Themes Update Call today (PEP)
We are hosting a flash update call to our 1H22 Consumer Staples Themes today at 12:30 PM ET. We are staying Long Consumer Staples. Hedgeye’s Macro team is calling for Quad 4 in Q2. Growth slowing remains the defining macro dynamic for 2022. Recent world events have introduced a new regime of inflation volatility. Food prices have hit a 40-year high. The average gasoline price in the U.S. has set a new record high. For Consumer Staples, we are seeing a high level of pervasive inflation. In the past two weeks, Consumer Staples stocks (historically the best performers in Quad 4) have reacted to Q1 shifting to Quad 3. Recent events have not changed our expectations for Quad 4 in Q2. We will do a deep dive into the topic of food inflation. We still see an inflection in margins ahead for the Consumer Staples sector.
We are adding PepsiCo to our Long position monitor. PepsiCo’s style factors align with outperformance in Quad 4. Share gains in international soft drink markets and the secular growth in snacking provide visibility in MSD% organic growth. PepsiCo shares have sold off recently, reflecting concerns about the company’s business in Russia. At 4% of sales, the circumstances are already discounted. PepsiCo’s market-leading brands are well-positioned to pass on price increases. Seeing less cost pressure and having more tools to manage the inflationary headwinds, PepsiCo will dictate pricing for most of the categories it competes in.
We are also raising Grocery Outlet higher on our Long list, anticipating a traffic tailwind from inflationary pressures on household budgets.
The themes for our call:
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Our updated position monitor:
Nasonex approval (PRGO)
Perrigo received final approval from the FDA to market OTC Nasonex 24 hour allergy. Perrigo licensed the U.S. rights to Nasonex from Merck in 2018. Nasonex is Perrigo’s first branded prescription to OTC approval. Perrigo expects sales to begin later this year. In 2013 Nasonex had a run rate of $600M+ in U.S. sales. The first generic version was launched in 2016. Nasonex is one of several OTC drug launches Perrigo expects to launch in the 2H of the year. OTC launches are the fourth of our investment themes for Perrigo.
Indoor Grow acquisition (LOCL, RICO, APPH)
Local Bounti, an indoor grow agricultural company, announced that it will acquire Hollandia Produce Group, an indoor farming company based in California, for $122.5M. Hollandia Produce operates under the name Pete’s. Pete’s primarily distributes butter lettuce to 10,000 retail doors. Pete’s has about 80% share of the Western U.S. Controlled Environment Agriculture (CEA) market. Pete’s retail customers include Albertsons, Whole Foods, AmazonFresh, Kroger, Target, and Walmart. Local Bounti plans to install its vertical farming technology to Pete’s facilities. Pete’s is Local Bounti’s first acquisition since going public. Pete’s had revenue of $22.7M last year with gross margins of 45%. The acquisition represents the new technology acquiring older distribution. The 5x revenue acquisition multiple does not reflect the expected synergies in customer relationships and distribution. At the same time, it reflects what both of those are worth to the indoor grow companies as they seek outlets for all the capacity they plan to build.
