Category: Research

the larger third-party video game publishers and owns one of the largest most well-known video game franchises in Grand Theft Auto (GTA). The firm is well positioned not only to capitalize on the success of Grand Theft Auto, but also to continue diversifying its revenue beyond its signature franchise. It is expected Take-Two to continue to benefit from the high demand for consoles, the ongoing revitalization of PC gaming, and the growth of mobile gaming.

Take-Two generally focuses on the higher end, using both its capital to fund the higher-budget blockbusters and its marketing advantage over independents in terms of both budget and established networks to support its titles. The new fair value estimate of $200 per share implies a fiscal 2022 price/earnings of 42, enterprise value/adjusted EBITDA multiple of approximately 27, and free cash flow yield of approximately 3%.

Take-Two introduced a separate multiplayer mode, GTA Online, with the launch of GTA V in 2013. The mode has helped this installment sell over 145 million units by expanding its life cycle and monetization. As a result, GTA V will be launched onto its third generation of consoles in November 2021, likely pushing the potential launch of GTA VI even further out.

Financial Strength

Take-Two is in very good financial health. As of March 2020, Take-Two had over $1.3 billion of cash on hand and carried approximately no debt, a conservative capital structure for a company that generated over $540 million in free cash flow in fiscal 2020. The more consistent free cash flow generation is due in part to management’s efforts to diversify and expand its release slate as well as “GTA Online” expanding the lifecycle and monetization of “Grand Theft Auto V” with free DLC and micro transactions. It is expected that the firm will continue to reinvest its cash into developing new franchises and into R&D for video game engines and video game specific technologies. We also project that the firm will continue to make acquisitions, specifically within mobile and PC game development. 

Bull Says

• Take-Two has established newer large franchises, such as “Borderlands,” while revitalizing older ones, such as “Xcom.”

• “Grand Theft Auto” is one of the largest and best known video game franchises, with more than 345 million units sold over its life.

• The introduction of “GTA Online” in “Grand Theft Auto V” enabled the firm to monetize the game beyond the initial sale.

Company Profile

Found in 1993, Take-Two Interactive Software Inc (NASDAQ: TTWO) consists of two wholly owned labels, Rockstar Games and 2K. The firm is one of the world’s largest independent video game publishers on consoles, PCs, smart phones, and tablets. Take-Two’s franchise portfolio is headlined by “Grand Theft Auto” (GTA) (345 million units sold) and contains other well-known titles such as “NBA 2K,” “Civilization,” “Borderlands,” “Bios hock,” and “Xcom.”

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

 José Batista Sobrinho (JBS) seeks to simplify its corporate structure by delisting Pilgrim’s as a public company, allowing for a reduction in administrative expenses and an increase in operational flexibility. The proposal equates to an $8.4 billion enterprise value, 6.3 times our 2022 EBITDA estimate and 6.5 times. However, it is a light offer, particularly when compared against the 9.1 times Sanderson Farms agreed to be purchased earlier this week by Cargill and Continental Grain Company. 

Shares of Pilgrim’s popped more than 20% on the news to above $27, suggesting investors also think there could be upside to the offering. The proposal now stands to be reviewed by a special committee of Pilgrim’s board of directors and, if approved, would need to be supported by a majority of Pilgrim’s shareholders excluding JBS, which should take several months to conclude.

There are three potential outcomes, 1) Pilgrim’s board could negotiate a higher price (we see this as the most likely scenario as our $32 intrinsic value suggests 17% upside), 2) the $26.50 deal could be accepted (causing the stock to move 3% lower), or 3) a deal cannot be reached, putting the stock at risk of gravitating towards its pre-offer price of $22.68 (17% lower). 

Although shares of Pilgrim still trade at a mid-teens discount to our fair value estimate, we also continue to view no-moat Conagra and wide-moat Kellogg as attractive investment options, trading 20% below our assessments of intrinsic value.

Company Profile 

Pilgrim’s Pride Corp (NASDAQ: PPC) is the second-largest poultry producer in the U.S. (62% of 2020 sales), Europe (27%), and Mexico (11%). The 2019 purchase of Tulip, the U.K.’s largest hog producer, marks the firm’s entrance into the pork market, which represented 11% of 2020 sales. Pilgrim’s sells its protein to chain restaurants, food processors, and retail chains under brand names Pilgrim’s, Country Pride, Gold’n Plump, and Just Bare. Channel exposure is split evenly between retail and food service, with the majority of food-service revenue coming from quick-service restaurants. JBS owns 80% of Pilgrim’s outstanding shares.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

planned within the next 60 days, and construction ramps up in 30 other markets across the country. The television business continues to pump out cash, funding wireless spending with enough left over to build cash on the balance sheet.

The wholesale agreement Dish signed with AT&T was the biggest development of the past quarter. Dish remains at odds with T-Mobile, calling the firm a “sore winner” looking to steal back Boost customers with the CDMA network shutdown and aggressive 5G phone offers. Most new Dish/

Boost wireless customers will use the AT&T network going forward. The options tied to this relationship are more intriguing than the wholesale arrangement. Notably, the two firms hold complementary spectrum positions and have a shared interest in the licenses currently used to provide satellite television service. Dish and AT&T also have an opportunity to collaborate in the enterprise services market.

Dish ended the quarter with $4.8 billion on hand, up from $3.7 billion at the start of the year, enough to fund debt maturities until late 2024 with more than $1 billion to spare. Reported debt outstanding increased to $16.2 billion from $15.7 billion at the end of 2020 solely because of the accounting treatment of convertible debt already outstanding.

Company’s Future Outlook

It is expected that Dish’s television business will decline at an accelerating pace over the next several quarters. The firm has done a great job of dropping certain content, notably regional sports networks, to cut costs and offer more attractive prices, but believe there are limits to how far it can take that strategy. Dish is currently negotiating with Sinclair for carriage of more than 100 local broadcast networks, but Sinclair has indicated that it doesn’t expect to reach an agreement before the existing agreement expires on Aug. 16. Dish will face increasingly difficult decisions on which content to carry, forcing it to choose between losing customers at a faster clip or giving back the margin gains it has made in recent years.

Company profile

From its founding in the 1980s Dish Network’s (NASDAQ: DISH) has primarily focused on the satellite television business, capitalizing on technological advancements to expand its reach. The firm now serves 9 million U.S. customers via its network of owned and leased satellites. Dish launched an Internet-based television offering under the Sling brand in 2015 and now serves about 2.5 million customers on this platform. Dish’s future, however, hinges primarily on the wireless business. The firm has amassed a large portfolio of spectrum licenses over the past decade, spending more than $22 billion in the process, and is now building a nationwide wireless network. It acquired Sprint’s prepaid business, serving about 9 million customers, as the entry point into the wireless retail market.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and we believe private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape. Management has reoriented the business strategy to align more with market dynamics instead of product categories. For categories that are either in early or mature stages of growth (snacking and beverages), the team is looking to grow the top line profitably through volume leverage and value-added innovation.

Portfolio optimization is also a core strategy pillar, and it has rationalized many underperforming areas of the assortment. It has also divested secularly challenged business lines like nuts and ready-to-eat cereal. The outlook for Treehouse is still murky, as it remains beleaguered by competition and at the mercy of a consolidated customer base that wield disproportionate influence during times of volatility (like the current industrywide commodity and logistics inflation). Still, we expect its strategy to lead to a largely stable core business, which, along with new growth vectors (like co-packing), should allow it to navigate the environment.

Financial Strength

Treehouse’s financial health looks reasonable to us, though it does leave a bit to be desired. The company has leveraged up meaningfully in the past to fund acquisitions (like Flagstone in 2014 and Ralcorp in 2016), constraining its ability in recent years to make value accretive investments. Nevertheless, leverage is no longer at obscene levels (it sits below 3.5 times EBITDA today on an internally calculated basis), and the firm remaining in the 3-3.5 times range in the medium term. As management continues work to divest assets (it recently completed the RTE cereal business sale, and we wouldn’t be surprised to see more portfolio grooming), even more cash should be available for debt paydown. Treehouse generates a good bit of free cash flow, averaging in the mid-single-digit range as a percent of sales in recent years.

Treehouse also has other cash flow levers, including its receivables sales program, whereby it monetizes its receivables more quickly in partnership with a financial intermediary. The company is still responsible for administering and collecting the receivables, but net-net, this program will continue to reduce its working capital funding needs during any given period. The firm’s debt covenants are fairly restrictive. Most of the debt is secured, and maximum allowable leverage is 4.5 times. Some of its notes also inhibit dividend payments.

Bulls Say’s 

• The private label industry should continue to benefit from secular trends across the grocery retail landscape and demographic trends in the U.S.
• If the coronavirus induces prolonged recessionary conditions in the U.S., private label will likely outperform, and Treehouse would benefit disproportionately as a market leader.
• Its massive manufacturing apparatus should allow the company to benefit from the secular shift toward small, niche brands, by way of co-packing arrangements.

Company Profile 

Treehouse Foods, the largest private label manufacturer in the U.S., is the product of a slew of acquisitions, the most significant being the 2016 acquisition of Ralcorp, Conagra’s former private brands business. The firm plays in over 25 categories, including snacks like pretzels and cookies, meals like pasta and dry dinners, and single-serve beverages like pods and ready-to-drink coffee. Retailers represent its most significant end-market, where it sells products for resale under retailer brands, but it also serves foodservice customers (providing a similar service as its retail business), industrial (selling bulk food for repackaging and repurposing), and branded consumer goods firms (under co-packing arrangements). Over 90% of its revenue comes from the U.S.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

 while COVID-19 remains pervasive. With a return to sail underway, cruise operators are now utilzing updated health protocols to ensure the safety of cruising as paying customers return onboard. As virus mitigation tactics prove successful, we expect Royal to see modest pricing gains as it digests bookings paid for with future cruise credits, limiting near-term yield gains. On the cost side, stringent health protocols and cruise resumption costs should inflate spending, factors that will aggravate profitability through 2022.

Royal took quick action to reduce operating expenses and capital expenditures as a result of the coronavirus (we forecast capital expenditures of $2.2 billion in 2021, down from $3 billion in prepandemic 2019). Also, since the beginning of the pandemic, the firm accessed around $13 billion to enhance its liquidity cushion. Further, as of June 30, $2.4 billion in customer deposits were still available for use. Although we believe Royal’s cash burn should remain between $300 million-$350 million a month (as it restaff the fleet), it should be able to navigate a graduated return to sailing over the next six months. While Royal is set to return to positive profitability over the next year, the prior 20>25 by 2025 target (EPS to $20 by 2025) is virtually impossible to reach as a result of secular changes in demand due to COVID-19.

Financial Strength 

Royal has taken numerous steps to ensure it remains a going concern after COVID-19. In March 2020, Royal noted it was taking actions to reduce operating expenses and capital expenditures by the tune of $1.7 billion to improve liquidity. Additionally, since the beginning of the pandemic, the firm secured around $13 billion in liquidity through various debt and equity issuances (resulting in our estimate for $1.1 billion in debt service costs in 2021, up from around $400 million in 2019). 

Furthermore, as of June 30, $2.4 billion in customer deposits were still available for use, although industry commentary suggests about half of canceled bookings have been refunded in cash rather than future cruise credits during the pandemic. And in April 2020, Royal announced it was laying off or furloughing more than 25% of its 5,000 shoreside employees. The cash burn for Royal every month while restaffing and redeployng its ships should be between $300 million-$350 million.

Bulls Say’s 

• If COVID-19’s delta variant recedes quickly, yields could recover faster than we currently anticipate.
• Lower fuel prices could help benefit the cost structure to a greater degree than initially expected, thanks to Royal’s floating energy prices (with only about 50% of fuel costs historically hedged).
• The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators previously had capacity for nearly 4 million passengers at the beginning of 2020, which provides an opportunity for long-term growth with a new consumer when cruising fully resumes.

Company Profile 

Royal Caribbean is the world’s second-largest cruise company, operating 60 ships across five global and partner brands in the cruise vacation industry. Brands the company operates include Royal Caribbean International, Celebrity Cruises, and Silversea. The company also has a 50% investment in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises, allowing it to compete on the basis of innovation, quality of ships and service, variety of itineraries, choice of destinations, and price. The company is completed the divestiture of its Azamara brand in the first quarter of 2021.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

 Monster continues to extract outsize growth and stella profitability from this market. Crucial to Monster’s positioning in the market is its partnership with Coca-Cola. Being able to rely on the widest moat in beverages for distribution, merchandising, and retailer negotiation reinforces and perpetuates the benefits of its resonant brand, in our view. With its entire U.S. footprint and most international territories fully incorporated into the Coke system, strategic and logistic planning should become more seamless, allowing products to be scaled more quickly, particularly in international markets (over 35% of sales). Despite the inevitable complexity of appealing to distinct local palates, we believe Monster’s continued geographic diversification should augment its positioning.

Given the importance of the Coke relationship, the launch of Coke Energy products following arbitration between the two parties was a significant development. Still, it has proved to be far from an existential threat, garnering trivial share in the markets where it launched (and recently discontinued in the U.S.). In addition to a seemingly more tenuous Coke relationship, Monster must contend with an intense competitive environment. While Red Bull remains the most formidable rival, Monster is also beleaguered by a number of both established and upstart firms looking to carve out niches in the energy space. Nevertheless, structural advantages and an experienced management team should allow the firm to navigate an evolving competitive landscape.

Financial Strength 

Moreover, the business churns out healthy free cash flow, with over $1.1 billion generated on average over the past three years (high-20s as a percentage of sales). The company’s free cash flow has historically supported persistent share repurchases, and the company’s ability to continue buying back shares amid market disruptions like the coronavirus pandemic is a poignant illustration of its financial health, in our view. As of June 2021, Monster had over $1.5 billion in cash and short-term investments on its balance sheet, with no long-term debt to speak of. 

Still, general liquidity is not a concern. In addition to its healthy cash balance and an untapped revolver, Monster has implemented certain nontraditional means of financing, such as a working capital line of credit that is similar to an interest-bearing liability but not treated as leverage for accounting purposes. 

Bulls Say’s

• Monster is a leading pure-play incumbent in a secularly advantaged beverage category that is growing in the high single digits, meaningfully above the broader industry average (low single digits).
• Monster’s strategic partnership with Coca-Cola aligns its fortunes with the widest moat in nonalcoholic beverages, affording it top-tier store positioning and merchandising.
• International expansion through Coke’s bottlingsystem offers material runway for growth.

Company Profile

Monster Beverage is a leader in the energy drink subsegment of the beverage industry. The Monster trademark anchors its portfolio, and notable offerings include Monster Energy and Monster Ultra. The firm has also started to incubate new trademarks for emerging enclaves of the energy space, like Reign in performance energy. It is primarily a brand owner, outsourcing most of its manufacturing processes to third-party copackers. It primarily uses the Coca-Cola bottling system for distribution after a strategic agreement in which Coke became Monster’s largest shareholder (roughly 19%) and that also included the exchange of certain businesses between the two firms. Most of Monster’s revenue is generated in the United States, though international geographies are increasing in the mix.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.