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1Q23 Earnings Notes (Pt. 2)
BERY at 7.6x FCF / BEBE at 5x FCF
Continuing the scratch notes on 1Q23 earnings commentary (part 1 here)… these 2 stocks should wrap up all of my Core holdings after which I’ll share some thoughts on various special situations in Part 3…
Berry Global ($BERY)
Price: $57 Market Cap: $6.8bn Valuation: 7.6x FCF Category: Core
Berry is plastics manufacturer that grew via debt-fueled roll-up over the past decade. They’ve hit a critical mass point and needle-moving acquisitions aren’t really an option anymore. So management is changing gears to focus on: 1) reducing leverage from historically >4x down to 2.5-3.5x; and 2) returning capital via buybacks and dividends.
Q1 (technically fiscal Q2) results were a mixed bag… revenue declined 13% to $3.3bn, EBITDA declined 3% to $541m, and EPS grew 2% to $1.96…
Guidance reaffirmed… EPS of $7.30-7.80, FCF between $800-900m, and shareholder returns of at least $700m through buybacks and dividends
I’ve owned this stock for ~3 years now and at a recent price of $57/share the returns have been pretty good… However, based on 2023 guidance, FCF will have fallen for 4 straight years from 2020-2023; though FCF/share is flat-to-up with all the buybacks recently. There’s a few distinct periods here… in the past, they’d lever up for an acquisition, repay the debt, and then do it again. Activists started pressuring the company to stop the acquisitions, delever, and buyback stock. Each of these periods highlighted below:
This stock is definitely cheap at less than 8x FCF but can they grow revenue and cash flow without acquisitions?
Peers all trade at higher multiples and most of them have similar margin and leverage profiles. Growth is much higher for most of the group and maybe that’s the only variable that matters here. For what it’s worth, BERY has never traded at a big multiple, averaging ~9x FCF over the past 10 years…
My original thesis back in early 2020 was that they were in early innings of the latest levered acquisition and shares had been unfairly punished. Today’s bet looks a little different… Cheap stock, plenty of buybacks, questionable growth or catalyst from here… hmm…
Price: $3 Market Cap: $39m Valuation: 5x FCF Category: Core
I recently posted a mini-thread on twitter and may not have a ton to add here…
Quick recap — BEBE is a post-reorg retailer; B Riley helped them liquidate stores and inventory, then converted their debt into equity and sold the brand to a brand operator named Bluestar Alliance in exchange for a partial ownership stake in a newly formed JV.
Today, BEBE has 2 earnings streams:
JV income — they own 2 joint ventures with brand manager Bluestar Alliance, bebe and Brookstone, where they collect regular cash distributions
Buddy’s rent-to-own franchise locations — 64 franchise stores operated in 12 states in the southeast
The latest quarter was unspectacular when compared to last year but compared to each of the previous 3 quarters, things are moving in the right direction! I calculate earnings at $2m for the quarter vs. $4m prior year and $1.2m prior quarter. That’s a run-rate of $0.60/share or 5x cash flow.
The JV segment produces steady distributions around $11-12m annually. The 2 brands aren’t high growth or anything special, but they contribute a nice stream of consistent earnings at huge margins.
Buddy’s has been up and down since acquired, initially producing good earnings which turned loss-making in calendar 2022. Cumulatively, BEBE spent ~$41m to acquire these stores and generated a combined $3.7m EBITDA since 2Q21 (although that includes all corporate expenses too).
TTM EBITDA fell from $4-5m to a $2.5m loss at Buddy’s. Cost inflation like wages and rent played a role but high cost inventory (i.e. lower gross margins) is the biggest factor. That alone should get them back to profitability within a few quarters.
A major reason the stock is getting thrashed was their policy of distributing all earnings as dividends…. that $0.15/share quarterly dividend fell to zero as they wait for Buddy’s to rebound. I doubt they’ll pay that much until that segment recovers to $4-6m earnings. Current run-rate earnings are $8m per year or $0.60/share; my guess is they’ll retain half that for debt / other purposes and start paying out $0.30/share (annualized) by end of year.
Shares typically trade around 8-10x the past few years. At $0.60/share that’d be $5-6 vs today’s price at $3… over the next few years as Buddy’s recovers I think they’ll get closer to $1/share in earnings so call it $8-10 price target.
In my view, BERY looks like some thesis drift and BEBE looks attractive to add at $3/share (though I’m not a huge fan of playing these COVID hangover situations)…
Feedback on each of these ideas welcome…