We wanted to flag USDA data that we will be using in our Best Idea Short presentation on COLD this coming Thursday, 10/7, as another mini preview of what underpins the short thesis:
- When mapping historical commodity stock levels in U.S. cold storage warehouses going back to 2002, quarter-ending inventory levels have averaged ~98% (median shown below) of the prior year's stock with a standard deviation of ~9.6%
- It makes sense to measure it this way, as producers/distributors/retailers typically build inventory levels ahead of key end-user demand periods (for example, the upcoming holiday season)
- As can be seen in the Chart of the Day below, ending stock levels are accelerating lower amidst unprecedented production issues, and now stand nearly one standard deviation outside of the mean
- This is historically rare and has happened only three other times going back to 2002 including 2007 (boom in commodity demand from EM), 2011 (swine flu), and 2014 (drought + bird flu)
- As a point of reference, the swine flu downturn lasted ~8 quarters before stock levels reverted to and surpassed the mean. Although the current pathogen is different in almost every way, if we are to use the swine flu experience as a template it would appear there is much more downside to go from an inventory perspective
- As it directly relates to COLD, lower production levels are impacting COLD's throughput and top line revenue results, with fixed-commitment contracts representing only ~40% of COLD's warehouse revenue and leaving the company uniquely vulnerable. At the same time higher labor costs and utility bills are pressuring the bottom line.
- Unfortunately, COLD is in a "vice" right now and numbers need to head lower
Chart of the Day: Cold Storage Commodity Stock Declines Accelerating
(1) 2011 declines correspond with swine flu outbreak.
Source: USDA.gov, Hedgeye
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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