Launching "The Week in the Markets" + Analysis of Red Robin Gourmet Burgers - Turnaround or Value Trap?
Also 3Q23 analysis on $ONEW $ARCO Unidata, Tamburi, Renold, Newlat,...
For those who have been following us from the beginning, you know that we've been on this adventure of publishing our company analyses, portfolio management, and macroeconomic topics for almost four years now (despite being on Substack since March).
This week, we're introducing a significant innovation that we hope you find useful and that is here to stay (free of charge). It's the section called "The Week in the Markets" where we provide a summary of the market's evolution and the main events that occurred during the week.
Furthermore, we've made significant updates to our Portfolio Management section, which will now feature a three-tier monitoring panel to track everything related to the 35 companies in our universe. This includes summaries of the theses published in 7 words, catalysts, comments, results... We believe it's an incredibly useful tool that you'll enjoy.
Finally, the analysis for this week (already planned following the analysis published on the situation of the US restaurant industry - and it's quite a coincidence that our second turnaround is the same week they make the takeover bid for Hotel Chocolat with a 170% premium), is about the potential turnaround of Red Robin Gourmet Burgers, a tremendously interesting situation.
The Week in the Markets
The big winners of the week have been small caps, with the Russell 2000 emerging as the top-performing index in the US. Regarding sectors, notable performers included REITs, Utilities, Financials, Consumer Discretionary, and Materials. The European indices also demonstrated strong performances, with Sweden, Germany, Spain, and Poland standing out among the countries.
To explain these movements, the key player of the week was the U.S. CPI released on Tuesday. It decreased to 3.2% from the previous 3.7% (compared to the forecasted 3.3%), reducing the likelihood of further interest rate hikes. The futures curve is already discounting rate cuts in May. This has led interest rate-sensitive sectors (REITs, Utilities, Consumer Discretionary, etc.) to rebound strongly, along with small businesses, which are more sensitive to any crisis. In essence, the market behaved in a Pivot mode this week, anticipating a potential economic downturn (the economy remains weak - as evidenced by a weaker-than-expected labor report - but markets always look a few months ahead, and what they've started to anticipate is a scenario of rate cuts. This movement is not only expected in the U.S. but will likely extend to Europe and other countries as other central banks tend to follow, albeit with some delay, the movements of the U.S.
As is customary in these types of weeks, the U.S. Dollar weakened against other currencies, as did bonds, with TLT rising and yields falling, particularly the 10-year U.S. Treasury, which declined by 4.5% during the week.
In the UK, CPI was also below expectations at 4.6% vs. the expected 4.8% YoY, and the inflation rate for the Eurozone reported its lowest figure since July 2021 (2.9% YoY growth). Both this data and the FED pivot horizon helped European markets to shine this week.
Despite recovering ground on Friday, oil ended the week with losses following the Thursday labor report. Increased inventories also played a role, although these data, under the new reporting system, need to be scrutinized as post-publication adjustments have become quite frequent (especially in most official data reported by the U.S. administration).
In the crypto space, there was little volatility this week. The SEC once again delayed its decision on the Bitcoin ETF, but beyond a slight correction, the market seems to believe that it will eventually happen, given the significant rise in recent months, especially for other cryptocurrencies that have a high beta vs. BTC.
On a broader scale, perhaps the most significant event was the visit of Xi Jinping, the President of China, to the U.S. to ease tension between the two superpowers. While the U.S., despite a now seemingly probable soft landing, cannot hide that its economy shows clear signs of slowing down and has faced more challenges than usual in recent debt placements. Meanwhile, both China and other countries (Saudi Arabia, etc.) have been reducing their exposure to the US debt, making it a point of the summit to try to change China's recent investment appetite. Additionally, they reached agreements on various issues (military equipment, fentanyl production, etc.). It's clear that the two global superpowers will never be strategic allies, and issues like Taiwan could escalate tensions. Nevertheless, it is positive that for the first time in many years, Xi Jinping visited American soil.
Our Companies highlights
Regarding our universe of companies, it has been a very active week in terms of earnings presentations:
OneWater Marine 3Q23 Results: Reported rather weak results, in line with the sector and expectations. Provided guidance of $135 million EBITDA for 2024, with some accounting issues that have not convinced us much. Our significant concern lies in the inventories, which continue to grow and are expected to result in around $70 million in interest costs (along with the current debt) during 2024
Unidata 3Q23 Results: Revenues grew +97% and 16.4% organically achieving €64.6 million. The EBITDA margin was surprisingly high at c. 26% showing the quick integration of TWT acquisition. The kms of optical fiber have continued growing +750km in 2023. Moreover, they have presented FY2023 consolidated estimations (TWT acquisition was done some months after beg of the fiscal year), with revenues of €90 million and EBITDA of €24 million. This places the stock at less than 7x EV/EBITDA.
On 21st November, they will present the updated 2024-2026 plan for which we expect continued growth vs 2025 and more color on the Joint Ventures development and potential impact. Next week, we will bring all the information about the presentation plus a detailed DCF valuation.
Newlat Results 9M23: Fantastic results with growth in almost all lines and margin improvement, notably in the United Kingdom (Instant Noodles). They continue to simmer their M&A plans and engage in share buybacks.
Renold 1H24 Results: Renold presented record revenues and EPS with an impressive increase in return on sales. The strategy (detailed in the thesis) is paying off and despite a softer environment, we believe the company is in a good position to deploy cash for acquisitions.The pension deficit continued shrinking and is each time more manageable. Including the pension cash costs, the cash flow generation is good and available for new acquisitions and strategic investments. We will tackle with detail the working capital and order intake relationship with the revenues to understand what can we expect in the near future.
Arcos Dorados 3Q23 Results: The company representing McDonald’s brand in Latam and the Caribbean continued overdelivering with further expansion in marginality despite the rise in loyalty fees to McDonald´s. In today’s reading, we will explain where will the top-line growth come in the future years and we will approach the new restaurant openings.
And the takeover bid by Mars for Hotel Chocolat, with a premium of 170% “A turnaround idea” published 6 months ago that has become an outright success.
Today, we delve into the details:
OneWater Marine's inventories: Result analysis of Newlat, Conference Call, and Renold analysis, Arcos Dorados details...
Red Robin Gourmet Burgers - Potential turnaround or value trap?
Portfolio Management - Our new three-tier monitoring panel (portfolio, watchlist, radar) to track everything related to the 35 companies in our universe, along with our analysis and thoughts on the current environment (Small caps, TLT, …)
Red Robin Gourmet Burgers - Turnaround or value trap?
What is Red Robin Gourmet Burgers? $ RRGB
Red Robin is a small-cap player in the US restaurant industry. Founded in Seattle in 1969, the company has expanded nationwide, boasting 414 company-owned establishments and 91 franchises. Focused on the casual dinner segment, Red Robin is renowned for serving "high-quality burgers and Bottomless Steak Fries."
After going public in 2002, Red Robin experienced substantial growth in the number of restaurants and revenues until 2015, the year when its market capitalization peaked at over $1250 million. However, since then, both financial results and share prices have been in an absolute decline, with the company's current market cap standing at less than $150 million.
In September 2022, Red Robin appointed a new CEO, a former CEO of Texas Roadhouse, who launched a new strategic plan in early 2023 in an attempt to turn the business around.
Today, we analise Red Robin Gourmet Burgers to determine whether its potential turnaround represents a tremendous opportunity or if there are red flags that suggest it might be a value trap.