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Short: HZO, MPW, PEB, TSLA, RVLV, STLD, DE, KNX, DLR, ONON, GOLF, ULTA, SBUX, ODFL, REXR, POOL, CF Long: NEM, DKNG, DDOG, MTCH, BCO, ATVI |
We added CF Industries (CF) to the Short Side and Datadog (DDOG), Match Group (MTCH), The Brinks Company (BCO) and Activision Blizzard (ATVI) to the Long Side of Investing Ideas this week.
Below are updates on our 23 current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
HZO
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HZO Short Thesis Overview: This is definitely a play on "shorting the rich." MarineMax (HZO) is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. Consensus straight-lined peak 32% margin into perpetuity and is modeling that $7 in EPS power holds steady over a TAIL duration. This company has reversion risk all through the P&L from peak revenue growth to peak margins to peak earnings power. A consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling will likely see gross and operating margins fall back to historical levels and presents ~40% downside in the stock – entirely from a massive negative earnings revision. |
Fed Chair Powell talked this week about the likelihood of rate hikes continuing in 2023. The rate environment has definitely been pressuring big ticket purchases, and both the market signal and fed signal suggest that there isn’t going to be a rapid reversion in rates. Higher rates mean higher borrowing costs on big ticket boats. We continue to think this category will see demand reversion and that will translate into earnings compression for MarineMax (HZO) while the company has taken on leverage to do some big recent acquisitions.
MPW
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Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. Assuming all goes perfectly for MPW and there are no tenant issues, and with an updated distressed cost of capital, we estimate the stock is worth no more than $5-$6/share today. |
Medical Properties Trust (MPW) continues to work through the restructuring (not refinancing) of its second largest U.S. tenant, Prospect Medical Holdings, with no recent received at all until the fall at the earliest from just the California hospitals. Despite what the company will say, they are NOT getting back their book value for the CT assets. Only ~70% of the consideration is being paid in cash, and whatever other recovery they receive from Prospect will be less than the difference on a PV basis. We continue to think that PA is a total loss. Meanwhile, we continue to believe that Steward is effectively insolvent given MPW’s ongoing liquidity support and the fact that Steward was forced to post ~$26 million bond for a judgment to Tenet Healthcare. We expect MPW to burn $750 million to $1 billion of cash through the end of 2024 and for this to become an emerging credit issue.
PEB
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Short Thesis Overview: Pebblebrook Hotel Trust (PEB) has a highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history. We see regression toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM. |
Pebblebrook Hotel Trust (PEB) was out with their usual monthly updates on operating trends and from our vantage, on a net basis, our numbers aren’t changing much. Not good news for the bulls. PEB’s SS portfolio RevPAR is tracking below expectations at around FLAT for the combined April & May period as compared to the 1-4% YoY growth guidance. June faces tougher comps so our own expectations of ~1.5% YoY growth might need to be pared back. However, it seems PEB is managing costs a bit better so the flow through from weaker RevPAR growth might be less pronounced. Net-net, we see EBITDA for Q2 coming in line with the current consensus at $112MM.
Looking ahead to Q3 though, we see more issues. Given the RevPAR softness that mgmt. flagged in this update and the comps heading into Q3, we think Q3 guidance could disappoint, and we see the EBITDA range coming in 5-7% below current consensus. PEB remains a Best Idea Short.
TSLA
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Short Thesis Overview: Tesla (TSLA) numbers are messy with far too much inventory, improbable OpEx containment, and flat to lower margins. But Musk’s salesmanship has become increasingly goofy. Tesla is just a "pandemic liquidity" driven bubble stock that is likely already in the midst of a downward revaluation. |
1. If Tesla Weren’t A Momentum-Driven Retail Mania, The Stock Would Be Far Lower
Most of the ‘news flow’ and fundamental developments for Tesla have been very negative. TSLA is facing intense competitive entry in EVs, including TM, and is cutting prices and overproducing relative to demand. Delays in new product launches and reliance on a stale Model 3/Y product has left to company selling access to its supercharger network, removing a key differentiation. A data leak and regulatory comments have raised concerns about the safety of the company’s Autopilot & FSD products. TSLA’s fig leaf of corporate governance is wilting. EPS are down, often a sign an equity will exit the ‘growth’ arena (growth holders have come down).
2. Tesla Is Uniquely In A Difficult Situation, Other OEMs Lean + Pent-Up Demand
Shares of VW (pref) have been decent outperformers YTD, about 8 points ahead of the S&P and ahead of the LCIDs, FSR, and NKLAs. Unfortunately, it has substantially lagged Tesla where we’ve been wrong YTD. We see Tesla as an awkward fit in the current “Artificial Intelligence” investing mania, and a beneficiary of elevated options activity. That said, we see far more value unlock opportunities for a VW, or even a Stellantis, with an auto market that has faced years of undersupply and de-stocking. A Lamborghini IPO or further sales of it’s Porsche AG interests could unlock further value in shares of VW, which remains at an obvious discount.
3. Moving Tesla To ‘Top Spot’ On Short List, Displacing DE; VW Pref. Straightforward
Monetary tightening in a disinflationary post-pandemic environment is typically negative for growthy EV names. Other “New Energy” bubble shorts, like PLUG and CHPT, are well into a correction. We expect Tesla to give back its YTD gains and then some, with the benefits of overproduction approaching an end point. We expect shares of VOW3 to continue to chip away at the obvious disconnect to the its sum of the parts. Other EV shorts, like LCID, become riskier as the capital destruction becomes evident, with licensing deals, partnerships, or ‘sales’ possible outcomes as deep-pocketed backers recognize the severity of competitive pressures and losses.
RVLV
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Short Thesis Overview: Revolve Group (RVLV) has a problem with rising returns and rapidly building inventories. The company notes it has high quality inventory, and that it will retain its value, but because of softening demand, and the desire to reduce that inventory, there will be some measured promotions. Maybe this is possible in a normal environment, but EVERY APPAREL COMPANY HAS TOO MUCH INVENTORY. Good luck moving inventory in a measured fashion when every company is trying to clear product at the same time. |
We continue to track SKU listings on the Revolve Group (RVLV) website. Compared to 3 months ago, total listings are up 16% in clothing, sale items are up 13%, and final sale items are down 10%. It’s perhaps good to see final sale (clearance product) down, but that means it’s being sold, pressuring 2Q margins and signaling the risk around consumer trade down.
We see Revolve as over inventoried, and will have to take a hit on pricing and margins to get the inventories in balance. That means growth and margin pressure for the foreseeable future which will hurt earnings and the stock, especially with the stock trading at 22x earnings.
STLD
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Short Thesis: Base metals have been deeply cyclical for decades and, most likely, centuries. We think all of the bullish catalysts will fail, once again, in the face of "the cycle." Construction and consumption drive demand, with higher rates and tighter credit an inevitable dampener. Credit tightening, more expensive borrowing, and inflationary/supply pressures limit the upside in total construction spending. It is difficult to build a scenario where the infrastructure package and the war in Ukraine support steel markets. These factors have instead emboldened investors to pay absurd valuations for among the most deeply cyclical companies (albeit often well-run) in a largely no growth industry at all-time highs. We expect greater than 50% downside in the shares of Steel Dynamics (STLD). |
Steel names are among the most straightforward correlations to CPI…which is likely to slow markedly. Betting on inflation re-accelerating here seems low probability, hence the Steel Dynamics (STLD) short. We’re mired in Quad 4 for now which means more disinflation at the margin. Investors can definitely “feel the Quad 4” given bank failures, job cut announcements, and a reasonably unsupportive fiscal outlook.
The STLD call is not just a Macro/Recession Call. A weak global growth backdrop helps (and is probably a sine qua non), but our Macro team doesn’t forecast the big GDP declines YoY that eat into metal demand. There are scenarios where that could occur, but our view requires lower shipping costs, disinflation, and eroding order backlogs.
DE
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Short Thesis: Low rates helped fuel profits at Deere & Company (DE) and other agriculture equipment suppliers. Ethanol-blending mandates, falling/negative real rates and investor interest led to a NASDAQ-like bubble in farmland values. Farmers have been able to tap that value to borrow and supplement spending. Farming is as mature and sub-GDP growth as Industrials get. Consensus expects higher EPS for DE, which we believe is a very unlikely scenario in #Quad4 for a company already trading at peak. We see DE EPS missing substantially over the next several quarters. |
ISM Backlogs Reading Below April 2020 COVID Low
Why should you position defensively on the cyclical side of Industrials? Because manufacturers are generating revenue by delivering orders accumulated during supply constraints in 2021 and 2022. Most mid-cycle/short-cycle book-to-bills started to slip below 1 in 4Q 2022. CAT was all the way down to 0.90 (adjusted for dealer inventories) in 1Q2023. Deere & Company (DE) likely slipped below 1 in their FY1Q23, with visibility muddled on a lack of “order bank” disclosure. The pricing in those orders, accepted by panicked customers in an operating environment with accelerating inflation for manufacturers, is abnormally rich.
We aren’t sure what that means as the ISM New Orders has been in contraction for 10 of the last 11 months. With bellwether companies like CAT and DE chewing through backlogs at century highs in operating margins, we don’t need much additional information. Industrial activity can be in recession – i.e. contract in a profit crushing way – without a broader economic downturn. We saw that in 2015-2016, for example. All one needs to realize is that a sustained contraction in backlogs means that manufacturers are over-earning relative to current order rates…and orders are continuing to decline.
KNX | ODFL
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Short Thesis: While earnings at truckload carriers in 2H22 declined more than for the average Industrial sector constituent, the share prices remained firm and often near all-time highs. Transportation data have deteriorated into 2023; there is little cause for optimism either in Macro or micro trends. Rails are the most out-of-favor group in the sector on some definitions; we expect them to be among the best performing industrial transports, we chose to fade hysteria from non-chemists who do not understand railroad operation and regulation. That matters to KNX since a 10% increase in Rail speeds takes ~5pts of margin from KNX. |
This week, Industrials analyst Jay Van Sciver hosted a call with Craig Fuller, CEO and Founder of FreightWaves, to discuss the freight industry with implications for Knight-Swift Transportation (KNX) and Old Dominion Freight Line (ODFL).
As explained in the short thesis overview above, "earnings at truckload carriers in 2H22 declined more than for the average Industrial sector constituent, the share prices remained firm and often near all-time highs."
The charts below quantify the weakness in the truckload carriers and why we see continued deterioration at KNX and ODFL.
DLR
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Short Thesis: We found an "AI REIT" (within the Data Center subcategory) to fade, and it remains a fundamental short. Our view, and it's less a view and more guaranteed by simple math, is that (1) leverage will continue to increase secularly through at least mid-2024 amidst a large funding need and mismatch in cash NOI recognition on a lag, (2) a follow-on equity offering may be needed, and (3) the economics of the DC business do not warrant DLR's multiple (we will go into that later). |
Digital Realty Trust (DLR) Black book to be held on 6/26. We think (1) a significant portion of DLR’s portfolio is functionally obsolescent, (2) the cash burn and balance sheet situation has not been solved, (3) ongoing capital requirements are higher than investors think, and (4) the stock is very significantly overvalued. Offsetting these are easing base effects and the question as to whether recent pricing is sustainable. We are still coming out on the short side.
ONON
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Short Thesis: The On Holding (ONON) valuation of 32x EBITDA is banking on TAM that doesn’t exist. The brand is growing too quickly and recklessly, with inventory up 190%. With too much like-for-like product being pumped into wholesale doors, discounting is inevitable. As the wholesale full-price model breaks down, DTC will ultimately slow as well, so sales will slow, inventories will bloat, GM declines, and the management team deleverages SG&A. None of that is in the stock right now. This reminds us of a few different companies. One of them is Kors, which blew up in 2015 when it oversold into wholesale resulting in discounting and slowdown in high margin DTC sales. Also similar to Under Armour in the early days when it was billed as “the next Nike”… clearly that didn’t work out. But at least UAA was a real brand; we aren’t so sure that’s the case for ONON. ONON is more of a product. The brand awareness is exceptionally low, but the awareness of the Cloud product is 4x higher. We estimate that the main Cloud product accounts for 60-80% of sales. The company hasn’t been tiering product by distribution channel or retailer, and when this +190% inventory flows through the channel this year that will start to be a problem with discounting. We think this cracks in CY23, with 50% downside over a TAIL duration. |
One of the concerns we have for On Holding (ONON) and its growth trajectory is that the company is overly reliant on a single silhouette. That is the core Cloud lines. This is the style that has been selling well and is very popular as a fashion shoe. If that fashion aesthetic falls out of favor, you have a lot of sales risk… whereas when shoes are consumed for function… the sales risk is less and less volatile around fashion preferences. We think that core Cloud shoe is around 60% to 80% of sales. This is the style that retailers want and which is driving the growth in wholesale revenue. It’s a big risk to growth and margins to have a singular style growing volumes at several retailers in single mall or small market area since any compression in demand means relatively elevated inventory and the risk of price competition between the retailers to move the marginal sale of product.
GOLF
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Short Thesis: We think we’ll see a tempering of how core golfers are spending on new equipment; build up of used equipment; had some insider sales; CFO is planning to leave next year; GOLF remains a short. |
The NGF reported golf club and shipment trends for 2023 through May. The aggregate is up 2%, golf club dollar shipments are down about 4% while golf balls are up almost 18%. The balls strength makes some sense, with a new ProV1 out, golf ball interest spike around the Netflix Full Swing doc as core golfers got excited to stock up for the year, and improved weather YY driving rounds up in the Spring.
Acushnet Holdings Corp (GOLF) equipment is expected to grow about 5% this year, so so far the industry is running a bit below that. We think the remainder of the year is likely to underperform as consumers curb discretionary spend and we have an air pocket from the golf long lived clubs not being re-purchased at the rate we saw the last few years.
We are also seeing steep discounts on prior generations of clubs, so when the marginal consumer sees the option to get a new driver at $250 to $400 for a still great and similar club from a year or two ago, vs $600 for this year’s, the purchase is going to shift to the former when the wallet feels pressure. That means building inventory of new, and reduced shipments from the club manufacturers. We see downside to the high $20s to mid $30s on this stock.
ULTA
Ulta Beauty (ULTA) is a sleepy ‘comfortable’ long today due to reopening trends in beauty, and people relying on a valuation framework that applied to ULTA over the past 10 years, not the next five. Unit growth is slowing to a crawl, competitive pressures are intensifying like ULTA has never seen in its history, and brands are increasingly going direct to capture more of the profits.
Sephora is moving into Kohls stores, right on ULTA’s door step, and our analysis indicates it is stealing traffic. The consensus is looking right through these competitive threats, and is forecasting that current 15% margins are ‘the new normal’ in perpetuity. We think that we’ll see closer to 12% over a TAIL duration, with risk to further downside as the beauty space becomes over supplied as it relates to square footage.
The stock currently trades at 13x EBITDA and 18x earnings. But when the market realizes the real growth and return profile of this company in the coming 1-3 years, we think it gets revalued at 7-9x EBITDA, or 12-15x on lower earnings. That suggests a stock closer to $250 vs the current $450. We’ve seen in many times before when the likes of DKS, BBBY, BBY, KSS and virtually every other off-mall big box ‘category killer’ were all massively revalued lower when they entered this phase of their growth and return cycle. And ULTA should be no different.
SBUX
Could the new Starbucks (SBUX) CEO's first quarter out of the box get any better?
SBUX 2Q23 Non-GAAP EPS of $0.74 beats by $0.09, and Revenue of $8.7B (+14.5% Y/Y) beats by $270M. 2Q23 SSS Up 11% Globally; Up 12% in North America; Up 7% internationally; 2Q23 Active U.S. rewards membership reaches 30.8 Million, Up 15% Over the Prior Year.
The prepared comments from the SBUX conference were 45 minutes, during which Laxman Narasimhan, the company's new CEO, and other executives focused on new initiatives, such as streamlining store operations and making new investments to boost long-term development. They said several times that these investments are already having an impact; I have a hard time believing that these investments are already having an impact since they were only announced last September. According to CEO Narasimhan, the company reported strong performance in U.K. and Japan with double-digit comparable sales growth matching the performance in North America (North America +12% vs. FS +8.5%, transactions +6% and Ticket +5%.)
Even while China's comparable sales increased by 3% vs. FS (3.0%), transactions by +4%, and Ticket (1%) (and +30% in March), he added that the path of China's recovery is likely to be uneven. China recovery has not even begun given where sales are versus 2019 (YUMC echoed the same' sentiment). The company highlighted that barista turnover, a source of concern, improved in 2Q23. On the product side, it was highlighted that the drink Oleato's introduction in three U.S. cities and Italy was a great success but did not define what that means and was expected to help drive comparable sales growth. They said its is currently available in 650 stores across three markets, Italy, Japan, and the US but stopped short of announcing further plans except to say "we look forward to bringing this exciting new offering to more stores and more markets around the world this year."
After reporting results, in afterhours trading, the stock started to sell off when the CFO reiterated its previous full-year outlook regarding guidance after handily beating the quarter and the CEO spending 30 minutes telling everyone how great things are. They threw caution to the wind, saying there may be imminent changes in consumer behavior. The issue became more complicated, saying 2H23 is back-end loaded. "We also expect EPS to step up in the second half of the fiscal year, improving sequentially in Q3 and Q4. We expect year-over-year EPS growth in Q3 to be meaningfully lower than our fiscal guidance range of 15% to 20%, with Q4 year-over-year EPS growth slightly above the high end of our guidance range." Yet SBUX anticipates that the rate of increase of worldwide comparable sales will be towards the top end of the +7% to +9% range, and that of U.S. comparable sales will be between +7% and +9%.
I don't believe that this company can sustain 7-9% SSS growth over the long term. When will the new CEO need to lower LT guidance?
REXR
We have stayed away from Rexford Industrial Realty (REXR) for awhile in Quad 4, as the company's premium valuation is totally contingent on maintaining its above-peer growth profile and the Southern CA infill logistics markets remaining the best in the country. Any slight RoC deceleration could cause some pretty reflexive downside as we saw with PLD in early-2022. While we like the platform and REXR as a TAIL idea, we think the near-term risk is far too skewed to the downside.
For example, broker CBRE projects market rent growth of +15% for comparable assets within REXR's submarkets, compared to +5% blended for all of the U.S. REXR is very clearly priced based on that assumption both occurring but also continuing.
With that said supply risk is definitely the lowest for REXR among the industrial REITs which, all else the same, supports rent growth. It's potential changes on the margin for demand that we are worried about, especially in Quad 4 and given what we are very clearly seeing with the U.S. consumer right now.
We estimate guidance implies roughly +7% compounded "internal" NOI growth over the next two years from rolling expiring leases to market rents and embedded rent escalators. This excludes growth from recent acquisitions and redevelopment activities.
POOL
Pool Corporation (POOL) earned $5-$6 per share pre-pandemic, with the pandemic boom in home spend (including pools) consensus is modeling high teens EPS over a TAIL duration. Sales per store were ~$3mm pre-pandemic, and are now coming in closer to $6mm – something we think is utterly unsustainable given that 40% of sales come from equipment and supplies to contractors installing new pools.
To its credit, the installed base of pools is higher today, so its chemical business – around 10% of total -- will likely see a sustained lift. But nearly half of revenue comes from ‘other products’ which includes everything from gas grills, outdoor lighting and lounge chairs – something which people already bought and don’t have to buy again for 5-10 years. In our model, we have the company putting up store productivity down 10% in 2023, down another 5% in 2024 and 2025. That still gets us to productivity 25% higher than pre-pandemic (again, due to the higher installed base of pools), but materially below the Street.
The company is an aggressive buyer of its stock, something we think will evaporate – even at a lower price – as the business declines, and it’s staring at maturity of its $1.5bn in floating rate debt that comes due in 2026. Ultimately, we’ve got TAIL earnings closer to $10 with the street around $19. This stock carries a serious p/e multiple – unlike other high end retailers that trade at mid-single digit earnings multiples – and trades at 16x EBITDA. We think this stock has material downside to earnings and the multiple, and is not overly shorted with only 11% of the float held short. We think there’s 30-50% downside in this stock.
CF
The fertilizer names are among the most correlated to inflation in our coverage. As disinflation bites, it is reasonable to expect these names to lag the broader market. We expect oversupply from nitrogen fertilizer industry capacity additions and the H2 subsidies in the Inflation Reduction Act. Nitrogen was down YoY, but other nutrients showed a weaker margin progression.
As the ‘bubble’ in farmland prices deflates and disinflation impacts prices/incomes, we expect Ag exposed names to underperform. Capacity additions, such as those in India and Nigeria, portend a challenging urea market…one which doesn’t have the demand growth to absorb significant new production. The IRA likely results in a glut of cheap H2, a set-up that would drive ammonia prices lower.
Like all peaking cyclicals, these stocks look cheap on a trailing multiple basis. But buybacks are a terrible, pro-cyclical use of capital, as CF Industries (CF) is buying in shares at comparatively high prices. We think there is more downside in these names through at least 1H2023.
NEM
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Long Thesis: In addition to GLD and Physical Gold, we remain bullish on Gold Miners (GDX) and Newmont Corporation (NEM), the world's largest gold mining company. While the broader commodities complex is a notable underperformer amid Quad 4 environments, tend to be the exception. Gold’s flight-to-safety appeal is most pronounced in Quad 4, an environment that historically corresponds to declining real rates. |
Gold has never been higher, Newmont Corporation (NEM) valuation diverged from product. While not technically ‘cyclicals’ in the standard sense, gold miner profits are driven by product prices – a dynamic that leads to high multiples at low product prices.
For now, we aren’t pairing off gold miners… the exercises around individual mine evaluation, cost comparisons, and the like doesn’t drive market-relative performance/alpha. Getting the Gold Price, factors exposures, and a reasonable handle on the operations will.
NEM has the Newcrest deal, a transaction that vaults NEM into a different scale category… and the company has had some success with earlier integrations. We see ~30% relative upside as NEM revalues to reflect the current gold price dynamics… without as much downside risk as other metals and mining names.
DKNG
Just checking in with our bi-monthly reminder that the domestic iCasino business is an absolute juggernaut and continues to grow at a very fast clip despite base getting bigger each month. Online sports betting (OSB) attracts the media attention and more of the focus from investors but iCasino, even with its small reach, remains a huge piece of the pie. In fact, in markets with both iCasino and OSB, the revenue generated from iCasino is 2x larger than OSB, and much more profitable.
As of May, the industry is still tracking towards a $6-$6.5Bn annual revenue run rate. On a total market basis, growth was +23% YoY in the month, while on a same-state basis (NJ, WV, and PA), growth accelerated to +22% YoY. For the YTD, the same-state sample is tracking up ~20% YoY, exceptional growth at scale. As the #1 operator in the iCasino space (including all states), DraftKings (DKNG) stands to benefit the most from these positive trends both from an incremental revenue and profit perspective. We remain bullish on DKNG as our pureplay name in the online space.
DDOG
The bull case on Datadog (DDOG) is that Datadog has exhibited great vision through the years, including evolving into APM, and then fully shaping the Observability opportunity, in part via acquisition. The company continues to be at or near the top of its core market, catering to a DevOps centric audience, and justifying its high priced business model with a move into adjacent product markets in DevOps. We like the DevOps market which continues to exhibit growth in usage and key adoption metrics notwithstanding current macroeconomics.
We think Datadog has a chance to grow into what Gitlab so far is not, and we like innovative companies in fast growth markets that are engineering led, whose innovation can open up additional revenue markets. We think DDOG has the potential to be that company, albeit perhaps after one more quarter of tough backlog growth comparisons in 1Q23.
MTCH
Communications analyst Andrew Freedman presented New Best Idea Long Match Group (MTCH) Tuesday, June 20th @ 2pmEST. During his monthly Communications Wrap Call, he discussed how he’s been stalking MTCH on the long side for most of 2023 with an eye on 2H23 as the potential positive inflection point. While it is still early in the turnaround, Andrew believes the worst is behind us for Tinder, and we are seeing signs of stabilization among established brands. He sees a path to accelerating growth NTM as comps ease and management's strategic initiatives bear fruit. As investors gain confidence in the turnaround, we expect a re-rating to occur and see 40%+ upside in our base case scenario over the next 6-9 months.
BCO
The Brinks Company (BCO) | That’s The Idea For Business Services Longs In Quad 4
Brinks reported its highest first quarter operating margin that we have seen in 1Q23. It hasn’t been the biggest winner, perhaps, but shares of BCO have provided a total return of ~24% in the last year vs. ~15% for the S&P 500.
Investors are concerned that cash is going away. But Brinks is much more of a penetration story with products that make cash management vastly more efficient in a clear value proposition for outsourcing (see Brinks intelligent safe offerings). Organic growth has remained decent. Margins have expanded. Penetration can continue. We think the conflation of cash usage trends with the outsourcing opportunity for BCO is what has created the alpha opportunity for shares of BCO.
ATVI
Microsoft continues to pursue its proposed $69 billion purchase of Activision Blizzard (ATVI), a $95 per share cash offer. Following approval of the MSFT-ATVI deal by EU regulators, focus has intensified on Microsoft's effort to overturn the UK regulator's decision to block the transaction based on competition concerns in the nascent cloud gaming market.
Despite deferential judicial review standards in the UK, the upcoming appeal arguments and potential case outcome could shift momentum toward ultimate deal approval globally.
