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).
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.”
I’ll try to help provide some insights into the businesses and “what you need to believe” to invest in these companies. The bull case for Uber and Lyft is that “transportation-as-a-service” or “TaaS” is a new market. While Uber and Lyft are fiercely competitive today, and unprofitable, the market is really 2 players (in the US) and that should ease over time (“think of the great duopoly’s of Visa and Mastercard” the bulls will tell you).
So let’s rehash the investment case:
“TaaS” is a large market and growing
Upside possible from the “end” of car ownership (and entry of autonomous cars)
These are “platform businesses” that can leverage their user base to expand into adjacent markets (UberFreight, UberEats, third-party delivery, scooters, bikes etc.)
Only two players today. Now that they are public, competitive behavior should cool as the CEOs will be beholden to new investors
I struggle with the last point for several reasons. Uber and Lyft are not actually the only two players – taxi’s do still exist. While you may not take one every time to the airport, they wait for you when you arrive in a new city as the marginal provider of transportation. When the Uber wait is too long or there is surge pricing, yellow cab is still there… My point is that pricing for Uber and Lyft can only go so high. And who knows if the companies that have succeeded in China and elsewhere are waiting in the wings to enter the US market (and drive down prices).
If Uber and Lyft can’t raise the the price of your ride, maybe they take more of the driver’s fare. That’s possible, but they also have to incentize the drivers to drive and beat the hell out of their car. As I calculated in my post on what driver’s might make, it is a decent wage, but if you squeeze that too much, they just won’t drive anymore.
DoI think Uber is the Facebook of transportation? No. Facebook increased the return on investment for all advertisers and increased the total pie. Uber drove down the price of taxi medallions because it added significant supply to the market (everyone can now be a driver) and drove down prices.
The other bull case is that Uber or Lyft win the race to autonomy. The reason why this would be so important to the stocks is that autonomy is viewed as a winner-take-all business (think google maps – do you really need another provider?).
There again, I struggle. Calling the winner in autonomy is anyone’s guess. Why would I bet on Uber or Lyft winning vs. Google? I can’t, I can only speculate. And to speculate, I would have to bet that others are not pricing it into the stock. Google spends over $1bn on Waymo a year. I have no insight into this market
Next, to the notion of Uber reducing car ownership. There have been anecdotes of people forgoing car ownership, but that doesn’t seem to be impacting car purchases yet. Car sales, measured by units, are at all-time highs. It’s slowing, but its because we are selling nearly 17MM cars per year and have been for ~5 years.
Prices too have marched up since the Great Recession. In December 2018, the average price paid for a car was $37.5k, up from $30K in 2013. If Uber and Lyft are having an impact, it is hard to decipher this from the data.
Indeed, while Uber is growing bookings significantly and reported revenue, their growth rates have slowed dramatically. As shown below, Q1’19 adj. rideshare revenue growth is only +9%.
That is materially different than the +21% for the reported bookings. This is revenue that is adjusted to reflect driver earnings as well as incentive comp. An example is provided below:
As you can see, the driver pay and incentives matter materially here. “Excess” incentives are defined as “payments, including incentives but excluding Driver Referrals, to a Driver that exceed the cumulative revenue that we recognize from a Driver with no future guarantee of additional revenue.”
Is this number improving for the Company? Hmmm…
Granted, this does include incentives for UberEats and Rideshare incentives are expected to improve for Q1’18 compared Q1’19, but hard to see that the conditions overall are less competitive.
As an aside, I recently had an Uber driver tell me he was going to buy the Uber IPO (he admitted he didn’t study it much, just knew they were growing). That actually could be an interesting employment hedge… if the drivers are hurting, Uber may be doing well – and vice versa!
There are two players so we should compare what they look like. For starters, Uber is much bigger than Lyft and is global. How has that scale played out on the financials? Still a bit too early to see benefits. It’s clear you can see Uber expanding into other markets, while Lyft is focused on the core.
Clearly, they both burn cash. This actually surprised me a bit. Before the financials were released, I would have viewed the companies as platforms and apps, or asset-light businesses, whereas all the asset-heavy stuff is left to the drivers. Similar to AirBNB, where the homeowner faces the cost of serving the guest and the platform just takes a fee.
Clearly, that is not the case. They spend a lot on data centers and other infrastructure (more on cash flow at the bottom of this post)
We should compare and contrast the two players as well (feel free to add anything in the comments):
Pros of Uber:
– ride sharing is 5x the size of Lyft.
More diverse business with options – UberEats, UberFreight, autonomous… with the added
scale. You could argue Lyft is also entering these, but Uber appears to have
Valuation seems less demanding – basing that only on Lyft’s valuation and other
Cons of Uber:
Clearly losing share to Lyft
Operates in highly competitive markets – as if ride sharing wasn’t competitive enough, Uber
got into UberEats (a zero barrier to entry business, but I get why they did it),
and freight brokerage
Pros of Lyft:
– nothing other than “transportation-as-a-service”. There is some support of companies
that focus on one goal tend to execute on that rather than be stretched in all
Increasing Share – overthe past 2 years,
Lyft’s share has grown from 22% to 39%, taking advantage of Uber’s PR mishaps
while also being competitive
More Upside in Core Market – Similar to the bullet above, if Lyft continues to
take share, it seems clear that it will be at the expense of Uber. Given Lyft is
1/5 the size of Uber, there is plenty of share to give
Cons of Lyft:
Smaller company / less scale
No “other bets”
– Similar to google’s “other bets” segment, Uber benefits from its core
delivery business, cross-synergies with UberEats, and other bets. Lyft has autonomous capability, but its anyone’s
guess on who wins the war here.
Perhaps Uber should trade at a significant premium to Lyft due to scale, global presence, and “Amazon” view of transportation. Jeff Bezos wanted the everything store, Uber will be the transportation store. Conquer all, forget profits in the near term, it is all about the next 10+ years…
At $45/share, that means Uber is valued at $82.4BN while Lyft is valued at $15.7BN at $55/share. That places them both at exactly 7.3x 2018 sales…
I will be passing on both. I just don’t see this as a great market and I think it will be forever competitive. It seems like a race to the bottom for both attempts to gain and retain riders and drivers. Yet, there is nothing binding one to either. Therefore, I don’t see much pricing power here, as noted above.
Interesting Insurance Dynamic Not Discussed Often
One last thing — as I was building the cash flow statement for these companies, I noticed working capital changes were an inflow of cash, largely due to changes in an insurance reserve.
At first, it seems that Uber and Lyft are negative working capital businesses (i.e. the more sales grow, they actually get cash in the door like an insurance company that they can reinvest). That could possibly be a great thing. Lo and behold, I learned Lyft and Uber actually have self-insurance.
In other words, when a driver
accepts a rider on Lyft, up until the ride is finished, Lyft is responsible for
insuring the trip. This is a huge cost.
In fact, cost of revenue is
really made up of two main items: Insurance costs and payment processing
charges. Payment processing is the merchant fees that credit cards charge. Insurance
costs include estimated losses and allocated lost adjustment expense on claims
that occurred in the quarter. It also includes changes to the insurance
reserves. These latter two items make up the bulk of COGS.
Lyft says in its S-1 that, “By
leveraging our data and technology, we are seeking to reduce cycle times,
improve settlement results, provide a better user experience, drive down our
cost of claims and have fewer accidents by drivers on our platform.”
Clearly, this would be great. But insurance is also one of the items that can be gamed in the future. By reserving less, Lyft and Uber and report higher earnings. This often happens in good times for banks, where they reserve less for bad loans to boots EPS until a recession hits and they realize they didn’t reserve enough.
Analysts typically are wrong in their expectations, but this could be something where they are especially wrong. If analysts think they can leverage COGS more than reality, the forward estimates people are baking in could be too high.
Beyond Meat’s stock surged on its first day as a public company. You could say it was BEYOND expectations. The stock surged 163% in the first day of trading. This was one of the strongest one day performances since the 2000 dot com bubble.
Is Beyond Meat’s Stock… Beyond Sensical?
Beyond Meat’s Valuation is currently is $4 billion based on market cap. Based on my calculation, the company is currently trading at 36.5x 2018 sales. For context, Google trades at 5.0x sales. Tesla is 2.4x sales. I would actually be interested to hear any stocks with higher price / sales multiples that are non-pharma related. Clearly, this is a high multiple.
As an aside, this is actually a poor outcome for the company, all things considered. They could have raised the same amount of money by issuing much less shares if the underwriters had priced it correctly at a higher price. That said, hindsight is 20/20.
But the companyIS growing quickly and has noted that it has been capacity constrained. Sales were up 170% in 2018 from 2017 (albeit, only $88MM in sales in 2018 so coming off of a low base). Based on the company’s disclosure, they estimate the total meat market to be $1.4 trillion in size. Clearly, they will not be able to capture the total market here or even come close. What they want investors to say is, “well, if they just get 5% of the market, thats $70BN!”
I don’t think that is going to happen. The product is good, but its not that good. There are also competitors (I’ve personally tried the Impossible Burger and I really like what they’ve done).
When assessing this company’s moat, and taking the ingredient list into consideration, it is hard for me to say over a long period of time no competitor can break in. The ingredient list looks pretty simple to me, so it really comes down to texture. Obviously not an easy task since veggies burgers have been around for at least 30 years, but players are emerging. Again, I’m not being paid by Impossible Burger but it is good stuff!
So is Beyond Meat Stock a Buy?
It seems almost impossible to justify a price to sales multiple like what BYND trades at. That is likely why the underwriters had so much trouble pricing it. But if you take a longer term view, it is actually interesting.
Lets walk through some assumptions:
I am going to assume the company grows 175% in 2019. This is decent deceleration from their Q1’19 pace. The company was able to triple its monthly capacity and its corresponding sales are expected to be up ~290%. Gross margins are also set to improve to ~25-26% of sales, from the 20% area during 2018.
Following 2019, I expect the company to double in 2020, 75% in 2021 (stark deceleration) and 45% in 2022. Once the company has capacity online, its relatively easy to ramp if demand is there and the incremental margins already appear quite strong. I am going to assume they have a 38% incremental gross margins in 2019, stepping up to 40% as they hit the high notes of 2021 and beyond. Long story short, as my snapshot below shows, I have the company reachin 12-13% EBITDA margins by 2022-2023.
The interesting thing is that the business, like most food companies, does not require much capital to grow. Therefore, I have the company FCF positive by 2023. That may not seem that great, but considering the growth, it isn’t too bad.
Unfortunately, as shown at the bottom of this snapshot, Beyond Meat’s stock valuation just is not there. It is just way too high. These are optimistic assumptions and by 2023 we’d still be sitting at 20x EBITDA. That seems too rich for my diet.
Although the market was a little shaky after the Fed spoke on Wednesday, the S&P500 ended the week flat-to-up thanks to Friday, May 3rd’s rebound.
According to the CME website, the odds of a rate cut (or the Fed lowering interest rates) are actually around 47% by Dec 2019 and move to above 50% by January 2020. Before the Fed meeting, the market was actually banking on the Fed lowering interest rates. Data showed a 65% chance of a rate cut in December from last week, April 26th.
It wasn’t until the Fed spoke on Wednesday did this begin to subside.
When I think about “Where will stocks go from here”, it seems to me that if the market is baking in a a large chance that there will be a cut to rates, they may be disappointed this year. If rates actually trend upon a stronger economy, we all say the tantrum the market threw last year.
Take a look at almost any building products name this year, and you’ll find an absolute massacre. It’s important in these times of almost indiscriminate selling to find names that have been thrown out with the bath water.
Mohawk Industries, on the face of it, may appear to be one such name. The company, which sells mainly flooring products such as ceramic and stone tile, carpet, hardwoods and LVT, has seen its stock cut in half YTD. This performance is much worse than other diversified building product names such as Masco and Fortune Brands, as seen below:
So is it time to dive in? Well according to consensus estimates, the stock now trades at just 10x 2019e EPS and 7x EBITDA. Unfortunately, I think consensus estimates are still too high.
I won’t re-hash all the problems of Mohawk here, but let’s simplify the issue down to: Mohawk has seen material margin pressure YTD. In fact, Q4 EBIT margins are expected to be down 400bps Y/Y! The company has called out raw material and freight pressure, customers downgrading choices resulting in a negative mix effect, and competition.
While the street has started to downgrade its expectations for 2019, I think they are still too high. And to explain that, we’ll do a quick history lesson.
Below is MHK’s EBITDA margins by year… the gray and light blue lines represent long-term averages for margins. However, I exclude ’08 & ’09 from these as these were obviously times of extremely diminished demand and not an accurate depiction, in my view, of normalized margins. Over the long-term, EBITDA margins averaged around 14.5%. However, we can see in 2015-2017, margins stepped up materially. Excluding these years, EBITDA margins were around 13.5%.
So what happened in 2015-2017? And would I view those years as “over earning”? Yes, I would.
Think about the main inputs into carpet and flooring? Resin, such as glues and plastics, as well as other chemicals are major inputs into carpet and vinyl and ceramics.
As shown below, the price of carpet staid relative flat while the raw materials declined significantly. Essentially, hold price steady while raw materials decline precipitously, and you’ll see great margin uplift. Now, that is clearly unwinding.
As such, I think the street targeting 17% EBITDA margins is too high. Let’s assume that margins normalize to 14.5-15.0% of sales and the street is right about the company doing $10.5BN in sales (though this could come down in the face of higher competition).
This points to the company trading at more like 8x 2019 EBITDA. The company’s long-term trading multiple as been 8.4x, though that is skewed by optimism in 2015-2016 when the company traded at >10x. Either way though, the stock hardly looks cheap on a normalized basis, it will also be hard for it to outperform when it is printing heavy margin pressure.