Feedback on 2 to 5 Minute Stock Pitch
I have an interview coming up (Friday) with Fidelity for the 2017 equity research summer analyst position. I have been working on a few stock pitches. I have two longs and one short thesis. I am going to lead with the short thesis to hopefully stand out a bit. I am going to post the narrative I will base my pitch on below. Any feedback would be incredibly helpful, such as what financial information and/or questions about my logic that I should be able to answer that the interviewer would be likely to ask.
National Beverage Corp designs, makes, and sells branded soft-drinks and non-branded carbonated beverages. Lacroix, which makes up approximately 30 – 40% of their revenue (which I will get into later) is their most popular product. Lacroix stock currently trades at $52.
Lacroix has demonstrated incredible growth the last 2 years and attraction to investors given a 5% FCF yield between 2014 and 2015. However, it is in a market that is becoming increasingly competitive. Both Pepsi and Coca Cola released strikingly similar products in the last 3 quarters. The costs of a consumer switching products are low and Pepsi’s and Coke have the scale to compete Lacroix down on price. Given consumers of Lacroix tend to be price sensitive (as the less price sensitive shoppers look for brands such as Perrier and Pellegrino) National Beverage’s market share seems to be in question. The effects are becoming obvious, as revenue grew 9% y/y last quarter.
National Beverage is priced as a growth stock with a 19 EV/EBITDA and 35 P/E that compares to the industry average 27 P/E. In 2014, FIZZ stopped reporting their segments separately. However, by triangulating revenues from 2014 to present, I estimate that it only comprises about 40% of their $704 million last twelve-month revenue. This also implies LaCroix has roughly 40% market share of the $1.7 billion annual revenue branded sparkling beverage market that is growing at a low single digit pace, giving Lacroix little more room for growth. The rest of Lacroix’s products are either stagnant or in sequential decline.
Disregarding problems with future growth, National Beverage’s profitability margins also fall short of industry averages. Its roughly 10% EBITDA margin falls well short of the 17% industry average.
For my valuation, I grow revenue at 14% CAGR between 2016 and 2021 for my base case. Additionally, my base case assumes that the EBITDA margin grows from last quarter’s 10% margin to the industry average 17%. I have CapEx grow at 12% CAGR and operating assets and liabilities grow in line with revenue. Lastly, I calculated terminal value by exiting year 2021’s earnings with a 16x median which I obtained from spreading public comps. For the discount rate, I used WACC which came out as 6.5%.
Using a sensitivity analysis based on the discount rate and exit multiple, I ultimately conclude a reasonable price range of $38 to $42.
The major risk posed by shorting Lacroix is an acquisition. Also, its FCF and $105 million in cash supports a dividend which a short seller would have to pay. The effects a dividend would have on this investment, however, is minimal and an acquisition seems unlikely given industry trends.
Why would you grow capex at a CAGR? I'm more accustomed to seeing it either as a % of revenue, or in actual numbers based on company guidance (they tell you what they'll spend sometimes)
Are you sure Lacroix has 40% of this market? Is this the same market as Pellegrino and Perrier, or are you segmenting it? If it is, it just doesn't seem right
Just be careful with some of your words. "Obviously" "Triangulated" etc. you're sharp but young. Most people don't like interviewing kids who are too sure of themselves.
I 100% agree about the terminology I use in this report being a little too confident. This is taken out of a report I drafted for the hedge fund I interned with this previous summer, so my language will definitely be less high conviction when I give the verbal pitch. I don't actually model capex using CAGR, I am simply stating what the growth rate is through the 5 year period based on my assumptions, which I actually model out by forecasting PP&E using a depreciation schedule and other assumptions drawn from management guidance.
I should be more specific, I mean 40% of the price-sensitive branded product market. There really isn't much overlap between consumers in the premium sparkling water market and the bottom shelf niche, so I separate these into two distinct consumer market segments. I estimate that the price sensitive branded sparkling water market is about $1.5 to $2 billion in annual revenue.
Does this make sense, or do you think there are further clarifications I would need to make in the pitch? I am just worried about going over the allotted time.
It makes sense. If you're doing this level of work for a undergrad summer internship, you should be proud. Keep working at it and getting better.
You should post a draft of your stock pitch, which we can give much more insightful feedback on. There isn't much above to comment on. You're obviously still early in flushing out your idea. The key to your pitch above is to highlight where you differ from the Street's estimates and why. Are your market share estimates more bearish? What about your profitability margin estimates vs. Street?
The street forecasts FIZZ's EBITDA marging (according to Stifel's model) widening about 200 bps by year 2020, so I am even being more bullish on that aspect of the operating model than the street. Thank you for pointing that out, however. I definitely agree that it is important to point out specific differences between my forecasts and the street.
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Their margins are compressed by the nature of their product - it is a bargain brand. The only reason I assume that their business becomes more profitable and their EBITDA margin widens to the industry average is to be conservative. I want to demonstrate to the person I am pitching this company to that I have been as optimistic as possible, but the stock still trades intrinsically rich. I think what makes my pitch different is my analysis on the segmentation, where I found that roughly 40% of revenue comes from the Lacroix product. So, the market has it positioned for growth, but the product that has been driving its growth accounts for less than half the revenue and will struggle to support growth given the competitive dynamics of the industry. This will only be further pressured by the exit of the company's key marketing strategist.
N/a
The analyst I spoke with told me that it would be best to prepare both a long and short idea. I think that the ability to identify strong characteristics in a company is equivocal to detecting bad characteristics. I personally think its a great strategy.
Doesn't hurt to be prepared, however if time was limited I would put more energy where the highest probability question will be asked.
Not sure if I am missing something, but why does this company not have any earnings call transcripts or analysts covering it?
You're not required to release the transcripts actually- just adds to the suspicious opacity of their business, which has actually been recently called into questions by a hedge fund that thinks there is fraud
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