Value Investing A (first) Harvard case study of the WeWork IPO attempt |
- A (first) Harvard case study of the WeWork IPO attempt
- The economics of streaming is changing pop songs
- Writeup on why WeWork and other venture capital saturated unicorns are prone to fail
- Long KHC Pitch
| A (first) Harvard case study of the WeWork IPO attempt Posted: 08 Oct 2019 08:57 PM PDT |
| The economics of streaming is changing pop songs Posted: 08 Oct 2019 07:56 AM PDT |
| Writeup on why WeWork and other venture capital saturated unicorns are prone to fail Posted: 08 Oct 2019 07:45 PM PDT |
| Posted: 08 Oct 2019 04:50 AM PDT I've included the crux of my pitch on KHC below. You can find the detailed report in this LINK. I'm using this pitch for interviews so welcome all constructive criticism. Recommendation: KHC has never been about topline growth given meaningful underperformance vs. peers. Rather, we believe the company has room to support core EBITDA margins of ~27% vs. consensus at 22-23%. We see favorable risk reward in KHC (up 45% /down 20%) driven by supply chain deflation, manageable leverage, positive earnings revisions and a sizable valuation discount vs. peers. Investment Thesis § Supply Chain Deflation. KHC has seen ~$700m of EBITDA pressure over the last 18-months from supply chain inflation. These issues should start to reverse over the next 6-12 months, given freight, overtime labor, and packaging costs are deflating Y/Y. Relative Valuation. KHC trades at a ~25% discount to Diversified Food peers on the back of legitimate, albeit addressable concerns. At current level, KHC trades at 10.5x consensus 2020 EBITDA vs. our implied 9.9x estimate, largely driven by the potential for positive earnings revisions. There is also scope for this story to re-rate higher (not our base case), but will be predicated on executing on the margin front. Visible Path Towards Delevering. Net leverage remains relatively high at 4.9x vs. the peer group at 3.5x. We believe leverage targets of 2.5-3x are likely not achievable in the near-term, but do see a credible path towards leverage of 3.9x by 2021, driven by ~$4.5bn of disposals (Maxwell/Ore Ida), 50% dividend cut, and cumulative FCF of $7.6bn (consensus). Incremental EBITDA From Mondelez: The 10Y license held by Mondelez for Kraft and Lunchables branded products outside of the US is expiring in 2022. We see the potential for an incremental ~$170m of EBITDA to flow to Kraft in 2022-23, which consensus estimates exclude. Key Risks Margin Weakness Continues. Further deterioration of EBITDA margins given ~500bps of erosion over the last 3-years. Management has spoken of further investments (marketing/media) to ignite topline momentum. We think continued supply chain misstep and ag inflation could lead to further margin weakness in the near-term. Dividend Cut. KHC cut the dividend by 40% during 4Q18 earnings to support FCF. The dividend yield stands at a whopping ~5.5% vs. peers at 3.2% and 200-300bps over its bonds. We view the possibility of a dividend cut as a credit positive and supportive of de-levering actions, given management has repeatedly noted its commitment to IG credit rating. High Yield Downgrade. Net leverage stands at an industry high of 4.9x, while plans for asset disposals are temporarily on hold. Credit rating agencies have stood behind IG ratings, although stable/negative outlooks could deteriorate into HY category. CDS spreads and term structure spreads are pricing in a downgrade to HY, but we think this is premature given a visible path to 3.8x net leverage. More Goodwill Impairment. Goodwill/intangible (~$85bn) is still 2.3x KHC's market cap, despite taking $16bn of impairment YTD. While it's difficult to estimate when another impairment charge could materialize, we think another $11bn of charges is possible. However, this would be a non-cash charge, excluded from core EBITDA/EPS, and not affect credit metrics. Catalysts SEC Investigation. The SEC launched an investigation into KHC citing accounting issues. The investigation is ongoing, despite voluntarily restatement of historical numbers, given supply rebate irregularities. Any resolution will likely be well received. Additional Asset Sales. Although on hold for now, KHC was considering divesting some underperforming assets. We think additional asset sales would temper credit rating downgrade expectations. Unveiling Strategic Initiative. New management is formulating a plan to drive better execution on growth, margin expansion, and strategic initiatives. As such, this announcement could come as early as February 2020 and could clear up a lot uncertainty. [link] [comments]  |
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