Tag: US Market

selling some $2.1 billion worth of stock while also acquiring a little over $1 billion of equities. Based on the insurer’s recent 13- F filing, Berkshire trimmed positions in US Bancorp and Chevron, and sold off more than 10% of the investment portfolio’s stakes in Abbvie (selling 2.3 million shares or 10.2% of its holdings), General Motors (7.0 million shares or 10.4% of its holdings), Bristol-Myers Squibb (4.7 million shares or 15.3% of its holdings), and Marsh & McLennan (1.1 million shares or 20.6% of its holdings). Berkshire also disposed of meaningful amounts of Merck (8.7 million shares, or 48.8% of its holdings) and Liberty Global Cl C shares (5.5 million shares, or 74.5% of its holdings), while completely eliminating the firm’s holdings in Liberty Global Cl A, Biogen, and Axalta Coating Systems.

As for the purchases, almost all of them involved existing holdings as Berkshire added to stakes in Kroger (picking up 10.7 million shares and increasing its position by 21.0%), Aon (around 300,000 shares and increasing its position by 7.3%), and Restoration Hardware (35,500 shares for a 2.0% increase in the company’s holdings). Berkshire had originated stakes in the pharmaceuticals–AbbVie, Biogen, Bristol Myers Squibb and Merck–as well as the insurance brokers—Marsh & McLennan and Aon–in just the past year and a half, but many of these stocks have seen marked gains in just the past few quarters, allowing the insurer’s main managers of many of these smaller holdings (relative to the portfolio overall)–CEO Warren Buffett’s two lieutenants Todd Combs and Ted Weschler–to take some profit off the table. Even so, the firm ended the second quarter with $293.0 billion of reportable equity holdings.

Berkshire’s top 5 positions of Apple (41.5%), Bank of America (14.2%), American Express (8.6%),Coca-Cola (7.4%), and Kraft Heinz (4.5%), accounted for 76.2% of the insurer’s 13-F equity portfolio, and its top 10 holdings, which included Moody’s (3.1%), Verizon Communications (3.0%), US Bancorp (2.5%), DaVita (1.5%), and Charter Communications (1.3%), accounted for 87.5%. Given the changes in Berkshire’s 13-F portfolio during the second quarter, the financial services sector now accounts for 28.7% of the portfolio (up from 28.5% at the end of March 2021), with technology stocks at 43.2% (up from 41.8%), and consumer defensive names decreasing to 12.8% (from 13.3%).

Company Profile 

Berkshire Hathaway is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm’s core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. Berkshire has used the excess cash thrown off from these and its other operations over the years to acquire Burlington Northern Santa Fe (railroad), Berkshire Hathaway Energy (utilities and energy distributors), and the firms that make up its manufacturing, service, and retailing operations (which include five of Berkshire’s largest noninsurance pretax earnings generators: Precision Castparts, Lubrizol, Clayton Homes, Marmon and IMC/ISCAR). The conglomerate is unique in that it is run on a completely decentralized basis. 

(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.

As the cereal category has come under pressure, the firm diversified its revenue base by entering categories that were driving the legacy business’ deterioration, such as eggs and protein-based nutritional products. While these actions have stabilized the top line, it is believed a competitive edge remains elusive.

The cereal business (42% of fiscal 2020 revenue) has been declining (outside of the pandemic) as consumers have shifted away from processed, high-sugar, high-carbohydrate fare. Post’s cereal business is very profitable, with EBITDA margins around mid-20% and low-30% for the U.S. and European businesses, respectively. The refrigerated segments (41%, with 24% food service and 17% retail) consist primarily of egg and potato products. As a result, this business is relatively low margin (10%-12%) and does not offer the firm a competitive advantage, in our view. While 2020 was challenging for food service, the segment should recover in 2021 with the dissemination of vaccines.

Post holds a majority stake in BellRing Brands (17%), which makes protein shakes, bars, and powders. The business has realized low-double-digit growth and attractive operating margins (17%-18%). Post recently announced plans to reduce its stake in BellRing from 71% to no more than 20% in the first half of calendar 2022, which will undoubtedly result in slower sales growth for Post. 

Financial Strength

Post has a unique capital allocation strategy, preferring to carry a heavier debt load than most packaged food peers. Post’s legacy domestic cereal business generates significant free cash flow (about 12% of revenue, above the 10% peer average), although after acquiring the refrigerated foods, BellRing, and private brands businesses, this metric fell to just over a 6% average between 2013 and 2018. Post has no intention to initiate a dividend. It is increasing FVE for Post to $114 per share from $110 to account for better than expected third-quarter sales, partially offset by a higher U.S. tax rate beginning in 2022. The company’s valuation implies a 2022 price/adjusted earnings of 21 times.

Bull Says

• Post’s Premier Protein brand is well positioned in the protein shake category, an attractive, high-growth market with outsize margins.

• The refrigerated foods segment, nearly half of Post’s business, is benefiting from consumers’ evolving preference for fresh, unprocessed high-protein eggs, and fresh and convenient side dish options.

• Although growth in the cereal business has been stagnant, it reports attractive profits and cash flows and has a lucrative opportunity with Premier Protein co-branded cereal

Company Profile

Post Holdings Inc (NYSE: POST) is a packaged food company that primarily operates in North America and Europe. For fiscal 2020, 42% of the company’s revenue came from cereal, with brands such as Honeycomb, Grape-Nuts, Shredded Wheat, Pebbles, Honey Bunches of Oats, Malt-O-Meal, Weetabix, and Alpen. Refrigerated food made up 41% of 2020 revenue and services the retail (17% of company sales) and food-service channels (24%), providing value-added egg and potato products, prepared side dishes, cheese, and sausage under brands Bob Evans and Simply Potatoes. The stake in BellRing Brands makes up the remaining 17% of revenue, with protein-based shakes, powders, and bars that sell under the Premier Protein, Power Bar, and Dymatize brands, but Post is reducing this holding to a minority position in calendar 2022.

 (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.

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.