Stock Sonar #34 - 12/6/2023

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.