Position Monitor Changes
Kimberly-Clark and The Duckhorn Portfolio are swapping spots on the position monitor. Both are Best Idea shorts. Kimberly Clark’s valuation looks more attractive on the short side given with the lower estimates in our model in 2023. The Duckhorn Portfolio is a more attractive Quad 1 long. The wine company is somewhat insulated as a higher-end wine as its customers are less sensitive to worsening financial conditions for consumers.
On the long side, Walmart is moving lower on the position monitor ahead of its earnings report. We added Walmart to our Best Idea long list ahead of the inflection in EPS revisions, but that is in the past. Our model projects a top and bottom line beat for Q4, but our sense is that it would not be a meaningful surprise. The company’s defensive style factors and upside to EPS estimates are less attractive on a relative basis in a different quad regime. Moving higher on the position monitor are Monster Energy and Celsius Holdings, two of the best secular growth stories in consumer staples. We recently presented our Caffeine Black Book focusing on the growth drivers behind energy drinks.
Price increase (BRCC)
Black Rifle Coffee Company is raising the price of its coffee subscription by ~12% at the end of the month. Arabica prices are up 6% so far in 2023. However, coffee beans are not the only inflationary pressure. The PPI for roasted coffee increased by 21.1% in January, accelerating from 20.3% in December. Coffee did not see a surge in inflationary pressures until February of 2022, much later than other food and beverage categories. Price increases will push more customers towards the retail channel from DTC.
Flu monitor (PRGO)
The CDC estimates that there have been at least 25 million illnesses from the flu this season through the week ended February 11. The flu had surged since Thanksgiving but has declined in most areas despite the Christmas and New Year’s holidays. The flu sometimes has two peaks, but influenza A(H3N2) continues to be the main subtype making a second peak less likely. If the trend continues this season’s flu will have started early and ended even earlier.
The cumulative hospitalization rate is the second highest observed for the sixth week of the year going back to 2010-11, following only the 2017-18 season. The in-season cumulative hospitalization rate is still lower than the end-of-season hospitalization rates for all but five pre-COVID-19 seasons (2014-15, 2016-17, 2017-18, 2018-19, 2019-20). Perrigo’s Q4 is mostly set for the cough & cold season as orders are already in and production is maximized, especially for liquid medicines. Most retailers are short of cough & cold medicine. A larger or longer cough & cold season would be seen in Q1 results as retailers reorder more inventory.
