Stock Sonar

Whole Earth Brands (NAS:FREE) — mrkt cap $99mm; Price $3.00; trailing P/E NA

EXITED. We wrote about FREE in a previous Stock Sonar when we initiated a small weighting. It has run up about 30% since then and we are closing out the position. The thesis was predicated around gross margins expansion and sku rationalization, however retailers are pushing back on FREE’s price hikes due to its lack of leverage and size. This was one of the reasons why FREE was intent on acquiring brands early on in an effort to grow. FREE is now turning to private label even though this is in direct competition with their brand portfolio (and has lower gross margins). FREE lacks a coherent strategy that will enable gross margin expansion and subsequently cash flow generation and as such we have closed the position.

Liquidity Services (NAS:LQDT) — mrkt cap $500mm; Price $16.31; trailing P/E 16.27

PASS. LQDT aspires to be the market leader reverse supply chain solutions. Which means they own several market places and distribution capabilities to connect sellers to buyers. Sellers/buyers include commercial and government institutions that are looking to sell/buy excess inventory, idle equipment or real estate. For example, the company is helping Delta to become the first carbon neutral airline by helping offload its CO2-producing ground support equipment. Management appears well aligned with significant insider ownership (~28%). There are several promising trends that can provide nice tailwinds for LQDT. We have reached out to management and look forward to ascertaining a more nuanced segmentation of their revenue.

Hibbett Inc (NAS:HIBB) — mrkt cap $474mm; Price $37.24; trailing P/E NA

PASS. HIBB is a specialty retailer of branded sports apparel with Nike making up a majority of sales (~60%). This company is a good example of one that is run on a good strategy but has poor competitive advantages. Their strategy is to locate stores in underserved communities, primarily in the southeast. Labor and rents are cheaper so the company can compete on costs. The recent surge in labor expenses (over 20% since 2019) has put pressure on what is already a low margin business (normalized at ~5%). As previously mentioned, the competitive advantages are hard to determine as they do not sell differentiated apparel. Their survival will depend on operational efficiency and although their track record is solid in this category, it is not enough to warrant continued interest.

Advance Auto Parts (NYSE:AAP) — mrkt cap $4.08B; Price $68.66; trailing P/E 10

PASS. AAP is an automotive aftermarket parts provider that caters to both professional and DIY customers. The stock caught our attention due to a significant decline of over 50% this year, primarily driven by inventory issues, supply chain challenges, and diseconomies of scale. Unfortunately, their inventory comprises a poor mix and is bloated. Immediate action is required to heavily discount prices, rationalize inventory, and strengthen relationships with vendors to enhance fill rates. Regrettably, the company is currently facing significant operational difficulties and is unlikely to resolve them under the current CEO. On a positive note, there is an ongoing search for a new CEO. It could be the case that this company is trading low enough where one can “hold their nose and buy” but our discipline is to wait for signs the ship is righting itself before considering a position.

Hammond Power (TSX:HPS) — mrkt cap $551mm; Price $46.35; trailing P/E 13

PASS. Hammond Power manufactures dry type transformers and has about 25% share in the North America market. They have been around for more than 100 years and their main competitors are independent manufacturers and large players like Eaton and Schneider. Hammond stands to capitalize from the electrification of the USA. This is a megatrend from electric vehicle charging stations to the infrastructure bill to the rise of GPU datacenters. Hammond specializes in custom made transformers and has thousands of SKUs and produces a couple of thousand new ones every year. Although the company is run well and has significant tailwinds, margins are inflated given the supply tightness of transformers in the last year. We will look to buy Hammond given a pullback.

Natural Grocers (NYSE:NGVC) — mrkt cap $266mm; Price $11.72; trailing P/E 16

MORE RESEARCH NEEDED. A well-managed specialty grocer based in Colorado with a strong commitment to providing healthful foods. The company upholds rigorous standards across all food categories. They currently operate 166 stores in the western and midwestern regions of the United States. In 2018, they temporarily halted their expansion efforts to prioritize profitability. However, they have recently resumed their expansion plans and aim to add 4-6 new stores annually. There is a promising opportunity in the relatively low penetration of their private label products (only 7% of sales compared to competitors like Sprouts at 20%). Additionally, industry trends regarding organics and health foods are favorable. This is a company we will continue to dig through.

The Joint (NAS:JYNT) — mrkt cap $205mm; Price $13.93; trailing P/E 25

PASS. The Joint is a chiropractic care chain. It generates about $100mm per year in revenue and has about 830 stores in USA. JYNT offers subscription/package deals for minor adjustments and competes against the fragmented 40k plus chiropractic offices. Although management is competent, a chiropractic business that relies on recurring revenue from clients seems tenuous. One would imagine that chiropractic care inherently is more of a one-time transaction as opposed to a habitual one. Leaving aside the question of whether chiropractic is a legitimate form of alternative medicine, the misalignment of incentives between the chiropractor and the client gives us pause with JYNT.

TLYS (NYS:TLYS) – mrkt cap $188mm; Price $6.3; trailing P/E

PASS. What initially drew us to this west coast-oriented specialty retailer was their inclination to pay a special dividend. Our view is that a periodic special dividend is much more desirable than what is frequently a procyclical buyback policy. We spoke to IR/CFO this week and while we think highly of the management team and their capital allocation, we will wait until their merchandising strategy is a bit clearer before greenlighting for a deeper dive. They have recently added leadership help in this area so we are a eager to observe how their merchandising evolves.

Playtech (LON:PTEC) – mrkt cap £1.8B; Price £608; trailing P/E 29

PASS. Playtech is a 24-year old B2B company that supplies software solutions to online gambling companies (aka B2Cs, aka operators). Most operators are not capable of maintaining an in-house software development team that can produce solutions that meet customer needs while also satisfying extensive regulatory requirements. The company has grown to a dominant position through in-house growth capex and sensible acquisition strategy. They also acquired B2C operator Snaitech in 2018 under the strategy of “diversification” which we generally view as an inadequate justification for an acquisition. ~30% of PTEC’s B2B revenues are from unregulated markets and there is always the risk of operational deleverage if those revenues fall off. Although there are interesting trends in the online gaming space we will continue searching for a better positioned name.

Stericycle (NYSE:SRCL) — mrkt cap $3.95B; Price $42.83; trailing P/E 80

PASS. Stericycle is as close to a monopoly as companies come. It has about 70% market share in the medical waste industry with the rest of the competitive landscape fragmented with mom-and-pop operators. SRCL shares peaked in 2015 when a class action lawsuit arose due to perceived price gouging. This negative goodwill was then compounded by Stericycle diversifying into multiple other industries, leading to classic shareholder value erosion and high debt loads. Stericycle has begun to right the ship and divest non-core divisions while paying down close to $2B in LT debt.  Although trading at a high multiple, SRCL has significant latent pricing power. We will continue to watch SRCL and wait for a better entry point.

MarketWise (NAS:MKTW) — mrkt cap $777mm; Price $2.38; trailing P/E 54

PASS. Marketwise is a company founded on bringing institutional research to retail investors. We began looking at this company a month ago—we ran a filter on companies that have gone public in 2020/2021 via SPAC given drastic price declines (most of these names have sold off more than 80% since highs). Most companies in this space are not worth a second look but MKTW was one of the few companies that was cash flowing nicely. They are capitalizing on the self-directed investor trend and collect subscription revenue on 12 research brands that they have either built in-house or acquired. They have close to ~15mm free subscribers and 1mm paid subscribers. We believe this is a growing industry but MKTW has high churn and high marketing spend. The company is undergoing new leadership and we will wait for more stability in strategy before greenlighting for a deeper dive.

Sleep Number (NAS:SNBR) — mrkt cap $422mm; Price $19.04; trailing P/E 12

PASS. Sleep Number is a vertically integrated mattress firm from production to retail.  SNBR has been aggressively pursuing growth with high advertising budgets, spending almost as much as Tempur Sealy, a company with 2.5x the revenues of SNBR. SNBR is a solid brand however its ~$470mm revolver debt level gives us pause. During the last three years, SNBR repurchased $700mm worth of stock at an average share price of $100; the share price today is 1/5 of that. Predictably, share repurchases have tapered off while share prices have plummeted. This lack of sound capital allocation coupled with SNBR being in a more fragile position leaves us unable to proceed further.

Getty Images Holdings (NYSE:GETY) — mrkt cap $2.5B; Price $6.32; trailing P/E 24

PASS. GETY owns one of the largest stock photo libraries in the world with over 500mm digital assets. These images are extremely high quality, labeled, and exclusive to GETY. Getty’s platform works by photographers and videographers submitting their content to GETY, once approved by GETY, content creators will then receive a royalty ranging from 20-45% of content revenue. Although forecasting high growth technologies is difficult, we believe generative AI will cause an inflection in content generation and GETY could be a prime beneficiary of this trend given the assets they own. Although GETY is trading at too high of a multiple for us, we will keep it on our watchlist in case of retracement.

SteelCase (NYSE: SCS) — mrkt cap $820mm; Price $7.19; trailing P/E 22

PASS. Steelcase is a designer and manufacturer of workspace solutions ranging from ergonomic office chairs to desks. Although the office industry has seen significant fallout (office REITS are down 75% from highs in 2021) we believe hybrid workspaces will supplant the traditional office set up. It is possible we could even see demand for office equipment increase as hybrid workspaces result in more offices as volume is at the heart of their business model. SCS saw revenues organically increase in 2022. Although SCS is a great brand, its FCF is anemic at around 2% net margins. Given management with a more focused eye on cost optimization we would take a closer look at SCS but currently it is a pass.

Thryv Holdings (NAS:THRY) — mrkt cap $817mm; Price $23.47; trailing P/E 17

PASS. THRY owns online business directories like yp.com (formerly known as the Yellow Pages) that are heavily cash flow generative but deteriorating quickly. THRY has seen success upselling small businesses on its all-in-one SAAS solution Thryv: payments, reviews, task automation, payroll etc. all in one place. Subscriber growth has been trending at double digits per annum but online reviews seem to indicate a heavily promotional sales team. Disaggregating their subscriber base from the different tiers in their offering has also proven difficult. They have begun to expand internationally and it is curious with such a massive TAM domestically (400k+ small businesses in U.S.) why management would divert resources to expanding elsewhere. Even still, if we had spoken to long time SAAS users that loved the product we might have reconsidered this but still haven’t come across them. Ultimately, we cannot fully get behind the product-market fit and are passing.

Zumiez (NAS:ZUMZ) — mrkt cap $312mm; Price $15.94; trailing P/E 14

STARTER POSITION INITIATED. We have taken a position in this name and are looking to make this a core holding. Zumiez is an in-mall retailer with ~600 stores in the United States. They sell edgy apparel to the 14-24 y/o demographic (think streetwear merged with something like a Hot Topic). They have relationships with ~500 brands–many of them micro brands. People go to Zumiez because they have access to brands they cannot find anywhere else. The on-screen P/E multiple is ~14 but this is off a low revenue year and we calculate normalized cash flow in the range of 30-40mm. After netting out cash, ZUMZ is trading at ~4x normalized free cash flow. This company has over 44 years of successful operations, has zero leverage and is well managed. In fact, we think this is one of the best run retailers in the world.

Lee Enterprises (NAS:LEE) — mrkt cap $77mm; Price $12.37; trailing P/E NA

PASS. LEE is the 2nd largest owner of local newspapers in the USA. LEE is engaged in digitizing their offerings along with creating an aggregated ad platform. Lee generates about $700mm per year and operates about break even however revenues are declining at ~5% per year.  Local newspapers are being squeezed from both ends; from people’s attention becoming more globalized along with the emergence of hyper-localized platforms like Nextdoor. Gauging future appetite for local news is difficult and given their 500mm of debt, the margin for error is low. We are passing.

OneWater Marine (NAS:ONEW) — mrkt cap $438mm; Price $27.76; trailing P/E 7

MORE RESEARCH NEEDED. OneWater Marine is consolidating the marine dealership space and owns about 100 dealerships nationwide. The vast majority of marine dealerships are mom and pops. New boat sales make up 70% of ONEW revenues and are its highest margin business followed by services and parts. Management’s capital allocation decisions are questionable given aggressive acquisitions financed by shareholder dilutions (by over 30% last two years) and ~700mm in debt. Despite this, ONEW could be an interesting candidate given the fragmented nature of dealerships and the possible synergies in rolling them up. We will be speaking with management next week to learn more.

Hanes Brands (NYSE:HBI) — mrkt cap $1.47B; Price $4.21; trailing P/E na

EXIT. Last month we wrote to readers that we were taking a small tactical position in this name. HBI is high risk—it is overleveraged with ~$4B of mostly variable debt. Our working thesis is that they will work through their 500mm of inflated inventory and create enough cash flow to survive until they reach a more normalized environment. HBI reported earnings last week and innerwear sales were stronger than expected, however activewear sales were down ~18% q/q. Although we are still convicted in their innerwear segment, the activewear segment is now more of a question mark. The position is down 20% since purchase and we are exiting and waiting for a more favorable risk/reward skew before entertaining reentry. We believe the company will internally generate the cash it needs to survive but it is less clear than we originally thought.

Graftech (NYSE:EAF) — mrkt cap $1.07B; Price $4.19; trailing P/E 4

PASS. Graftech manufactures graphite electrodes that are used in electric arc furnaces (EAF) to produce steel.  EAFs are gaining share on Blast Furnaces due to the secular trend of decarbonization (EAFs use scrap steel to make other forms of steel whereas Blast Furnaces use coal to make virgin steel). Additionally, Graftech benefits from vertical integration, giving it control over its petroleum needle coke supply, a critical component for manufacturing graphite electrodes. Supply of petroleum needle coke is limited outside of China. The reason we write outside China is because there are no verifiable numbers of the petroleum coke China produces and by association, how many graphite electrodes they can produce. We suspect whatever that number is, it will continue to grow providing an enduring headwind for Graftech. Despite the potential growth opportunities, the lack of visibility on the supply side prevents us from viewing Graftech as a viable investment opportunity.

The Container Store (NYSE:TCS) — mrkt cap $151mm; Price $2.99; trailing P/E 4

PASS. The Container Store is a specialty retailer of containers and closets. Its brand is well loved and it has about 100 stores generating about $1B/year in revenue. About 50% of revenues are generated by private label and can be seen by high gross margins of about 60%. Although it has a great brand with a durable moat, TCS’s leverage gives us pause given the macro environment. It has about 200mm in long-term debt and current liabilities and most of its current assets are in inventory. Despite this, TCS continues to be aggressive with store expansions having spent almost $50mm in store expansions and additions the last three quarters. While valuations look attractive, our view is management needs to adopt a more conservative stance on capital allocation.

Western Union (NYS:WU) – mrkt cap $4.13B; Price $11.90; trailing P/E 5.0x

HOLD. We originally posted this as a tactical “buy” trade idea on 4/19. The stock popped today about 12% after earnings were announced and the company beat on both top and bottom line. We believe that WU will be a benefit from the thematic change of companies no longer being able to use ‘capital as a weapon’ as they did so freely in a ZIRP world. Profitable industry incumbents like WU that have been losing share to profitless competitors are discovering new advantages – being able to internally finance promotional activities and growth projects in the face of constrained competition. We believe Western Union will be able to increase share with their digital business as a result of their tech investments and promotional activities.

Tempur Sealy (NYS:TPX) — mrkt cap $6.3; Price $36.59; trailing P/E 14x
PASS. TPX manufactures and sells mattresses under the brands ‘Tempur Pedic, ‘Sealy’, and ‘Stearns and Foster’. Generally, this is a sleepy industry, however, competitive dynamics look to be swinging in TPX’s favor. TPX’s largest competitor, Serta, filed chapter 11 at the beginning of this year. Other competitors such as Purple and Casper are not faring much better. TPX is better capitalized and stands to gain share as bed purchases are driven by advertising budgets. It is trading at slightly higher multiples than we would like given the discretionary nature, pull forward in demand, and recessions risk. We will look to initiate a position in the event of a pullback.

Whole Earth Brands (NAS:FREE) — mrkt cap $99mm; Price $2.30; trailing P/E NA

STARTER POSITION INITIATED. FREE is a consumer food company that has faced significant challenges with its sweetener business, resulting in an ~80% drop in share prices. The sweeteners business is highly competitive and will likely see continued volatility, however, the cash cow of FREE is the licorice segment of which they have 70% market share (used in cigarettes, cosmetics, and pharmaceuticals as a moistening and flavor agent). Gross margins have expanded to 28% from 20% a year ago, with ample runway for volume and price increases. Given ongoing SKU rationalization of the sweetener segment and recent management changes led by activist Michael Franklin – who has an ownership stake of 22% – we believe FREE is a compelling risk-reward. We have initiated a small weighting.

Viad Corp (NYSE:VVI) — mrkt cap $372mm; Price $17.88; trailing P/E 34

PASS. Two wholly separate businesses under one roof. ‘Pursuit’ is a portfolio of hotels in attractive destinations where new supply is constrained (Banff Jasper Collection). ‘GES’ is a provider of exhibition experiences for corporate events. PE firm Crestview Partners has significant preferred share ownership (with control) in VVI, and we believe they are intent on incenting management to build up the GES business and spin it off to unlock value. VVI’s hotel business is capex intensive, and they will need to see the return of the long-haul traveler to reach potential. Valuations relative to cash flow are not yet compelling.

Koppers Holdings (NYSE:KOP) — mrkt cap $676mm; Price $32.45; trailing P/E 11

PASS. KOP has a leading market share in the railroad tie and utility pole industry. The industry is a duopoly, with Stella Jones, a Canadian-based company, being their main competitor. Both firms are increasing capacity to take advantage of the nationwide 5G rollout along with tailwinds from the infrastructure bill. Although this industry seems ripe for tacit collusion, given the stability of the industry and homogeneity of products, KOP and Stella’s gross margins have been stuck at an anemic 17%. Given the capacity additions and competitiveness between firms, we will remain out of this name.

Western Union (NYS:WU) – mrkt cap $4.13B; Price $11.0; trailing P/E 4.7x

STARTER POSITION INITIATED. Not often do you see an investment grade company trading at 4.7x earnings. WU is the global leader in cross border remittance payments. Their vast and impressive global distribution system along with their commitment to the dividend (~9%) was enough to give it a close look. According to the World Bank, the remittance market has grown over the last several years but WU’s revenue growth has been anemic. There has been a rise in cross border digital trends that has been stealing share and despite WU’s efforts to building a strong digital platform, they are falling behind their competition. Although this is cause for concern, we believe the fears around existential threats are overblown. We are initiating a starter position. Our call with IR/management next week should help us fill the gaps in our knowledge regarding their revenue stabilization strategy.

TFF Group (XPAR:TFF) — mrkt cap €867mm; Price €40.80; trailing P/E 16x

PASS. TFF produces barrels for wineries and bourbon/whiskey distilleries. Due to high working capital requirements – such as the wood needed to be aged for several years – the industry has seen consolidation with TFF being one of the larger players. TFF Group will make over €400mm in revenue for 2023, growing more than 30% from 2022. A large part of TFF’s recent growth has been from a boom in bourbon production with the number of distilleries in USA going from 50 in 2006 to 2100 distilleries today, a CAGR of 26%. Consumer demand for the various alcohols is cyclical and we believe bourbon could see a significant retracement, similar to what happened with vodka in the early 2000s. While TFF has significant competitive advantages, the not-so-cheap multiple along with the hard-to-predict cyclicality will keep us out of the name until a better entry point.

IDT Corporation (NYS:IDT) – mrkt cap $829mm; Price $32.5; trailing P/E 17.6x

PASS. IDT is a mini-conglomerate composed of in point-of-sale services, remittance services and telecom. It has a long history of building up business lines and selling them along with a robust culture built on good capital allocation decisions. The p/e multiple of 17x seems reasonable given certain legacy business lines and their payment solutions business growth. However besides good management, it is difficult to gauge the competitive advantage of the different business units. Furthermore, the business units are not remotely synergetic. Although it seems like this is a well-managed business that could deliver for shareholders, we need both a good jockey and a good horse before greenlighting.