (NYS:CSV) — mrkt cap $378mm; Price $25.21; EV/EBITDA 9.6

PASS. Carriage Services is a roll-up that owns and operates 173 funeral homes and 32 cemeteries throughout the United States. The funeral home and cemetery industry remains heavily fragmented, with 80% of the market still in the hands of individual operators. The company was formerly led by its long-time founder and CEO Mel Payne, who recently faced health challenges with a stroke. The current management in place has held former positions at Service Corporation International – by far the largest player in the space. Given the industry’s predominant ownership by individual operators, there’s ample room for roll-ups like CSV. Despite our efforts, the impact of the COVID-induced surge in death rates and the growing preference for cremations over traditional burials—priced at a third of the cost—results in an unclear forward-looking profit picture. While this could make an interesting acquisition target for a PE firm, we cannot gain conviction and are passing.

Stemmer Imaging (XETA:S9I) — mrkt cap €210.6mm; Price €32.40; P/E 10.8

MORE RESEARCH NEEDED. Stemmer is the largest distributor/assembler of machine vision technology in Europe. The machine vision industry has been steadily growing and could see a step change in demand with the rise of GPUs and AI algorithms such as transformers drastically improving inference ability. As a distributor of machine vision components, Stemmer would be a direct beneficiary of this trend. Stemmer is a value-add assembler with the goal to have them be plug and play. It is positioning itself to be hardware and software agnostic to reduce reliance on suppliers. It will be important to assess the leverage of the component suppliers as that evolution will determine the profitability of Stemmer. The more modularized the value chain becomes, the more value accrues to Stemmer.

Lemonade inc (NAS:LMND) — mrkt cap $1.2B; Price $16.64; EV/EBITDA NA

PASS. Lemonade, a modern insurance player, is making strides in achieving more reasonable loss ratios across various lines of business. The company emphasizes advanced AI modeling, though historical internal data was limited until recently, positioning them as a leader in AI adoption within the insurance sector. For example, Lemonade employs a comprehensive dataset of around 4,000 points for assessing homeowners policies, in contrast to the approximately 40 data points used by traditional carriers. Advanced predictive techniques are at still low penetration rates across the industry. LMND reported improved Q3 earnings, and the stock saw a quick ~50% surge. Notable improvements in loss ratios across business lines and impressive growth in the pet care insurance segment are promising. However, the intensely competitive nature of the insurance market poses a challenge, with larger carriers potentially undercutting Lemonade in larger markets. Unless Lemonade focuses on niche lines, a sustained path towards profitability will be challenging.

Berkshire Hathaway (NYS:BRKB) — mrkt cap $817B; Price $376; P/B 1.6

PASS. We believe that the risk is reasonably high that Berkshire will underperform the market on a go-forward basis. Berkshire relies on two drivers of value – one is their investment portfolio, and the other is their collection of subsidiaries. It is unclear to us how the investment portfolio will continue to be a driver of value it once was, and we believe that Berkshire should officially de-emphasize the importance of the investment portfolio to focus efforts on fixing and enhancing its subsidiaries. Berkshire 1.0 was largely an investment manager and budding conglomerate. For Berkshire to address its vulnerabilities, Berkshire 2.0 would need to complete its transition into a full conglomerate. In case readers missed it, we have written about this here.

Abercrombie & Fitch (NYS:ANF) — mrkt cap $5.2B; Price $103.9; EV/EBITDA 10.7

PASS. ANF is an American lifestyle retailer that also owns the Hollister brand. They have seen an impressive re-rating of their fundamentals in a challenging environment. Recent quarters have seen year-over-year revenue growth of over 15%, with earnings also improving. This is surprising because when we originally researched ANF in 2016, it was dubbed the most hated retailer in America by various consumer surveys. This was due to a ‘models only’ hiring policy and an overall brand image that was viewed as racially alienating. Longtime CEO Franz Horowitz engineered an impressive turnaround by using consumer intelligence to do more ‘chasing.’ They succeeded in their goal of staying true to their American heritage while tactically adjusting to fast fashion trends. After achieving the proper product assortment, ANF successfully used influencers and affiliates to raise awareness about their rebranded image. Although we like the company, in this environment, the price is slightly high, and we will wait for a better price before reconsidering.

Kalray (PA:ALKAL) — mrkt cap €175mm; Price €20.65; EV/EBITDA NA            

MORE RESEARH NEEDED. Kalray is a fabless semiconductor company that designs Data Processing Units (DPUs). DPUs are specialized processors designed to offload specific compute tasks from CPUs. These tasks are workloads such as data transfer, security, and data compression. DPUs essentially orchestrate data transfer from cloud to edge to premise whereas historically data has been more fixed in a central location. Kalray recently partnered with Dell which provides them access with distribution. Kalray competes against larger player such as Nvidia and Marvell and has positioned itself to go after more specific workloads and smaller customers. KLRY has grown 60% yoy and is currently value at about 7x revenue. The DPU market is set to grow to 6B by 2031, roughly a 27% CAGR from today.

Dr. Martens (LSE:DOCS) — mrkt cap £750mm; Price £0.78; EV/EBITDA 4.4   

ADD. We initiated a starter position on 12/6/23 following a ~20% drop after a predictably weak earnings report. DOCS, the world’s leading boot brand, went public in 2021 and since its acquisition by a PE firm in 2014, the brand has gradually transitioned from selling through distributors and wholesalers to a DTC mode (now ~50% of current sales). We attribute DOCS long-term growth to effective execution, store expansions in key cities, and improved brand and product awareness. The substantial price drop since IPO  (~80%)  can be attributed to an overvalued IPO, operational challenges in the U.S., and footwear category macro headwinds. However, we believe that DOCS has the potential for recovery in the U.S. and we hold management in high regard, as they take their role as custodians of the brand seriously. Our ongoing discussions with IR increasingly reinforces our view that the stock’s undervaluation presents an attractive entry opportunity (In addition, DOCS pays a 7+% div yield).

Powell Industries (NAS:POWL) — mrkt cap $967mm; Price $81.05; EV/EBITDA 12

MORE RESEARCH NEEDED. POWL is a leader in custom design, manufacturing, and servicing of electrical distribution solutions such as switchgears and power control rooms. A large part of its business has been historically tied to the O&G sector however recently it has seen demand from the electrical infrastructure upgrade along with data centers. Data center capex spending has been exploding with the rise of computationally intensive AI models. POWL revenues increased 32% yoy however this could be the start of a larger trend. POWL has no debt and significant operating leverage. The fragility of its current customer base in the current macro environment is the biggest question mark and more analysis needs to be done here.

ZipRecruiter (NYS:ZIP) — mrkt cap 1.4B; Price $14.1; EV/EBITDA 14.7                            

PASS. ZipRecuiter is one of the largest online job market places in the U.S. with the other two major competitors being LinkedIn and Indeed. We have firsthand experience with the product from previous roles on the employer side and found it to be highly efficient. The company greatly benefited from a hot labor market marked by substantial turnover. The majority of their revenues come from a solid SAAS business model, with over 100k employers on the platform paying on average ~1.7k quarterly. We hold a positive view of the business model and the value proposition of the product. Given the negative macro momentum surrounding job openings and an overall slowing labor market, we think the likelihood that this stock goes on sale is moderately high and it will remain on our watchlist.

Cullen/Frost Bankers (NYSE:CFR) — mrkt cap $6.7B; Price $105.7; P/TBV 2.4

PASS. Cullen/Frost is a regional bank HQ’d in San Antonio, TX. We maintain a strong bias against traditional banking exposure for the foreseeable future. The bond market, both public and private, has been a formidable competitor in taking loan-share and since the GFC, increased bank regulation has been onerous. Regionals aren’t any better – what they gain in reduced regulatory burden they lose in perception. The Fed has unofficially created a two-tier banking system: large banks being TBTF and smaller banks that can fail but with uninsured deposits ‘most likely’ safe. Then there are shorter-term issues such as office exposure and duration losses on HTM assets. Our current hurdle for gaining interest in a bank is when it is trading close to its book value and has an ROE set to improve (unlike the vast majority of sectors, these metrics are relevant for banks because most assets and liabilities are MTM). Although CFR has a history of conservative underwriting and solid management a P/TBV of 2.4 doesn’t meet our very high hurdle.

Miller Industries (NAS:MLR) — mrkt cap $450mm; Price $39.47; EV/EBITDA 7

MORE RESEARCH NEEDED. MRL is one of the largest manufacturers of tow trucks in the world. Over the last 23 years, it has grown revenues from $20mm to over $1B. MRL benefits from the average automobile age being significantly older and more prone to breaking down, construction (IIJA and IRA) causing more accidents, and construction equipment that needs towing. Due to this change in demand, MLR has seen gross margin expansion and looks cheap on a TTM basis. However, we believe that supply will inevitably catch up and margins will return to a normal baseline level. We will revisit the name in more depth if the share price comes down.

Planet Labs (NYSE:PL) — mrkt cap $647mm; Price $2.25; EV/EBITDA NA

PASS. The ‘Bloomberg Terminal’ for earth data. PL has one of the more diverse revenue streams both geographically and by customer type (commercial, government etc). It also boasts high revenue retention rates in excess of 100%. PL has no debt and 300mm in cash and short-term investments, giving it a 4-year runway at its current burn rate.  PL has gross margins of about 50% however does not have the revenues needed to be profitable due to about $250mm in fixed costs. Without massive cost cutting, profitability won’t be reached until PL at least doubles its revenues. PL grew topline 20% yoy and is modifying its go to market strategy to go after both low-touch customers and high touch customers such as government agencies.

Scholastic (NAS:SCHL) — mrkt cap $1.13B; Price $38.09; EV/EBITDA 8

MORE RESEARCH NEEDED. SCHL is a classic good company with bad governance. SCHL has a dominant market share as a publisher for children’s books (think those sold in a book fair) such as the widely known Goosebumps. SCHL’s strong cash flows were spent on non-accretive acquisitions and costly R&D projects that did not pan out. The result is a company that has traded roughly flat over the last two decades. However, the future might look very different given a recent change in ownership. SCHL has recently had more shareholder friendly allocation decisions such as a Dutch Auction tender along with open market share repurchases. More work needs to be done to assess the strategic positioning of their other segments (educational solutions and intl operations) and we will be meeting with IR later this week to glean a better understanding.   

Potbelly (NAS:PBPB) — mrkt cap $293mm; Price $9.97; EV/EBITDA 6.8

MORE RESEARCH NEEDED. Potbelly is an American fast casual sandwich operator with 426 stores– of which, 54 are franchised. PBPB went through a C-suite change in 2020 and is now led by former Wendy’s COO, Bob Wright. Their ambitious goal is to reach 2000 locations in the next 8-10 years with roughly 90% franchised. Since the leadership change, they have streamlined operations and improved AUV economics to attract franchisees. They are undoubtedly showing progress in what is a notoriously difficult category. We will do more research into the economics for potential franchisees and the differentiators of the PotBelly brand.

Consumer Portfolio Services (NAS:CPSS) — mrkt cap $186mm; Price $8.83; EV/EBITDA 13.2

MORE RESEARCH NEEDED. CPSS is one of the few well-run (indirect) subprime auto lenders in the U.S. Their secret sauce is having a large sales force that maintains relations with ~8000 auto dealer locations across practically the entire country. They purchase and service a pool of subprime auto loans (~3B) and these loans are typically securitized and sold to institutional investors. Understandably, the term “sub-prime” can have market participants reaching for the Rolaids but CPSS has survived through multiple market cycles and has conservative underwritings standards versus competitors. Rates softening next year should improve net interest margin and a relatively benign economy will see default rates that remain historically low.

Yellow Corporation (YELLQ) — mrkt cap $271mm; Price $5.2; EV/EBITDA NA

TRIM. This speculative trade is up 100% since we wrote about Yellow Corporation on our 12/6/23 Stock Sonar. We are trimming our position by half to keep the weighting under 1% of our portfolio. Aside from the price move that has reduced upside potential, our take on the situation is roughly unchanged since our 12/6 SS: “This position will represent less than 1% of our portfolio due to certain unanalyzable aspects of the bankruptcy sale proceedings… What we can analyze are the assets on the balance sheet. Auctions on the sale of their terminals were released before close yesterday and came in significantly higher than expected: ~400mm above the 1.5B stalking horse bid (and this wasn’t even for a full sale of the terminals). Our estimate of fair value for shareholder recovery is north of 600mm…The risk is that our estimates do not account for very large potential off-balance sheet liabilities (Worker adjustments/retraining along with multi-employer pension plan). We think the chance is decent these potential off-balance sheet liabilities are treated in Yellow’s favor and have sized our position accordingly (in the event this doesn’t favor Yellow this will be a full loss)”.

Gildan Activewear (NYSE:GIL) — mrkt cap $5.7B; Price $33.0; EV/EBITDA 9.8

MORE RESEARCH NEEDED. Gildan is the largest manufacturer of low-cost basic apparel for the Printwear industry. We completed a full analysis of Gildan on 4/1 (here) and while the company did have promising “moaty” attributes, we found the CEO/founder Glenn Chamady to be overly promotional and rarely did he directly address the firm’s many missteps. We assigned the company a neutral rating and patiently observed potential developments that might warrant a re-rating. As things would have it, earlier this month the CEO was ousted by the board for emergent reasons. The stock reacted negatively on the news (-12%) and to our surprise large shareholders/funds have decided to take an active role in reinstatement (WSJ article: here). We think these funds likely have a relationship with the CEO that is blurring their vision (or just plain attention seeking – active campaigns look good to their investors). Gildan is a better company without the CEO (former) and we are hopeful added volatility creates potential for entry.

Nextdoor (NAS:KIND) — mrkt cap $737mm; Price $1.92; EV/EBITDA NA

PASS. KIND is a localized app for neighborhoods. Neighbors can share information about local news, safety, garage sales, lost pets etc. The benefits of a hyperlocal marketplace is that it is more valuable to local businesses with ad dollars to spend. Unfortunately, KIND has been unable to execute, losing roughly $35mm a quarter on $60mm of revenue along with ongoing deterioration of metrics such as number of users. With 40mm weekly active users and with a net cash balance of $500mm, the market is valuing each user at ~$5, which is low by most marketplace standards. KIND would be a great acquisition target of firms like GOOG however, with majority voting rights being controlled by select few directors, it is uncertain whether this value will be realized.

Smith & Wesson (NAS:SWBI) — mrkt cap $630mm; Price $13.85; EV/EBITDA 8

EXIT. We disclosed our starter position initiation on 9/13 and the stock is up slightly over 20% since. We continue to believe SWBI is a strong company operating within the best type of oligopoly – a friendly one. NICS figures (indication of demand) are still high, and since our initiation channel inventory has come down considerably. In addition, their large relocation from Massachusetts to Tennessee is complete with unexpected expenses that will most likely continue to pop-up putting pressure on near-term margins. A 20% re-rating is usually not enough for us to sell a starter position but it is trading closer to fair value (on a normalized FCF basis) and given the environment we want to maintain ample liquidity for other opportunities. If we had to guess, SWBI is a company that we will revisit many times in our careers.

DO & CO (ATX:DOC) — mrkt cap €1.4B; Price €130.00; EV/EBITDA 8.9

MORE RESEARCH NEEDED. DO & CO is an Austrian gourmet catering firm that specializes in airlines and international events such as FIFA and Formula one venues. It boasts 33 gourmet kitchens worldwide and has more than 60 airline customers. DO & CO’s strategy is to focus on large airport hubs and then expand their gourmet offerings to restaurants, hotels, etc. Airline catering makes up the lion share of revenue at about 75% of revenue and has seen more than 30% growth yoy due to strong load factors. Fixed costs make up about half of the expense structure and given additional scale, DOC could see significant operating leverage. Although the company is well run, more work needs to be done to assess DOC’s ability to expand into adjacent gourmet markets.

Mesabi Trust (NYSE:MSB) — mrkt cap $271mm; Price $20.69; EV/EBITDA 33

PASS. Mesabi is one of the more interesting royalty trusts we have run into. It was created in 1961 and dissolves 21 years after the last death of twenty five named individuals in the Trust agreement (based on their birth dates this likely means by 2050 or so). Mesabi has a lean operating structure and owns the mineral rights to an iron ore mine. The driver of demand for that mine is a Cleveland Cliffs hot briquette iron plant in Ohio. However, given recent acquisitions by Cleveland Cliff along with the increased penetration of Electric Arc Furnaces which use scrap steel instead of iron, the reliance on Mesabi’s mine has lessened considerably. These headwinds will likely persist, impairing MSB.

Altria (NYSE:MO) — mrkt cap $73B; Price $41.2; EV/EBITDA 7.1

PASS. Altria has remained focused on the U.S. market since its spin-off of Phillip Morris International. Volume of cigarettes seemed to stabilize during COVID but has since continued the decline we have seen in recent years. Marlboro volume sales are down from 83 billion sticks sold in 2021 to 75 billion last year. Unsurprisingly, this is an industry-wide phenomenon, and as a result, tobacco companies have increased prices over 30% since pre-COVID levels. Largely because of this, revenue, net of excise tax, has remained stable. Altria’s risks are well-known, and the company is under constant regulatory threat. The company has tried several times to expand outside of cigarettes but has been largely unsuccessful (about 10% of revenue is from non-smokable products). We believe that at some point fears may be overblown, but the company’s well-covered approximately 10% dividend yield is not enough to attract us.

Sally Beauty Holdings (NYSE:SBH) — mrkt cap $1.23B; Price $11.57; EV/EBITDA 4.9

MORE RESEARCH NEEDED. SBH is a beauty retail store with roughly 3000 stores worldwide. We originally discussed SBH in September and passed on the name due to uncertainty surrounding turnaround investments the company was making in concept stores. The company has since grown SSS and is right-sizing its footprint through cost-cutting (closing roughly 350 stores). Bears believe that strong competitors like Ulta and Sephora are a threat, but Sally operates in a differentiated segment of the market more geared towards hair products and professional beauty supplies. We believe they are a highly differentiated retailer that sells proprietary products at scale, and we will continue researching the name.

Diageo (LSE:DGE) — mrkt cap £63B; Price £28.01; EV/EBITDA 14

MORE RESEARCH NEEDED. Diageo is the world leader in premier spirits, owning brands such as Johnnie Walker, Guiness, and Casamigos. Diageo’s vast ownership of brands and distribution allow it to acquire emerging premier brands and then leverage its distribution to push the product globally. This combination has made it a dominant force with enormous latent pricing power. Diageo has recently undergone a CEO change due to the death of the previous CEO. Diageo is trading at a lofty multiple so we will wait for a pullback to initiate a starter as well as continue to monitor the company for any strategy and capital allocation decisions.

Dr. Martens (LSE:DOCS) — mrkt cap £926mm; Price £0.95; EV/EBITDA 5.1

STARTER POSITION INITIATED. Dr. Martens, a British footwear company founded in 1960, is renowned for offering high-quality, timeless boot designs that resonate with culturally edgy consumers. The company’s stock has declined by ~80% since its 2021 IPO, largely due to investors regaining their perspective, a downturn in the footwear category, and company fundamentals falling short of high expectations. In a world where retailers are vying to transform into brands (private label) and brands are striving to become retailers (DTC), there will inevitably be considerable volatility in company fundamentals as supply chains and distribution channels are optimized. Doc Martens, despite being a well-managed company, has faced challenges in its U.S. wholesale channel, along with persistently elevated costs and operational hiccups. Although our research is still in its early stages, we hold the belief that Doc Martens will overcome these primary challenges, and the brand’s enduring strength will prevail.

Yellow Corporation (YELLQ) — mrkt cap $135mm; Price $2.6; EV/EBITDA NA

SPECULATIVE POSITION INITIATED. We’ve mentioned Yellow Corporation a few times in Stock Sonar this year and closed our position in August with a ~300% gain in a few weeks. However, we’ve decided to re-enter the trade. This position will represent less than 1% of our portfolio due to certain unanalyzable aspects of the bankruptcy sale proceedings… What we can analyze are the assets on the balance sheet. Auctions on the sale of their terminals were released before close yesterday and came in significantly higher than expected: ~400mm above the 1.5B stalking horse bid (and this wasn’t even for a full sale of the terminals). Our estimate of fair value for shareholder recovery is north of 600mm (this is 300% upside from current levels). The risk is that our estimates do not account for very large potential off-balance sheet liabilities (Worker adjustments/retraining along with multi-employer pension plan). We think the chance is decent these potential off-balance sheet liabilities are treated in Yellow’s favor and have sized our position accordingly (in the event this doesn’t favor Yellow this will be a full loss).

Atkore (NYSE:ATKR) — mrkt cap $4.97B; Price $130.25; EV/EBITDA 6.89

MORE RESEARCH NEEDED. Atkore is a manufacturer of PVC and metal conduit. Over 90% of sales are related to electrical infrastructure; this will be seeing a sea change in demand due to BEAD funding and CHIPS Act. The conduit industry is heavily consolidated and ATKR is one of the more profitable players given its capital structure and working capital efficiency (this metric is tied to their PSUs). Management has also demonstrated sound capital allocation in regards to buybacks and acquisitions. Although conduits are a commoditized business (‘bending pipe’), the rationalized industry structure coupled with a higher demand environment could represent a stronger earnings period for ATKR. More work needs to be done to determine the appropriate long-term gross margins.

First Advantage (NAS:FA) — mrkt cap $2.2B; Price $15.32; EV/EBITDA 13

PASS. FA provides background check services for enterprise and other organizations. It competes with HireRight, Sterling Check (and newcomers such as Checkr). Private equity took these companies private 5 years ago and bought them public again in 2021. They are all roughly the same size with each at about $800mm in annual sales. Although FA has slightly better operational execution exhibited by higher revenue retention rates, investing in a company with multiple competitors that occupy the same niche is a large hurdle.

Alta Equipment Group (NYSE:ALTG) — mrkt cap $300mm; Price $9.12; EV/EBITDA 4.8

MORE RESEARCH NEEDED. ALTG is a dealer of construction equipment. Its business model is similar to our holding TITN (although TITN primarily is in the ag sector). Namely it has semi-exclusive geographic supply for OEM equipment. These relationships are extremely important to OEMs as dealers act as both distributors and customer service reps to their equipment. OEMs have the ultimate say in what dealers can get acquired and as a result PE has been prohibited from entering the space. This allows consolidators such as ALTG, who have an existing relationship, to acquire smaller dealerships at low multiples. Although we generally pass on serial acquirers, given the dynamics at play in this industry more work needs to be done to determine the capital allocation proficiency of management. 

Villeroy & Boch (XETR:VIB3) — mrkt cap €469mm; Price €17.7; EV/EBITDA 6.9

PASS. Villeroy & Boch was founded in 1748, making it the oldest company we have looked at. Unfortunately, legacy is not correlated with shareholder returns as share prices have grown at an anemic 2% CAGR over the last 30 years. VIB3 produces high end ceramics  (toilets and sinks) for bathrooms and kitchens and has gross margins of over 40%. VIB3 has primarily targeted the residential industry and it has recently made headways into the commercial space with its large acquisition of Ideal Standard earlier this year. Ultimately, the driver of this business will be operating leverage and if it can achieve the projected $40mm in synergies with Ideal Standard, it will be cheap on a cash flow basis. The key word is IF. We will wait to see the effects of this combination on the firm.