Position Monitor Changes (ACI, STKL, PEP, GIS)
Albertsons – is being removed from our short bias list. The valuation seems to reflect an FTC challenge to the merger with Kroger – it seems like a foregone conclusion. This past week we had the news of the FTC challenging Jet Blue & Spirit Airlines. The most recent FTC challenges confirm a very active Lina Kahn at the head of the agency, especially for consumer mergers. There is a likely scenario that Albertsons comes out better if it fails to go through.
PepsiCo and General Mills are being lowered on the position monitor to make room for SunOpta. The change is not about EPS visibility. Our model reflects a recovery in Pets for General Mills leading to another positive EPS revision. Our estimates for PepsiCo are still above consensus. From a market perspective, the two companies provide safety when/if another shoe were to drop. The change is an acknowledgment of what disinflation and maybe deflation in the 2H and 2024 will do. It will make it more difficult for the shares to make new highs this year.
SunOpta had double digit growth in each of its 4 product categories. Plant-based had 13.5% pricing growth and 10% volume growth. Oat product revenue grew 37%, outpacing the market growth. Total market POS plant based milk sales grew 12% in Q4 with unit declines of 4%. The overall market continues to be led by oat milk growth of 23% with 4% unit growth. Gross margin expansion of 400bps in the quarter is not an aberration as new capacity is filled.
La Nina leaves (WMT)
The National Oceanic and Atmospheric Administration said the La Nina weather phenomenon is gone. La Nina is a temporary cooling of parts of the Pacific Ocean that changes weather worldwide and, in the West, worsens droughts. This La Nina lasted for three years and was one of the longest on record. We are now in a “neutral” weather condition that will probably trend towards El Nino in late summer or fall. El Nino brings more rain to the Midwest.
The recent storms that have brought considerable rain and snow to California have caused a major improvement in drought conditions. The latest data shows 26% of California is now free of drought, up from 16% a week earlier. With the atmospheric rivers forecasted for California, drought conditions will continue to improve this spring. The Sierra Nevada snowpack, which historically provides about a third of the state’s water, is at 180% of its peak historical average. The state began releasing water from its second largest reservoir, Lake Oroville, over the weekend to prevent flooding downstream. Of the state’s 17 major reservoirs, seven are still below historical averages. The rains in California and the higher probability of El Nino are bearish for crop prices in the U.S.
Silicon Valley Bank’s impact on wine (NAPA, VWE)
The closure and regulatory takeover of Silicon Valley Bank has sparked a crisis in venture capital, but it is also a concern for California’s wine industry. The bank’s website proudly states that it has lent over $4B to premium wine clients for over 26 years. At the end of 2022, $1.16B of its loan portfolio was to clients with premium wineries and vineyards. There were roughly 400 clients in the bank’s premium wine division.
On Friday, Vintage Wine Estates announced the sale of 42 acres of Tenma Vineyard for $11M. The company will use the proceeds to pay down debt. The company owns roughly 1,600 vineyard acres. There will be near term repercussions in California’s wine industry. Having a flexible balance sheet is an advantage in times of distress.
