GMCR

Thought Piece: The Hidden Advantage

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As activist investing proliferates, investors are becoming more and more familiar with celebrity investing gurus such as Carl Icahn and David Einhorn. Let’s examine how these investing giants have carved out a unique structural advantage over mom-and-pop investors. This article was originally published in June 2014. By Brian Nelson, CFA Wouldn’t it be great to load up on options and then announce to the world that you’ve done so, thereby generating tremendous gains as other investors pile into the stock driving its price higher? I think most investors either believe that such behavior is mere fantasy, or would love to have this significant influence for their own use, assuming it was legal. Perhaps to your surprise, this behavior is neither … Read more

Keurig Green Mountain Goes Private

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Keurig Green Mountain (GMCR) will be taken private by a JAB Holding Co. led investor group for ~$13.9 billion in cash. The price of ~$92 per share represents a 78% premium to the company’s December 4 closing share price, which was the result of a year of disappointing earnings and questions about the firm’s long-term growth prospects. In its fourth-quarter earnings report, Keurig recorded double-digit declines in net sales, operating income, net income, and diluted income per share. Though the price premium certainly was a surprise (greater than the high end of the fair value estimate range), the buyout hardly comes as a surprise to us. We have been of the opinion that a takeout would the best case scenario … Read more

Earnings Brings Out Volatility of Speculative Entities

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Tesla Falls on Lowered Delivery Guidance Tesla’s (TSLA) shares fell following the release of its second-quarter results August 5, despite beating consensus estimates on revenue and earnings per share. The firm reported non-GAAP revenue growing 40% from the year-ago period to $1.2 billion, and a non-GAAP loss of $61 million or $0.48 per share. The company was significantly cash flow negative through the first half of 2015 due in large part to capital expenditures for capacity expansion and tooling associated with the new Model X and the construction of the Tesla Energy Gigafactory. Management claims its capital spending is more efficient than ever in terms of capital spend per unit of incremental capacity, which will be necessary to get the firm … Read more

Peltz’s Reasons for Breaking up Pepsi Do Not Hold Water

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Our team took a read of Barron’s cover story over the weekend on Pepsi (PEP) that goes into activist investor Nelson Peltz’s thesis for breaking up the firm into two pieces: a soda group and a snacks group. Nelson Peltz’s Trian Partners holds ~$1.2 billion of Pepsi’s shares, so he has a relatively large voice on the future direction of the company. Barron’s seemed to take the opinion that a break-up makes sense, but after reading the article, we were left with little economic reason to believe that a split should be pursued. For background, the thesis on breaking up Pepsi goes something like this: “a split would allow both beverages and snacks to operate more entrepreneurially. ‘The goal is … Read more

Coca-Cola Expanding Its Dominance; SodaStream in Play

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Coca-Cola (KO) has recently become a savvy asset manager, and we think recent moves speak volumes about the company’s strategy to retain dominance in the non-alcoholic beverage space for decades to come. Coca-Cola’s management is capitalizing on what we’d describe to be the ‘Hidden Advantage‘—something more commonly witnessed in activist dealings in which small initial stakes turn into large gains once news is made public. In February, for example, Coca-Cola scooped up 10% of Green Mountain at $74.98 per share (it subsequently increased its stake to 16%). With shares of Green Mountain (GMCR) now trading at ~$115 each, the deal for just a small portion of Green Mountain looks incredibly savvy—especially in the event Coca-Cola ends up buying Green Mountain … Read more

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

The Cola Wars: Currency Headwinds Intensify; Snacks Looking Better

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We live in a thirsty world. Global non-alcoholic ready-to-drink (NARTD) consumption is expected to advance at nearly a 6% compound annual growth rate over the next four years. Since the beginning of this decade, NARTD retail value has increased by $135 billion, and the market is expected to grow by another $300 billion before the end of 2020. The global beverage industry is fueled by a number of global macro trends: 20% growth in urban population, 70% increase in personal expenditure per capita, 50% growth in middle class, and 1 billion teens today. Coca-Cola (KO) and Pepsi (PEP), which both reported results last week, are poised to benefit from these strong market demand trends, and Pepsi has a faster-growing snacks … Read more

Coca-Cola Remains Strong; Green Mountain Deal Shakes Up Beverage Industry

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Though many investors are focused on the relatively weak global volume performance in Coca-Cola’s (KO) fourth-quarter results, released February 18, we’re not worried about the beverage giant’s fundamental strength. Excluding the impact of structural changes, comparable currency-neutral net revenues advanced 4% in the period, while comparable currency-neutral operating income jumped 6%, in line with its long-term growth target. Comparable currency-neutral earnings per share jumped 7% in the fourth quarter, roughly in-line with the full-year pace. This isn’t terrible performance by any stretch of the imagination, and the company continues to achieve global value share gains in nonalcoholic ready-to-drink beverages. Coca-Cola’s cash flow from operations declined modestly during the year, but greater scrutiny with respect to capital spending facilitated free cash flow … Read more

Starbucks’ Investors Are Forgetting That Coffee Costs Can Go Back Up; Shares Lack Valuation Support

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Starbucks (SBUX) has one of the strongest and most-recognized brands in the world. We think its brand name is largely responsible for it being able to charge lofty prices on its coffees and drinks, despite significant competition in each of its markets. Starbucks’ fiscal first-quarter results (ending December 29, 2013) reminded us of this solid position, which appears to be nearing impregnability given the strong pace of traffic trends and profit improvements. The coffee giant announced Thursday that it experienced 12% revenue growth during its fiscal first quarter thanks to strong holiday sales and solid store traffic, which drove quarterly revenue to a record $4.2 billion. Even though prices for its beverages are set at premium levels, the firm is … Read more