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The Weekend Edition #9
OpEx Effect, Iron & Uranium, Cash in the System; Dutch Bros & Toast IPOs, and more.
Welcome to the ninth issue of the Weekend Edition.
Again, thank you to all who’ve read and subscribed to the newsletter. 🎉
Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week.
Here’s what we cover:
Market Recap - a look at the major indices, OpEx effect and commodities
Chart of the Week - Cash in Hand
IPOs in Focus - Dutch Bros ($BROS); Toast ($TOST)
Around the Market - Apple Event; China’s Evergrande; $PLTR and more.
The Week Ahead - FOMC Meeting; Upcoming Earnings (watch out for Nike)
We’ve got quite a lot to cover, so let’s dive in ⬇️
Market Recap - 07 Sep 2021 to 10 Sep 2021
Just another week in September, with the indices all prancing downwards. There was some breathing space on Thursday but come Friday markets were very volatile closing lower for the whole week. Friday marked what is now called the “Quadruple Witching” day which occurs on the 3rd Friday of every quarter because stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While the effect is multiplied on a quarterly basis, these Options Expirations or, OpEx for short (not Operating Expenses!) have occurred, every 3rd Friday of the month. Here’s a chart from Bloomberg that shows this pattern for the S&P:
On to the Sectors…
Energy had the best performance this week. WTI crossed $73/bbl on Wednesday Sep 15, as the EIA reported a decrease in inventory levels by 6.4million barrels.
Uranium prices soared to “a nine-year high Sept. 15 as the Sprott Physical Uranium Trust began buying again after approval of an expanded equity sales program that will allow the fund to acquire up to $1 billion in additional uranium in the coming months”, according to S&P Global Platts. But, this apparently isn’t the only reason. Retail investors have increasingly become interested, buying Uranium (U308) or companies like Cameco ($CCJ).
According to the Financial Times on Friday, iron ore prices declined 20% during the week, marking the worst decline since 2008. China has reportedly curbed steel production and the Evergrande debacle will possibly cause a slowdown in the Chinese real estate sector, leading to further depressed steel demand. This sent US steel stock prices downward as well on Friday: US Steel ($X) closed -8%, Cleveland Cliffs ($CLF) closed -5.24% and Nucor ($NUE) closed -4.49%, despite higher guidance. Nucor expects 3Q earnings ending Oct 2 to be in the range of $7.30-$7.40 per diluted share, the highest quarterly earning’s in the Company’s history.
Chart of the Week - Cash in Hand
The level of cash in the hands of corporations and households are at levels never seen before. The chart shows, as of Q1, 2021, the total amount of liquidity in checking accounts and currency reached a staggering $5.3T.
What’s caused this?
At the Corporate level - higher earnings, reserving cash and deferred capital expenditure. Although, you can now see that corporations have started spending again, as also confirmed by an article on Bloomberg recently.
At the Household level - Stimulus, low interest rates, and increasing wages over the past couple of quarters.
What does this mean?
Overall, this trend still seems to support an upward trajectory for equities, despite the negative fears in the market.
The cash is already being deployed for Capital Expenditures, much of it for technology, creating further growth in leading tech stocks.
Companies have more money to return to the shareholders through share buybacks and dividend increases.
Consumer spending is also increasing as we’ve seen in this month’s Retail data, as the economy re-opens for business, creating more growth for companies. Retails sales increased 0.7% vs. -0.7% est., while Retail Sales ex-Autos increased to 1.8% vs. -0.2% est.
IPOs in Focus
Dutch Bros ($BROS) - listed 15 Sep 2021
Dutch Bros (BROS) opened on September 15 at $32.50. The company had priced 21M shares at $23.00. The deal priced above the $18.00-$21.00 range. BofA, JPMorgan and Jefferies are acting as joint book running managers for the offering. The stock price popped on debut reaching a high of $54.29 during the week before closing at $43.56 for a one-week return of +89.13%!!
Dutch Bros is an operator and franchisor of drive-thru shops that focus on serving hand-crafted beverages. It was founded in 1992 in Oregan by brothers Dane and Travis Boersma. In addition to coffee, the company serves a number of unique, hand-crafted drinks and has a distinct following.
“Dutch Bros is a fun loving, mind-blowing company making a massive difference, one cup at a time.”
As of June 30, 2021, the Company had 471 shops across 11 states - 264 franchised and 207 company operated. Dutch Bros stopped franchising in 2017.
As of 2020, the Company has had positive same-store sales growth for the last 14 consecutive years & average unit volume of 1.7million with an average bill of $7.50.
A few notes on the financial statements:
Net income decreased from $21.2 million in 2018 to $5.7 million in 2020 as a result of the recognition of $35.1 million in non-cash equity-related expenses that were first expensed beginning in the fiscal year 2019. They expect another $65M in the coming year based on an average stock price of $19, so this amount could be much more.
The Company quotes same store contribution margin of 29% but this dwindles to around 4% at the Company-wide Operating level and 3% at the Net Margin level. The margins for Starbucks is higher, shown at the bottom of the chart below.
Their Pro-Forma Income Statement upon listing shows a loss of H1, 2021.
The Company has cash of $19M as of H1, 2021 and long term debt of $191M which they plan to repay with the IPO proceeds.
When I started reviewing this company, I didn’t realize how much there was to be covered. While the company has a relatively straightforward business model, their unit economics and financial statements need a more thorough review. I didn’t take a position in the company and despite being well-received by the market, I want to have closer look at it before investing.
Toast ($TOST) - set to debut 22 Sep 2021
Let’s look at Toast in a nutshell.
Toast is a POS (point of sales) and payment management system tailored specifically for Restaurants, including handheld devices. Toast runs on a cloud-based platform.
The company also offers online ordering, delivery management, kitchen display systems and even payroll management. Toast has also incorporated a loyalty program which is very popular with its customers.
Toast Capital offers eligible Toast customers access to loans from $5,000 to $100,000 without the need for a credit score and takes into consideration industry seasonality. The loans can be automatically repaid, when customers pay through a credit card at the restaurant. This is similar to Square Loans that are also automatically paid off through a percentage of daily sales.
Toast was founded in Boston by 3 MIT graduates who previously worked for Oracle - Steve Fedette, Aman Narang & Jonathan Grimm. The CEO is Chris Comparato, a seasoned professional with extensive experience in leading SaaS companies.
According to the S-1, as of June 30, 2021, Toast serves 48,000 restaurant locations across approximately 29,000 customers, processing over $38 billion of gross payment volume in the trailing 12 months.
Toast has three pricing tiers: $0 for basic in-store systems; $165/month which also includes off-premise systems like online ordering and delivery and $272/month which also includes the loyalty and marketing program. The digital ordering bundle has 3 tiers: $75/mo; $100/mo; and $175/mo.
Toast makes a major portion of their money from credit card payment processing. They take a percentage of the amount charged and a flat fee per transaction. Let’s see how they compare to their closest competitors, who also have tailored offerings for restaurants:
Square ($SQ): 2.6% + $0.10; Online: 2.9% + $0.30
LightSpeed Upserve ($LSPD): 2.49% + $0.15
Clover ($FISV): 2.3% + $0.10
Touch Bistro: 2.99% + $0.15
Toast ($TOST): 2.69% of which ~0.77% goes to Toast (according to their website)
A third-party website states: “Toast’s processing fees for credit cards are quoted at 2.49% + $0.15 for card-present transactions and … 3.5% + $0.15 for card-not-present transactions”, dated Jan 2020.
The in-store transaction costs are competitive but, off-site / online transactions are quite expensive.
A quick look at the income statement:
Revenues grew in 2020 despite being a terrible time for restaurants, more due to online ordering.
Slim Gross Margins but, improving
ARR (bottom of the chart) growing rapidly
Toast is still making significant losses but has recently turned FCF positive.
Toast is offering ~21.74million at $30 to $33 per share, giving it an implied valuation of $16B to $18B. At $18B, the multiple is 22x 2020 Sales, which is not too bad considering Lightspeed’s NTM P/S is 30.9x and NTM EV/Sales is 29.9x (Source: Koyfin); but what we really need to watch out for are the margins.
This was a short review and if you’re considering investing please remember, prices may be volatile after listing & you need to read the S-1 properly before you do it.
Around the Markets
It was an eventful week around the markets. Let’s do a quick recap:
Apple ($AAPL) had it’s launch event on 14 Sep. They released a new iPad Mini, AppleWatch 7 and the new iPhone 13 & 13 Pro. The launch was underwhelming, other than a superior camera and the stock price took a hit.
Palantir ($PLTR) was the most talked about ticker on most social platforms during the week, as the stock rocketed to $29.24 on Friday, before closing at $28.73. Palantir announced a new partnership with WeJo, a company that focuses on collecting vehicle data and intelligence.
China’s Evergrande situation seems to have put markets on edge. Can you blame them? The Group has over $300B in debt with much of it issued as USD bonds sold to foreign investors and Fitch reported the company is on the brink of defaulting. Here’s an excellent recap from the Wolf Street.
SpaceX launched the first civilian crew - Inspiration4 - into space with Billionaire, Jared Isaacman, founder of Shift4 Payments Inc.
AMC’s Adam Aaron said he would consider making commemorative NFT’s out of movie tickets.
Microsoft ($MSFT) announces $60B share buyback
Intuit ($INTU) agreed to buy Mailchimp (the newsletter marketing company) for $12B. Mailchimp employees are outraged because the founders had promised never to sell the company and therefore, never offered them any equity. So now, none of the employees are cashing in!
The Week Ahead
A few exciting earnings coming out next week. Nike ($NKE) will be one to watch. Last quarter, Nike soared after earnings release. But, this time around we need to cautious. There have been reports of severe supply chain problems. BTIG Analyst, downgraded Nike to Neutral stating “the company is now facing at least two months of virtually no unit production at its Vietnamese factories which accounted for 51% of footwear and 30% of apparel units last year”.
FOMC Meeting - Wednesday, Sep 22
The FOMC meeting takes place next week and although we know that the Fed will probably keep rates constant, the market is still divided on whether there will be a tapering announcement. Why the divide? Because inflation and jobs data are mixed:
CPI data which indicates consumer level price increases showed better than expected numbers: MoM 0.3% vs 0.4% expected. 0.5% prior; YoY 5.3% vs 5.3% expected; 5.4% prior
Last week’s PPI data which indicate producer level price increases showed worse numbers: MoM 0.7% vs. 0.6% expected, but down from 1% prior. YoY PPI was up 8.3%, the highest increase since 2010.
The Beige Book showed the market thought inflation was elevated.
And jobs data for this week showed higher initial claims at 332K vs. 310k previous but lower continuing claims at 2.665M vs. 2.852M previous
Finally, the Michigan Consumer Sentiment still came in at 71, slightly below the expectation of 72.
We’ll just have to wait and watch what the Fed decides on Wednesday, Sep 22.
This week I joined the amazing, Samantha LaDuc and a fantastic team in their quest to educate people about the market. Samantha is an experienced trader who’s not just great at what she does but also represents an exceptional set of values and philosophy. I’m very honored to be a part of this endeavor.
Here’s wishing you a happy weekend, safe investing and less turbulent week ahead.
Ayesha Tariq, CFA
There’s always a story behind the numbers
None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $PLTR, $NKE, $AAPL as of the date of publication of this newsletter. Stock prices are volatile during the first week of listing (IPO), so please exercise caution if you consider buying. I have no affiliation with any of the companies that are mentioned and do not earn compensation from any of them.