Discover more from Elevator Pitches
Welcome, subscribers! Today, we share pitches for 7 new ideas — including a family-run cement company, a canned food company, and a plus-sized apparel company.
Read on to learn more. 📕👇
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Let’s get to it.
Alluvial Capital had an active third quarter with the fund initiating 4 new positions in Monarch Cement Company (MCEM), Talen Energy Corp. (TLNE), Hammond Manufacturing Corp. (HMM-A.TO), and Seneca Foods (SENEA). We include their theses below.
New Holdings
I have a soft spot for family-run businesses in boring industries far from global financial centers. Shocker, right? Problem is, many of these businesses are run for insiders, with the idea that outside investors should be happy with whatever scraps they receive after the “real owners” are satisfied. Monarch Cement Company is a happy exception. Founded in 1908 in Humboldt, Kansas, by H.F.G. Wulf, Monarch Cement operates a cement plant with >1 million tons of annual capacity. Walter H. Wulf, Jr., grandson of the founder, is CEO and chairman. Monarch produces and distributes Portland Cement and ready-mix concrete across Kansas, Missouri, and Iowa. The company has a stellar track record of profitability and growth.
Cement is nothing new for Alluvial Fund. We have been happily invested in a similar company, Boston Sand & Gravel, for several years. In Monarch Cement, I see an opportunity to own another rare asset with a huge economic moat, at a very attractive price.
Monarch is having a record year thanks to high cement prices and strong demand from construction and infrastructure projects. Despite strong performance year-to-date, Monarch Cement shares trade at just 5.5x my estimate of 2023 EBITDA and <10x net income. Monarch employs no debt and holds a substantial cash and securities portfolio. The company pays a healthy dividend and regularly repurchases shares. While the cement business is cyclical and Monarch will have its ups and downs, the current price represents an attractive entry point.
I don’t put a lot of trust in relative valuations, but it’s worth mentioning that Monarch Cement trades at a 40% discount to most other public cement producers. If the company were sold, shareholders could expect a very healthy premium. I don’t expect the Wulf family to sell any time soon. Then again, family-controlled businesses tend to be “Not for sale!” until the minute they are. Whatever happens, I am happy to be invested with the Wulfs in a successful, attractively valued enterprise that will continue creating and sharing wealth for decades to come.
We invested in a new post-bankruptcy security in the quarter, Talen Energy Corp. Talen owns a variety of power generation assets. Its crown jewel is the Susquehanna Steam Electric Station, a two-unit nuclear power plant with 2.5 gigawatts of capacity, enough to power 2 million homes. Talen sought bankruptcy protection after struggling with excess debt and high hedging costs. The company emerged from bankruptcy in May, shedding billions in debt. Talen shares currently trade over-the-counter, but I expect the company to achieve an exchange listing in short order.
Talen has numerous tailwinds that support a much higher share price. The Inflation Reduction Act passed last year contains supports and subsidies for nuclear power production, essentially providing Talen with a price floor and reducing its hedging costs. The result is a de-risked business model and a higher justified multiple of earnings and cash flows. Talen’s nuclear plants could be desirable assets for larger regulated utilities looking to expand their renewables fleets. Acquisition rumors have swirled, but nothing has materialized yet. In the absence of a transaction, I would not be surprised to see Talen separate its nuclear assets from its legacy “dirty” natural gas and coal generation assets. Finally, Talen has a 95% stake in a new data center being built adjacent to the Susquehanna plant. There is strong interest in data centers powered by renewable energy sources, and Talen expects to sell the data center or otherwise monetize the asset. I expect Talen will look much different by this time a year from now, if it is still independent at all.
Next is Hammond Manufacturing Corp. We also own shares of Hammond Power Solutions, but this is the other Canadian industrial company, run by the other Hammond brother. I hope that clears things up. Hammond Manufacturing is significantly smaller than Hammond Power Solutions, but it is consistently profitable, and its products are experiencing a huge growth in demand. Hammond Manufacturing produces enclosures, cabinets, and racks for electrical applications. It also produces power distribution products like power strips and small transformers. All products that have seen great growth in demand thanks to the boom in data center construction, industrial facilities investment, and electrification.
The strong US Dollar benefits Hammond Manufacturing. About 60% of Hammond’s sales are to US customers, while its expenses are all in Canadian Dollars. At the current run rate, Hammond Manufacturing shares trade at less than 5 times earnings. Free cash flow has been low of late as the company rebuilt depleted inventories and finished construction on a new facility in Palmerston, Ontario. Now that these investments are complete, I expect the company will focus on reducing debt and rewarding shareholders.
Finally, we have built a position in Seneca Foods. Seneca is a supplier of possibly the least glamorous product around: canned vegetables. I actually prefer the taste of certain canned veggies over fresh or frozen, but that seems to be an unpopular opinion. Still, there is a large market for canned vegetables, which appeal to the budget-conscious consumer. The market values Seneca like a relic in irreversible decline. That’s why shares trade at half of tangible book value and below net current asset value. I happen to think Seneca is in substantially better shape than the market believes, thanks to changes in the market structure of the canned vegetables industry. Simply put, there is only so much profit to go around in a mature market. Seneca earned a good share of those profits until Del Monte, in a bid for market share, cut prices and bought a small, struggling producer. This went poorly for Del Monte, which ultimately chose to exit the market, shutting down some packing plants and selling others, including to Seneca Foods. Since Del Monte exited, Seneca’s profits have bounced back. With Del Monte humbled and nobody else eager to rush in, I expect Seneca to enjoy a lengthy period of healthy profits and stable market share.
Seneca Foods shares trade at a mid-single digit multiple of 2023 profits. The company’s capital allocation is reasonably good, with shares outstanding down 22% over the last 5 years and no major investment missteps. The company’s accounting earnings can be volatile thanks to a quirk of inventory accounting. Seneca Foods is one of the few remaining public companies to employ “LIFO” (last in, first out) inventory valuation, which has the practical effect of understating the value of its inventory by $300 million. The LIFO convention results in under-stated earnings in periods of rising input costs and over-stated earnings when input costs are falling. Nobody should mistake Seneca Foods for a growth company or a return on capital standout, but neither should shares languish at 5x earnings.
Great Ocean Road Advisors started a new position in Torrid Holdings (CURV), an apparel company focused on plus-size women. Among other positive attributes, they believe the company is a buyout target. We include their thesis below.
Torrid Holdings (CURV) – New position
Torrid (CURV) is the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America. It serves more than 3m repeat customers through its e-commerce site and 640 physical store locations.
We are invested in CURV because its business is inflecting positively, shares are unsustainably cheap, and highly shorted. Finally, there is a reasonable case that CURV becomes a takeover target.
CURV has a strong brand and a good business, but IPO’d at the wrong time. It is among the 2021 class of IPOs - the last round before capital markets closed. There remains deep skepticism towards this group of companies by equity investors. For CURV, its IPO coincided with peak retail spending for women’s apparel. It has reported progressively softer results each quarter since. A CURV share price chart tells this story well. From its IPO price of $21 two years ago, we have been able to purchase shares for just $1.50.
We believe business has bottomed and is improving. We can observe this through a number of sources: high-frequency data sets show inflection, at store visits we hear of improvement, and we have heard from peer retailers that their business picked up after summer travel. We are convicted that for the first time since its IPO, there is upside to consensus estimates.
There is a behavioral element to our higher-than-consensus forecasts too. CURV management, like many consumer management teams, have become wary of forecasting their business through formal guidance only to disappoint expectations due to the volatile ebbs and flows of the current environment. As far as we can tell, management have given up on forecasting their business in any calculated manner when setting guidance and have arbitrarily selected the worst recent month of sales then presumed that level persists for the balance of the year.
Investors being investors have taken CURV’s guidance seriously. Believing management has some greater visibility into future sales, consensus estimates have homed in on this new excessively conservative guidance level. The valuation multiple has contracted too. As luck would have it, business now appears to have gotten better – much better than what is embedded in guidance. We therefore acquired shares at an EV/EBITDA valuation of just 3.0x, and FCF yield above 50%.
Finally, CURV’s shareholder registry makes it an interesting investment. Major PE firm Sycamore Partners IPO’d the company and retains 79% ownership. Management insiders account for the majority of the rest. The value of CURV shares not owned by Sycamore or insiders is less than $20m. Said another way, Sycamore could take CURV private again, then reintroduce it to public markets during better times for a check size of just tens of millions. Not bad for a business with $1.2bn in annual sales and EBITDA around $150m. Also, very doable for a PE group with more than $10bn in committed capital. Sycamore took private Chico’s (CHS) in September at a 65% premium, suggesting they have appetite.
Miller Deep Value Select stayed true to their name with two recent purchases — Bread Financial (BFH), trading at ~50% of tangible book value, and Fossil Group (FOSL), trading at ~0.1x EV/sales. The team briefly walked through their theses in their latest letter.
Recently we initiated a position in Bread Financial (BFH), formerly Alliance Data Systems. The company share price is down near historical recessionary price lows. Bread Financial provides proprietary direct-to-consumer credit cards and deposits along with digitally enabled private-label, co-branded credit cards, installment loans and buy now, pay later (BNPL). New management joined the company in 2020 and has completed a multi-year transformation to streamline its business model, develop differentiated products and expand brand partnerships. A new CFO has also dramatically improved the company’s balance sheet, enhancing their capital ratios nearly 3x to 9%+, reducing debt by $1.7B and increasing direct to consumer deposits by nearly $5B. Since 2020, BFH’s tangible book value has grown by >30% and is approaching $40/share. While the marketplace is concerned with potential industry changes to late fee payments and weaker consumer spending, management believes they will be profitable even if a deeper (2008-09-style) recession occurs.
Source: Thomson Reuters
We believe current marketplace concerns are significantly discounted in BFH’s low valuation, price to earnings (FY2) of 3.3x, and 25% discount to current tangible book value. Management’s long-term return-on-equity target is also significantly higher than market expectations providing a nice variant. We believe BFH upside potential over the next 3-5 years is more than three times the current share price.
Fossil Group (FOSL) appears to be a significantly mispriced global luxury good company with extremely low market expectations. The company designs, develops, markets, and distributes fashion watches, jewelry and accessories for their owned brands (Fossil, Michele, Skagen, Watch Station and Zodiac) and licensed brands (Armani Exchange, Emporio Armani, Diesel, Kate Spade NY, DKNY, Michael Kors and Tony Burch). The company recently announced a significant transformation plan that management expects to generate $300M of operating income benefits by 2025, more than 20% of annual revenue! The plan will focus on improving sales productivity (digital first approach, redesigning pricing/promotions and closing non-profitable stores), reengineering operations, streamlining overhead, and improving capital efficiency. With ongoing headwinds to company sales in the near term the current share price is discounting limited future benefits from the transformation plan. Fossil current share price is below cash per share on the balance sheet, a deep discount to the $6+ tangible book value.
Source: Thomson Reuters
Their net asset reproduction value remains in excess of $1B. Success on the transformation plan would likely mean significant upside potential, possibly 5 to 10x the current share price as normalized free cash flow should be greater than the current market capitalization. For comparison, we would highlight Tapestry, Inc.’s (TPR) recent acquisition of Capri Holdings (CPRI) in the luxury marketplace at an Enterprise Value to Revenue multiple of 1.5x, significantly higher than Fossil’s current valuation at less than .1x, suggesting significant embedded value potential from a successful transformation.
Until next time! - EP