Stock Sonar

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.

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.

Advanced Emission Solutions (NAS:ADES) — mrkt cap 70mm; Price $2.14; EV/EBITDA NA

SPECULATIVE POSITION INITIATED. This is a highly speculative position with a likelihood that it can go to zero; however, there is also a chance that it can be a ten bagger (10x return). ADES is on its way to being a pure play producer of a specialized filter (think like a Brita filter) that will be in high demand once a potential landmark EPA regulation is passed. To speak technically, ADES’s legacy business is manufacturing powdered activated carbon (PAC) which is used to capture air contaminants from coal fired generators. ADES is transitioning from PAC to provide granulate activated carbon (GAC) instead. Why? To be able to meet the sea change in demand caused by the proposed EPA ruling on per-and polyfluoroalkyl substances (PFAS). These forever chemicals are highly carcinogenic and were manufactured extensively by companies such as 3M as they had desirable manufacturing qualities. The EPA will be proposing the first ever limit, potentially set to 4 ppt (parts per trillion) for water utilities. The most cost-effective way for utilities to treat water is through GAC. If this happens, ADES will be ideally positioned to take full advantage (see more on our portfolio positionings below).

Enphase (NAS:ENPH) — mrkt cap 12.4B; Price $91.39; EV/EBITDA 14

STARTER POSITION INITIATED. ENPH is a provider of solar micro-inverters and batteries. ENPH has chosen a different approach than other solar providers by opting for a more decentralized layout which ensures higher reliability, safety, and convenience. Along with their products being easy to use for the end consumer, installers also view them as the most convenient and safest system along with providing the highest customer service. This is exhibited by their high NPS scores and the longest warranties in the industry. Although the solar industry has hit a temporary lull due to its discretionary nature and unfavorable regulation in the USA, we believe the industry has secular drivers and ENPH will be able to capitalize on this.

Stagwell Inc (NAS:STGW) — mrkt cap $1.3B; Price $4.9; EV/EBITDA 8.2

EXIT. We discussed STGW on our 9/6 Stock Sonar and initiated a position. Stagwell is a new-age marketing agency that serves blue chip companies and has grown through acquisitions. Although STGW fits nicely with the media fragmentation trend, we had trouble digesting the company’s complex accounting. Serial acquirers and companies that go public via reverse merger can tempt management to engage in a degree of accounting creativity so caution is paramount. As their previous auditor stated in the 10k “the volume of contracts and the diversity…introduces significant complexity in assessing the accounting.” To be clear we are not disapproving of their accounting practices, just that it falls into the “too hard” bucket and even after several discussions with IR we are unable to reach a high level of comfort. We have divested the name and were down ~12% since purchase.

CommScope (NAS:COMM) — mrkt cap 521mm; Price $2.46; EV/EBITDA 8.5

SPECULATIVE POSITION INITIATED. COMM provides network infrastructure solutions from broadband to enterprise networks. It has roughly 9B in debt making it a highly levered play on the broadband industry. The 9B in debt was reached through a series of botched acquisitions and operational mishaps, with current CEO Treadway brought in to right the ship. COMM is currently FCF neutral however it has debt maturing in 2025. COMM’s debt load would likely be an insurmountable task however the BEAD program (complements of the Infrastructure Act) is bringing in roughly $43B in subsidies to run broadband to rural areas. COMM will benefit greatly from this and coupled with the large cost savings the CEO has implemented, COMM might be able to pay down debt levels and have another lease on life.

Hooker Furnishings (NAS:HOFT) — mrkt cap 183mm; Price $17.21; EV/EBITDA 7.0

PASS. We are passing on Hooker Furniture but we will likely revisit in the near term. Hooker Furniture is a well-known furniture company that manufactures several brands and sells furniture primarily to residential and hospitality segments. The hundred-year-old company owns the well-known Hooker brand and has a reputation for quality. Few businesses have been hit as hard with the slowdown in housing. The company is currently cash flow positive given it is selling through built up inventory, however we would like to see the company cut its dividend soon to improve its liquidity position. This has a promising setup that we look for: a good company with cyclical earnings being aggressively sold off for short term reasons.

Farmer Bros (NAS:FARM) — mrkt cap 56mm; Price $2.76; EV/EBITDA NA

MORE RESEARCH NEEDED. Farmers Brothers provides a portfolio of coffee supplies for ~40,000 businesses (convenient stores and restaurants mainly). They were close to breaking debt covenants but managed to sell off their direct ship facility for ~100mm allowing them deleverage and improve liquidity. The sale also allows them to offload their low margin segment and re-focus on their core which is to be known by customers as the partner of choice for any coffee needs. If Farmers Bros is currently positioned for profitability the upside could be large but we hope to know more after discussions with management –specifically how the divesture affects, if at all, current operations along with an understanding of contract economics.

Rex American (NYSE:REX) — mrkt cap 667mm; Price $38.12; trailing P/E 25

STARTER POSITION INITIATED. REX is an ethanol producer with about 3% market share in the US. Unlike other publicly listed competitors, REX has no debt, has 300mm in cash, and has consistently been FCF positive regardless of the ethanol cycle. On top of this, REX is in a unique position to capitalize on IRA carbon credits at its One Earth facility given its geographic location and proximity to appropriate reservoirs. The potential windfall of this would be in the range of $200mm to $700mm, a significant amount compared to REX. Although more work needs to be done to narrow down this range, management has shown themselves to be good operators with prudent capital allocation.

Wise PLC (WISE:LON) — mrkt cap £7.1B; Price £6.96; trailing P/E 63.6

MORE RESEARCH NEEDED. Wise is a global cross-border money transfer company that uses a completely different business model of “matching” which enables it to significantly undercut fees on bank transfers which is the prevailing method for high value transfers. The average price of a transfer using Wise is .64% versus banks which will be 3-4%. Wise also has a large and growing deposit base –the Wise debit card is being used by the savvy traveler as a way to incur cheaper fees when using their debit card. Wise has large runway potential and we believe that it could be only in the second inning. We hope to learn more about the company’s operational nuances in the coming days/weeks.

Patria Investments (NAS:PAX) — mrkt cap 2.0B; Price $13.60; trailing P/E 17.6

MORE RESEARCH NEEDED. PAX is the largest private markets asset manager investing across LatAm. It IPO’d in 2021 with Blackstone as a backer. PAX’s LPs tend to be based in developed markets where it is increasingly being seen as the partner of choice for investments in the LatAm region. We believe that institutions and high net worth individuals will continue to increase alternative exposure and LatAm may be a sound place to invest in the coming years given geopolitical safety, improving governance, and easing monetary policy in the region. All great tailwinds for Patria. More work needs to be done to understand Patria’s institutional capabilities as operators and the investment landscape in LatAm.

Inmode (NAS:INMD) — mrkt cap 2.29B; Price $27.99; trailing P/E 12.89

PASS. To our surprise, we had over a dozen readers write to us wanting to know more about this name. At this time, we are passing. Further research and talks with insiders have led us to believe that Inmode is in danger of becoming a one-product company with the Morpheus8 as their flagship. The platform still maintains a competitive advantage in the marketing department (some clients request Morpheus8 treatments directly) and a slight technological advantage. However, the Radio Frequency Microneedling space has heated up dramatically since 2018 with strong competitors like BTL, Candela, Sciton, Alma, Cutera, Lumins, Lutronic and BENEV having competing products. Couple this exceedingly competitive industry with the fact that Inmode is now charging for demos, has poor customer service, is contending with financing costs that are likely to remain higher for longer, and it is just too many negatives for us.

Dollar General (NYSE:DG) — mrkt cap 22.7B; Price $103.37; trailing P/E 10.59

PASS. After researching DG more, we are passing on it. Despite DG’s impressive operating history and unique retail positioning to low-income shoppers in rural areas, we believe their future growth trajectory is uncertain. Dollar General has fully matured its U.S. footprint having the most retail locations out of any retailer at ~19,000 stores. Growth has come from an increase in store count and SSS. We believe these factors have headwinds as price increases have put pressure on their target demographic. DG is also making increased capital investments to operate more like a traditional grocery store which will put pressure on FCFF and place them in a more competitive market.

Babcock & WIlcox (NYSE:BW) — mrkt cap 300mm; Price $3.39; trailing P/E NA

MORE RESEARCH NEEDED. BW is an energy and environmental technology and services company. They historically produced boilers and combustion systems for plants with aftermarket parts and services making up 30% of revenues. Over the last several years BW has positioned itself to also offer renewable technologies through their Bright Loop technologies and Climate Bright platform. The strategy is to use their existing install base to upsell customers on these newer technologies. This segment has seen significant growth over the last two years, growing about 200% and becoming about 40% of revenues. BW also expects their backlog to grow more than 50% in the next six months given the deluge of projects in the pipeline. Although the growth is there, cash flows have yet to materialize. This is a highly competitive industry and if BW’s strategic positioning is the same as their legacy business, then it’s share price will continue to decline. More diligence is needed to discern if BW’s future will look different than its past.

InMode (NAS:INMD) — mrkt cap 2.33B; Price $28.09; trailing P/E 13

MORE RESEARCH NEEDED. InMode is an Israeli-based medical device company specializing in technology that utilizes radio frequencies and laser equipment to enhance aesthetics. They emphasize their niche position in the growing minimally invasive aesthetic treatment market. Despite being in a growing industry, the current valuation resembles that of a value stock, having decreased by 70% from its highs due to concerns about reduced spending on medical capital equipment. If we can gain confidence in the effectiveness and durability of their technology, we plan to conduct a more thorough analysis. We have a meeting scheduled with a cosmetic industry professional next week who has extensive experience with InMode’s Morpheus 8 and Triton treatments. We hope to learn a great deal more by then.

Amcon Distribution (NYSE:DIT) — mrkt cap $116mm; Price $191.23; trailing P/E 10

PASS. Amcon Distribution is the sixth largest convenience store distributor in the USA. What attracted us initially to Amcon was the high degree of operating efficiency it exhibited. However, Amcon is being squeezed on both sides of the ecosystem from both suppliers and customers. Distributors exhibit better profitability profiles the more fragmented its ecosystem is as no customer or supplier has significant purchasing power. Unfortunately, the convenience store landscape is heavily consolidated, and DIT primarily distributes branded products from large companies such as Hersheys. Although it is well run, its waning strategic positioning prevents us from looking much further.

Tomra Systems (TOM-OSL) ADR — mrkt cap $3.03B; Price $10.4; trailing P/E 28.8

MORE RESEARCH NEEDED. Tomra, a mid-cap Norwegian company originally founded in 1972, began its journey as a reverse vending machine company. Over the years, it has evolved into a prominent market leader, providing industrialized solutions to companies engaged in waste sorting and processing. Many Material Recovery Facilities (MRFs) responsible for waste sorting have recognized the need to upgrade their facilities to reduce contamination rates in recyclables. Despite its currently high valuation, exploring Tomra further could be worthwhile, especially if we gain confidence that cost pressures have eased. The company presents an intriguing opportunity in the realm of sorting technology and the promotion of the circular economy.