Category: Earnings Recap

Thoughts on Apple Given Tariff News $AAPL

AAPL reported Q2’19 earnings last week and they were pretty good. However, given the most recent tariff news, Apple’s stock has declined over 10% in two days. What is the market pricing in?

A simple way of expressing the markets new view is to say, “what is the change in stock price implying about EPS estimates?”

The price change in stock is therefore equal to the change in earnings estimates.

So the market is essentially pricing in a China impact of at least 11.7% to earnings. That could be from a 10% tariff or a retaliation against a US producer like Apple.

After skimming AAPL’s filings, I found that China represents ~20% of sales. Assuming this business is of similar margin to the whole company, that means that ~$10.8BN of net income comes from China, or $2.4 / share. Since the market is implying the earnings estimates need to come down by ~$1.5 / share, one could simply say that the market is implying 62% of AAPL’s China earnings are gone ($1.50 out of $2.40).

Obviously, it isn’t that simple (for example, the market could price in some slowdown in AAPL’s other regions due to a slowing global economy).

I will say though that this seems bold considering what Apple had said on its latest earnings call:

I sometimes like to do this math to gauge how realistic or unrealistic the market is being. Sometimes, like in the case of Bayer and the glyphosate liability, I think the market is pricing in sums that make no sense. Other times, it underestimates them.

Fortunately for Apple, they’ll be able to grow EPS in a lot of different environments due to their cash hoard. Here is a snapshot of their capitalization.

I think people often forget that Apple has a lot of long-term investments in marketable securities on its balance sheet. I would consider that cash for all intents and purposes because the company can (and does) sell some securities for attractive investments or to buy back stock.

Therefore, ~24% of Apple’s market cap is in cash right now. Let’s assume they use all that to buy back stock, but it comes at a premium. Let’s use ~30% premium which is around $250 / share.

At $250 / share, they can repurchase 842 million shares, which is a little less than 20% of the outstanding amount. If I assume net income is unchanged for 2020 (roughly $58BN), then EPS should go from $12.78 to $15.71. A 15x multiple on $15.71 is a $236 stock price, or 22% upside. A 17x multiple foots to 38% upside to $267. At 17x, this is ~1x above the S&Ps P/E multiple, but well deserved in my view given I think AAPL is an above-average company.

At this point, it seems like Apple is well positioned to either return capital to shareholders or invest cash for new projects. While others are concerned about the company and what lies ahead for its future, I think having so much cash at this point provides for a significant margin of safety.


Solid Q1’19 – Maintain Buy on Hostess Stock $TWNK

Hostess reported Q1’19 EBITDA of $49MM compared to $46MM of consensus and my $45MM estimate. Sales growth was the really strong point with 6.7% growth, beating consensus by 560bps.

This is honestly the best news for Hostess stock since the acquisition of Cloverhill. Recall, Hostess bought Cloverhill out of distress (but what I view is a great deal). Cloverhill was an operation with negative ~$20MM in EBITDA (and a bulk of its employees were undocumented workers), but still had strong brands. Hostess management figured they could turn the operation around and get it to $20-$25MM of EBITDA in a couple years from purchase. Since they paid $40MM for it, they essentially bought the asset for 2x EBITDA – in a market where food / consumer companies are going for well into the double digits.

Following the acquisition of Cloverhill, however, quarters optically looked very ugly since the company was negative EBITDA. Even if I didn’t mark it, you could probably guess when the business was acquired.

Now, with this print and clear improvement in Cloverhill (given margins are improving on a quarterly basis) I think Hostess will now start to be appreciated by investors.

For one, its becoming more clear that the Cloverhill deal has synergies.

Club was a terrific growth driver for us. We talked about when we acquired the Cloverhill business of not only did it give us a platform to expand into breakfast but it also gave us some access to certain customers and channels to be able to expand that.

We’ve leveraged that in club, not only for the Cloverhill and Big Tex brands but also to expand our Hostess branded business as well as we launched Dolly in club as well as across some other channels. So the innovation of taking that platform and spreading that across multiple channels

The cadence sounds good as well. With a solid beat here, we have to ask ourselves what the outlook is for the rest of the year. Management was pretty clear:

But more importantly, we did expect merchant — the breadth of the merchandising improvements including our largest customer still improve as the year went through. We expected it to get better as we came out of Q1. Across the board we’re seeing that and I expect that to continue and to accelerate as we go through the year.

Is Hostess stock still cheap?

I think it is. Despite Cloverhill pressuring the company’s margins in the short term, Hostess still has top-tier EBITDA margins in the food space. If Cloverhill is turned around as planned, this could step-up to high 20s again. But is that what consensus is expecting? Let’s look at the estimates:

This doesn’t add up to me. Hostess did $230MM of EBITDA in 2017 before it acquired Cloverhill. They said on the acquisition call they expected Cloverhill to contribute $20-$25MM in EBITDA by 2020 (which was re-iterated on the lastest call).

This would imply to me that Hostess should be more likely to do ~$250MM of EBITDA by 2020, well ahead of $222MM expected by Wall Street analysts. Now, there has been inflation across the board impacting food companies, but even if the company did $235MM, that is well ahead of street.

Despite too low of estimates, the multiple ascribed to Hostess is ALSO too low.

Hostess stock trades at nearly a 1x discount to where the median comps trade. If I were to use $235MM-$250MM, the company trades at 10.9x-10.2x 2020 EBITDA. This seems too cheap.

What do you think Hostess is worth?

The company has top tier margins, generates strong FCF, and has great brand value. I think the Cloverhill acquisition also shows management is smart with how they allocated investor’s capital.

Therefore, I think the company should trade for 12.5x-13.0x EBITDA. This would mean the company trades in-line with General Mills, a food giant that has been struggling with organic growth.

At the low end, I think there is ~20% upside over the next 12 months and ~30% upside in a bullish scenario. This seems like a solid return to me with relatively low risk compared to other investments I see today.

CorePoint Q1’19 Recap: Asset sales are the real story $CPLG

CorePoint reported Q1’19 EBITDA of $43MM compared to $40MM estimates and $37MM last year.

Net/net this was an OK result. Obviously, EBITDA beat expectations. RevPar was up 3% according to the company, which is ahead of their 0-2% growth guidance. Unfortunately,  though, excluding the hurricane-impacted hotels of last year RevPar would’ve been down ~1%. EBITDA improved due to these hotels coming back online, but that was to be expected.

April was also looking slightly weak due to oil related market which the company noted was softer than Q1’19 as well as an outage at their call center.

Fortunately, the outlook was also left largely unchanged. The company filed an 8-K that shows they are taking steps to lower G&A (reducing headcount which should save 7% of G&A or $1.5MM).

As I noted in my prior post, the real developing story, Core Point is looking to divest “non-core” hotel assets. They had conducted 2 sales at very attractive multiples when they initially announced this.

They also announced 3 more hotel sales. The hotels carried an average hotel RevPar that was 25% lower than the portfolio average and the average hotel EBITDA margin was 700bps below the portfolio average.

Therefore the implied valuation for these 15x at EBITDAre or 2.5x revenue multiple, per the company disclosure. This is a great result. Let’s take a look at what that means so far for the five hotels sold:

We know from this chart below that there is still a lot of wood left to chop.

Since the 76 non-core hotels were already excluding the 2 asset sales sold for $4.5MM, there are still 73 hotels left worth $132MM of sales and $11MM of EBITDA.

This is important because the sales proceeds / multiples thus far have come well in excess of where CPLG is trading. CPLG currently trades at 9.9x 2019 EBITDA… If it can continue to divest non-core assets at multiples above where it trades, this could be very incremental to the stock, as shown below:

More than likely, the company will probably sell these assets for 2.0x Sales as they move forward, meaning CPLG would be trading at 8.4x on a PF basis. If the stock were to trade at 10x, this would mean it is worth $18.7/share, or 35% upside.

That said, I think that would still be too cheap given multiple ways to look at it, whether it be cap rate, book value, EV/EBITDA, etc. CPLG is too cheap.  Imagine if CPLG just traded at book value… the stock would be worth $21/share.

It seems to me that the reported book value as well as the JP Morgan valuation is looking more and more accurate.

The company has also started to buy back some stock. Per the earnings call, “Our priority has been on paying down debt and opportunistically repurchasing our shares accretively at a discount to NAV.”

Why Facebook Stock is Still a Buy

Facebook reported a great Q1’19 and the stock has climbed a wall-of-worry back to the $195 area. However, Facebook stock is still a buy.

To recap, investors have been concerned about the list of negative headlines out of Facebook regarding privacy issues. In addition, based on commentary I’ve heard from friends and FinTwit, there is a growing list of “I don’t even use Facebook anymore”. Nevermind the fact that social media is proving addictive…

I recently argued that, while I am concerned with the Facebook headlines, the core business of Facebook is doing fantastic. The arguments of “Delete Facebook” are understood, but completely anecdotal.

That is why I argued back in November and October that you should be buying Facebook stock. My argument was based on these points:

  • Facebook is a dominant platform with >2.5 billion unique users
  • Advertising via social media platforms is still in its infancy
  • The ROI advertisers receive from using social media platforms is much higher than traditional methods, which will grow the advertising pie and should benefit the FB platform given how many users it has
  • Expect high growth from FB as it monetizes Facebook and ramps Instagram, video, Whatsapp and FB messenger

So did Q1’19 help assuage investors’ fears? Certainly – take a look at the opening statement on the earnings call:

This was a strong quarter, and our community and business continue to grow. There are now around 2.7 billion people using Facebook, Instagram, WhatsApp or Messenger each month and more than 2.1 billion people using at least 1 every day

Even in Europe where GDPR hit, MAUs grew nearly 2% Y/Y.

It’s great that they have lots of eyeballs on their sites still, but is that translating into profitable growth? Yes.

The company is seeing the most growth from a user perspective and an “average revenue per user” out of Asia and the RoW. That is actually why I think Facebook has much more room to run. As ARPU’s for these segments converge to where the US and Europe are (which will take time) I think Facebook can reach $80BN of EBITDA by 2022. Given the company’s strong returns on invested capital, I think it warrants a premium multiple. But if the stock traded at 12x at that point (in-line with the median S&P multiple today), I think the stock can double from here.

Remember that WhatsApp today is still largely under-monetized, but has >1.5 billion MAUs. Facebook has plans to turn WhatsApp into a payments and commerce platform, which should drive strong returns going forward.

As of right now, the company has a large goodwill item on the balance sheet after buying WhatsApp for $19BN.  Even so, the return on invested capital is extremely high. Facebook earns ~$0.40-$0.50 for every $1.00 it invests in year 1. This is extremely attractive and well above market average. Therefore, you could argue it deserves a premium multiple and my PT could be too low.

B&G stock pressures continue. Starting to think the company should pursue a sale of itself, either to a strategic or sponsor (supported by back-of-the-envelope LBO math). $BGS

Although there are no earnings updates or any particular newsworthy items on B&G Foods, I thought it would be a good time to update on the company as the stock has come under significant pressure. It also gives me time to gripe about the way dividends are viewed in the US.

You see, BGS’ stock is down 20.5% YTD (compared to SPY being up 14.5%). The dividend yield is now ~8.3%. However, all things considered, I’d prefer the company to turn that dividend off and buyback shares at these levels.  

Companies typically establish dividends as a way of saying, “here you go, investors, I can’t invest this cash at levels that would create value for our company (i.e. in excess of our cost of capital), so I am giving it back to you.”

That’s all fine and good, but what about when things change (as they always do)? The way it works now is that dividends are viewed as sacrosanct. A company that cuts its dividend from the previous level will see its stock get crushed. It seems silly to me for that to be a rule. In some cases, the result is that CEOs/ CFOs initiate dividends to get into stock indices or attract incremental buyers. If I were CEO / CFO of a public company, the last thing I would do would be a regular dividend (even if it meant some funds couldn’t buy my stock). Special dividends, or dividends that are understood as non-recurring, seem much more prudent.

Anyway, back to B&G. It appears that private values of companies are now in excess of public companies. I also think that public investors are not valuing B&G’s platform as it should. As such, I wish B&G would (a) cut the dividend and buyback stock and (b) pursue a sale of itself. While the company would lose its public stock as currency to buy things, private markets are more comfortable with LBOs of highly cash generative companies.

What do I think B&G could sell itself for? Well, Ferrero just bought Kellogg’s cookies, fruit & fruit-flavored snacks, pie crusts and ice cream cones business for $1.3BN, or 12x EBITDA. Kellogg decided to sell this business because it had areas that it felt it could invest in for a higher return.  Campell Soup, which is struggling with growth, trades for 11.5x. I think B&G should at least trade for that. Also recall that Campbell bought Snyder’s-Lance for 19.9x EBITDA pre-synergies and 12.8x post-synergies.

If B&G sold itself for 12x, that would imply a $31 price target (excluding any synergies or cost outs of no longer being a public company). I wouldn’t necessarily like that price, but it could be a catalyst for people to pay attention to the stock.

Does 12x make sense? Let’s look at the private equity math. I assume PE can carve out some costs and also the company should be lapping freight and other inflation costs. I also assume they use cash to pay down debt. It amounts to a ~16% IRR. Not a 20% winner, but not too shabby either.