PRGO Black Book
We are hosting our Perrigo Black Book presentation today at 2 PM ET.
In 2022, Perrigo earned 30% less than the original EPS estimate at the beginning of the year. Even events that were in Perrigo’s favor became causes of negative EPS revisions.
We will review what happened during the year, what went wrong, and what went right. 2022 was still largely driven by macro factors with more elements out of the control of management than what they can be held accountable for. We will hold ourselves accountable and assess what is thesis creep and what parts of the investment thesis remain the same. More importantly, we will look out and project what could go better or worse for Perrigo by examining the headwinds and tailwinds.
With depleted inventory levels at retail for Cough & Cold, a better outlook for Oral Care from lower freight rates, additional Infant Formula production capacity (better for revenue growth and margins), continued synergies from HRA, and margin recapture from pricing initiatives Perrigo's 2023 is set up to put the challenges of 2022 behind. Management’s three-year outlook is well above the long-term growth formula, but it reflects lapping non-repeating events and management’s confidence in both recovery and growth.
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Event Details:
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Our Perrigo investment themes from the presentation:
California gas (GO)
WTI crude oil prices have fallen to levels last seen in December 2021. Gasoline prices nationally have increased slightly in 2023, while prices in California have increased ~10%. The national average gasoline price has fallen to $3.44 per gallon, 24% below a year ago. Compared to last month, gasoline prices are close to even. In recent months the spread between California’s gasoline prices and the national average has widened again as seen in the chart below. Gasoline prices are 17% below last year in California, but are up 2.5% compared to a month earlier. Diesel prices are 12% lower than last year in California.
California adjusts the fuel sales tax annually on July 1 to reflect inflation. In 2022, a one-year reduction offset the inflation adjustment and there was no increase from a taxpayer’s perspective. The gas tax in California will increase 8% this July and a partial exemption for diesel is set to expire in August. The tax rate in California of $.54 per gallon is the second highest in the country. Refineries in the state will switch to producing the higher cost summer-blend of gasoline in the next few weeks. In GasBuddy’s 2023 fuel outlook it estimated that while most major cities may hit $4 per gallon this summer, places like San Francisco and Los Angeles could see prices soar toward $7 if refineries struggle under unique formulations of gasoline. Meanwhile, Governor Newsom has unveiled stronger proposals to hold “Big Oil” accountable. High gasoline prices can be seen to encourage consumers to save in other areas of spending and to discourage shopping trips. Grocery Outlet’s same store sales track record has shown it benefits from the former despite the headwind from the latter.
Falling dairy (STKL)
According to Robert Cropp, professor emeritus with the University of Wisconsin Cooperative Extension, farmers in Wisconsin should expect lower milk prices this year. Dairy farmers received record prices for milk in 2022. “Wisconsin’s average all-milk price was $24.43 (per hundredweight), $5.63 higher than the $18.80 average in 2021.” Although milk prices were at a record, after the higher feed, labor, and other input costs margins were lower.
The USDA estimates the average all-milk price will be $20.70, down from $25.56 for 2022. Contributing to the lower forecasts are production estimates up 0.8%, more competition for exports, and domestic sales of milk and dairy products expected to decline.
Milk is an input for a variety of products that would see some cost relief. Plant-based milks are generally priced at a premium to dairy milk. Lower dairy milk prices would be a headwind for plant-based milk prices.
