Ricky Sandler Long GMCR & ZNGA, Short WAB (Invest For Kids Chicago Presentation) ~ market folly

Friday, November 6, 2015

Ricky Sandler Long GMCR & ZNGA, Short WAB (Invest For Kids Chicago Presentation)

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Eminence Capital's Ricky Sandler who pitched a long of Keurig Green Mountain Coffee (GMCR).

Ricky Sandler's Invest For Kids Chicago Presentation

•    At 25 launched his own business Fusion Partners. In '98 started Eminence
•    Long idea: GMCR/Keurig Green Mountain.
•    Controversial there is a credible short story. Thinks it’s already priced in and an incredible long opportunity.
•    Two businesses, hot biz (kcups) and Kold with sodas, brand new.
•    Hot platform sell 9MM to 10mm brewers/year and sell 10B to 11B kcups per year.
•    Razor/razorblade model.
•    Significant room for increased household penetration. Current penetration at 21M to 22M households compared to 70MM homes. With a coffeemaker.
•    Think market goes single serve.
•    Industry kcup should grow in the LDD range.
•    $4 of EPS from the hot business in FY15 estimated.
•    Think hot EPS can reach $5 over the next couple years driven by volume growth, $300MM restructuring, normalizing brewer losses form the last holiday season, normalized coffee costs, share buybacks and offsetting some headwinds.
•    Kold launched in September with Coca-Cola. Addressable market thinks its 5x – 10x hot.
•    Reviews are high on quality but negative on price/value.
•    $375 asp per machine and pods more expensive than a can of coke.
•    Not so much price of pod, but thinks the range of pods/products.
•    Think its convenience/choice. Negatives looking at just price.
•    Kold loss 50 cents per share.
•    Trades at 15.5x FY15E sept EPS and 13.5x EPS ex kold.
•    EPS estimates under pressure – poor 2.0 brewer launch execution and K-cup profitability impacted by mix shift. Finally negative reaction to kold.
•    Hot value = 17x -20x hot EPS ($5) or 85-100 plus option value for kold.
•    KO owns 17% at $92. Insiders bought at $90.

•    Loves Baidu (BIDU), and a top five position.

•    Zynga (ZNGA) – mobile gaming. Franchises include Farmville, words with friends.
•    Some think games are obsolete, ZNGA has 75MM active users.
•    Zynga was late to the consumer shift from desktop to mobile making the last two years rough. •    Mobile games for the last year =70% of bookings vs 30% a year ago.
•    Expect new titles over the next 12 months.
•    Trading at 1x sales when backing out SF real estate ($500MM value). $687MM EV.
•    Launch 6 new games, $300MM incremental bookings bringing total bookings to $900MM.
•    KING sold for 2.6x sales, using that valuation = $5.
•    At a 35% margin, ZNGA generate $315MM EBITDA or trading for 2x.
•    Has big infrastructure to support bigger biz. Downside protection by cash and real estate.
•    Top hit potential = $1B rev potential.
•    Mobile gaming is $20B biz. New categories such as esports and real money gaming growing.

•    Wabtec (WAB) – Short.
•    Leading supplier of brakes, electronics and other railroad components to the global rail industry.
•    55% - 60% of EBIT comes from NA freight segment.
•    LT rail is GDPish industry and cyclical.
•    Track record is fantastic – only US listed co whose stock price increased every year for 14 straight years, 19% EPS CAGR form 06 to 15E and hadn’t missed earnings since 09 and 3Q15.
•    Bull thesis – not cyclical, high ROIC/ high market share high after market mix/quality biz.
•    Product mix is opaque due to acquisition strategy.
•    Bulls think EPS will grow double digits for ever.
•    WAB is cyclical and currently at the peak of rail equipment super cycle driven by NA O&G activity.
•    Demand driven by trail traffic, production of new locomotives and freight cars.
•    Rail traffic is weak – CNI talking about laying off employees.
•    Locomotives – NSC storing locomotives, expect it to be up to 200. GE orders dropped significantly, only sold compared 3 the last quarter.
•    Freightcar peak – industry backlog driven by tank cars oil and covered hoppers i.e. frack sand. 40% downside to deliveries.
•    Trading at 20x EPS, 13x EBITDA. Could be peak earnings in FY15. Mid cycle earnings $3.5 - $4. At 16x = $60 or 30% downside.
•    Low short interest, favorable sell side ratings.
•    Consensus calls for positive organic growth.

Check out the rest of the presentations from Invest For Kids Chicago 2015.

blog comments powered by Disqus