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BETR | It’s Already Popped

Given the current “free money” environment we are not surprised that Amplify Snack Brands is going public.  The company fast tracked its IPO process and is the beneficiary of the JOBS act, taking advantage of the reduced reporting requirements afforded to small ‘emerging growth’ companies.  Aside from getting the POP in the initial trading upon a successful completion of the IPO there is no reason to own this name.

 

THE OFFERING

Amplify Snack Brands (BETR) is set to price their shares tonight.  Amplify Snack Brands has positioned itself as a “high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for Better-For-You, or BFY, snacks.”  The only brand of consequence is the SkinnyPop brand.  Going forward the company will try to become “an industry-leading BFY snacking company that capitalizes on the potential of great-tasting and high-quality BFY snack brands that we create and acquire.” Existing shareholders of BETR are offering 15,000,000 shares between $14.00 and $16.00 per share, the company will not receive any of the proceeds.

 

OWNERSHIP HISTORY

TA Associated acquired SkinnyPop in July 2014 for $320mm, after the company was most likely shopped around to potential strategic buyers unsuccessfully.  We were not surprised that the company did not find a home due to the limited transferability of the SkinnyPop brand to anything but healthy popcorn. “The parties agreed to consummate the Sponsor Acquisition…for an aggregate purchase consideration of $320mm, which included rollover stock from the Predecessor’s members representing 14% of the Company.” Following the offering, TA Associates will beneficially own approximately 58.3% of issued and outstanding common stock.

 

HEDGEYE OPINION – As with any small company the future depends on management and the board successfully executing the growth strategy.

 

BRANDS AND THE MARKET FOR POPCORN

SkinnyPop is their anchor brand, and Paqui a tortilla chip brand acquired in April 2015 for $12.2mm is a minor brand in the portfolio.  BETR sales are dominated by SkinnyPop, the original sku represents 87% of total sales for the entire company, with an insignificant amount coming from White Cheddar, Naturally Sweet, Black Pepper and Hatch Chili flavors. As stated in the S-1, the U.S. popcorn sub-segment is estimated at $1.9bn in 2014 and grew at 8.1% over the prior year. The RTE popcorn sub-segment is estimated to be $966mm growing at a 14.6% CAGR since 2010.

 

HEDGEYE OPINION - The market in which they play is littered with small players, like Angie’s, Popcorn Indiana, Lesser Evil, Good Health, Earth Balance (BDBD), Garden of Eatin’ (HAIN), Beanitos and dominated by the powerhouse brands from major CPG companies such as, PEP, GIS, CAG, LNCE, DMND etc. not to mention the emergence of private label.

    

COMPANY OPERATING PERFORMANCE

In 2014 SkinnyPop’s market share grew 6.5% to 12.1%. Net sales increased from $55.7mm in the year ended December 31, 2013, $132.4mm in the pro-forma year ended December 31, 2014, representing growth of 137.6%. Gross profit and adjusted EBITDA margins were 58.6% and 44.5%, respectively, for the year ended December 31, 2013, 56.1% and 44.2%, respectively, for the pro-forma year ended December 31, 2014.

 

HEDGEYE OPINION – The margins for BETR are some of the best in the industry - because it’s just popcorn.  As the company expands into other categories the consolidated margins will likely decline significantly. 

 

BALANCE SHEET

As of December 2014 BETR had a DEBT / EBITDA ratio of 4.09x, not what you want to see from a company that is set to IPO and not receive any or the proceeds. This lofty valuation (6.55x June 30, run-rate sales) for this company is predicated on the fact that they can roll up more BFY snack brands in the $25mm-$75mm revenue range, but the balance sheet can’t support that right now. A better use of proceeds would be to de-lever the balance sheet, allowing the company to be in a better position to make acquisitions.

 

VALUATION

At $16 or even $14, BETR is significantly overvalued for basically a one product company.  If the IPO is priced at $16, the high end of the range, the implied market value of BETR will be $1.2 billion.  The implied market cap of BETR is 64% and 124% of the addressable U.S. popcorn sub-segment and RTE popcorn sub-segment, respectively.   

 

HEDGEYE OPINIONAt this point BETR is a one product wonder and given that at $16 the company market cap is 24% bigger than the RTE popcorn sub-segment the stock is grossly overvalued.

      

We’re impressed by the current owner’s ability to rapidly build up a business in a fast growing and very profitable category.  That being said, BETR is a small player in a very big competitive category.  The RTE Popcorn segment is littered with regional premium brands as well as the national premiums such as Popcorn Indian and Angies. Not to mention the emergence of Private Label.

 

The recently acquired smaller chip business appears like a quick tuck-in acquisition just to make the company’s IPO appear more appealing.  At this stage, anyone who wants to get involved in the chip business on a small scale has got to be crazy.  The chip business has little product differentiation, and the product isn’t much better or worse than other competitive products and they have a limited distribution compared to the competition.

 

Customer concentration is a significant issue, with 55.6% of BETR’s revenue coming from the club channel (Costco and Sams Club).  Without hesitation, one of those companies could drop SkinnyPop in a second for a faster growing more appealing brand.  Also, sales are limited to one maybe two sku’s with 87% of sales coming from the Original flavor.  Needless to say, it’s a lot different than saying 30% of GIS sales come from Walmart, because that is across possibly 100 skus.  BETR is dependent on a single co-packer, no internal manufacturing, although creating an asset light model; it puts the company’s fait into someone else’s hands.

 

Lastly, ‘Skinny Pop’ is a tough brand to bring across categories, basically just labeled as healthy popcorn. Retailers shifting focus away from the center-of-store, shelf space will come at a premium, competing against PEP, LNCE, GIS, CAG, DMND.  This leaves future growth in new categories dependent on the company acquiring other brands which presents a whole new set of issues.  The first issue being the company’s balance sheet does not have much room to make any significant acquisitions.

 

In the end the success of this story depends on total points of distribution (TDP’s) growth, and we do not believe that they will consistently grow at near the rate they currently are. In BETR’s filing they have been growing TDP’s by 115% from 2012-2014, to consistently grow at that rate going forward, in the competitive center-of-store salty snacks market, will not be possible.

 

This company is grossly overvalued in our opinion, take a look at the below data table for a conservative look at the downside potential.

 

BETR | It’s Already Popped - CHART1

 


#LateCycle

Client Talking Points

UST 10YR

UST 10YR Yield of 2.16% reminds Bond Bears that they need more of a catalyst than a chart – with both growth and inflation slowing (at the same time) again, the fundamental catalyst for a big asset allocation to the Long Bond remains as intact as #LateCycle data is.

OIL

Capitulation yesterday on the down -4% daily drop for WTI, taking its 3 month #deflation/crash to -23.4% - then the bounce off the oversold line this morning +1.3% to $45.77 with a risk range of $45.32-47.90 – “cheap” getting cheaper.  

RUSSELL 2000

The Russell 2000 is down -4.9% from its all-time high and continues to be bearish on both our TRADE and TREND durations  as the Russell “Value” side of the equation is getting thumped (relative to Russell Growth) like it did when growth slowed in the summer of 2011.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale and Ben Ryan.

Asset Allocation

CASH 52% US EQUITIES 4%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed.  

PENN

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

TLT

As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.   

 

Three for the Road

TWEET OF THE DAY

VIDEO: Got Gold History? #NewLows $GLD https://app.hedgeye.com/insights/45354-got-gold-history … via @Hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.

Sigmund Freud

STAT OF THE DAY

Spam accounted for 49.7% of email in June, which is actually the lowest it’s been since before 2003.


August 4, 2015

August 4, 2015 - Slide1

BULLISH TRENDS

August 4, 2015 - Slide2

August 4, 2015 - Slide3

August 4, 2015 - Slide4 

BEARISH TRENDS

August 4, 2015 - Slide5

August 4, 2015 - Slide6

August 4, 2015 - Slide7

August 4, 2015 - Slide8

August 4, 2015 - Slide9

August 4, 2015 - Slide10

August 4, 2015 - Slide11
August 4, 2015 - Slide12

August 4, 2015 - Slide13


investing ideas

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Are You Confident?

“I believe you’re confident; I know I’m not.”

-Wallace Stegner

 

I was walking down the fairway last month with a thoughtful and respected Founder/Portfolio Manager from the South who has struggled in 2015 because some of this “value” stocks (Metals & Mning, Oil & Gas, etc.) haven’t been valuable.

 

Since he runs the firm, he effectively told another PM that he had to sell those losers because they really had no confidence in where the underlying commodity price (and subsequent cash flow implied in the company’s valuation) was going. #GoodCall

 

On #Deflation, are you confident? I used the aforementioned quote from The Angle of Repose as it was the point an American Frontier-Era wife made to her mining husband. These are cyclicals. And her husband was dead-wrong on the commodity cycle too.

 

Are You Confident? - 08.04.15 chart2

 

Back to the Global Macro Grind

 

Some people are so confident that they can wake up every morning and ignore not only the “data”, but how Mr. Macro Market (Bonds and Utilities up yesterday) is moving in reaction to that data. Are you that confident? I know I’m not.

 

Friday’s data on wage growth (the US Employment Cost Index) was not only a “miss” versus consensus macro expectations, but it confirmed that both inflation and growth are what they always are – #LateCycle economic indicators that are now rolling over.

 

Contrary to the humble-pies one might be eating this summer if forced to ignore the data, we also took note of yesterday’s US economic data as it was one of the 1st big readings on the US economy for Q3. Here’s how that looked:

 

  1. ISM headline slowed to 52.7 in July vs. 53.5 in June
  2. ISM Prices Paid deflated to 44.0 in July vs. 49.4 in June
  3. ISM Employment Index slowed to 52.7 in July vs. 55.5 in June

 

In other words, with both #Deflation and a slowing US Labor Market readily apparent in both real-time market prices and the data, we’re more confident in our non-consensus GDP #slowing view for Q3 than we were before we got the data.

 

To review where we’re at on GDP:

 

  1. For Q3 our predictive tracking algo is looking for a 1.6% y/y GDP number
  2. For consensus headline readers that implies +1.4% headline q/q SAAR

 

And to remind you of the #process that drives our confidence intervals – it’s called a Bayesian Inference process – and it’s very useful in dynamically updating the probability of our best forecast being more wrong or right, given the most recent data.

 

Using Bayes Theorem doesn’t really work unless you have a long-term cycle overlay of historical data. This is where what they call the “Frequentist” approach to weighing probability comes into play and is also critical in providing context.

 

As you can see in today’s Chart of The Day, once you’re more confident that the US economy is #LateCycle, you can see that the profit-cycle (for corporations) isn’t far behind. Revenues and earnings (SP500) are down -4.6% and -2.4% so far, respectively.

 

Then, of course, we have a quantitative risk management signal that helps me be more or less confident. Here’s what that’s telling me, across everything that should matter to a modern-day macro risk manager:

 

  1. TREASURY BOND YIELDS: down hard, across the board, after failing @Hedgeye TREND resistance
  2. FX: #StrongDollar remains firmly intact and has no headwinds until the Fed folds and moves “hikes” to 2016
  3. RUSSELL2000: down -4.9% from its YTD high and continues to signal bearish TRADE and TREND @Hedgeye

 

Dollar Up, Bond Yields Down. Are Bond Bears confident that’s not a #Deflation Risk signal? How about the relative performance of “growth” (as a Style Factor) vs. “value” in the Russell itself? This performance spread looks very 2011 to me.

 

As market/economy history fans will recall, from Q1 to Q3 of 2011 most consensus economists (i.e. the ones who missed calling both the 2000 and 2007 cycles rolling over) had to keep cutting their GDP growth estimates until Bernanke bailed the market out.

 

I’m not confident in “calling” for QE4 (yet) because A) the data has to keep “surprising” those who are actually focused on it to the downside and B) the Fed then needs to pivot from when they “raise rates” to what they can do next to “ease.”

 

Our immediate-term Global Macro Risk Ranges (within intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 2.14-2.25% (bearish)

SPX 2067-2124 (bearish)
RUT 1 (bearish)
Nikkei 205 (bullish)
VIX 11.89-15.23 (bullish)
USD 96.81-98.21 (bullish)
EUR/USD 1.08-1.10 (bearish)
YEN 123.24-124.95 (bearish)
Oil (WTI) 45.32-47.90 (bearish)

Nat Gas 2.68-2.82 (bearish)

Gold 1074-1100 (bearish)
Copper 2.32-2.44 (bearish)

 

Best of luck out there today,

KM

 

Are You Confident? - 08.04.15 chart1

 


Stock Report: LinkedIn Corporation (LNKD)

Stock Report: LinkedIn Corporation  (LNKD) - HE LNKD table 8 3 15

THE HEDGEYE EDGE

LinkedIn (LNKD) is a company that has carved out its own identity within the social media space.  LNKD’s value comes from its database of member profiles, which it has a virtual moat around it since we don’t believe another player could replicate that database at comparable scale. LNKD’s product portfolio is primarily paywalls: varying degrees of access to these profiles, for which LNKD charges premium pricing. LNKD’s average annual revenue per customer in its largest Talent Solution segment is roughly $45K.

 

The opportunity for LNKD currently is that it is investing in its salesforce into an improving selling environment.  This investment created a near-term hiccup in the 1Q15 results, but the company is already showing improving trends in 2Q15, which we expect to continue into 2H15.  Meanwhile, LNKD has bought themselves some breathing room on its overly conservative guidance on its last two earnings releases, which has come at the expense of its stock price; hence a good entry point.

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

We see upside to LNKD share price of $240-$270 by year end.  We suspect the relatively soft guidance LNKD provided on each of its earnings releases have spooked the street, and we believe LNKD should rebound once the street realizes that management was being overly conservative - something it is infamous for.

 

The good thing about the soft guidance is the low expectations that accompany it.  We suspect LNKD has found a near-term floor, and the fundamental upside we see in the name should be reflected in the 3Q15 earnings release.

 

LONG-TERM (TAIL) (the next 3 years or less)

LNKD’s core segment is Talent Solutions, with its flagship product being its Recruiter product.  We have broken down LNKD’s U.S. Total Addressable Market (TAM) for this product alone, which is multiples of what it is producing currently today.  That said, LNKD has a long runway for future revenue growth.

 

However, LNKD’s selling environment is highly dependent on the macro environment, particularly around higher trends.  While the long-term opportunity is substantial, LNKD could very see some fundamental pressure in a recession.  That said we remain long on a quarter-to-quarter basis, and once we see a turn in the macro, we’re getting out of the way.

ONE-YEAR TRAILING CHART

Stock Report: LinkedIn Corporation  (LNKD) - HE LNKD chart 8 3 15


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