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.