Fundamentally Furloughed

I’m in agreement with you.

In terms of a social impact if you can create like for like tasty meat alternatives which have a reduced environmental impact, then that’s worth doing.

As a company is it enough to be a long term winner?

I feel like it’s the Tesla of the fake meat world. Yet somehow worse :rofl:

1 Like

AbbVie - ABBV (Buy)

Thanks to @Mateinfour for this exciting suggestion!

This is probably the most impressive company I have assessed to date. They have just acquired another business (Allergan), and they have a very impressive R&D pipeline as well as a profitable inventory of in use medications and drugs.

While I don’t normally look at Pharmaceutical companies, I am eager to tell you a bit more about AbbVie and why they should be on your radar.

abb logo

What Does AbbVie Do?

They are a biopharmaceutical company focused on creating, testing, and selling new medicines. If like me you are an outsider to medical trials and process, know that testing a new drug takes an extremely long time, and there is a lot of room for failure.

First, you must go through extensive laboratory research which can involve years of experiments in animals and human cells. If the initial laboratory research is successful, the new drug is submitted to the Food and Drug Administration (FDA) for approval to continue research and testing in humans. Once approved, human testing of experimental drugs can begin and is typically conducted in four phases. Each phase is considered a separate trial and, after completion of a phase, you are required to submit data for approval from the FDA before continuing to the next phase.


Source: CB Insights on Trials

Phase 1 studies assess the safety of a drug. This can take several months to complete, and about 70% of drugs pass this phase. Phase 2 studies test the efficacy of a drug This second phase of testing can last from several months to two years, and roughly 1/3 of drugs pass this phase. Phase 3 studies involve randomized and blind testing in several hundred to several thousand patients. This large-scale testing, which can last several years has an 80% pass rate for drugs. Phase 4 studies, often called Post Marketing Surveillance Trials, are conducted after a drug has been approved for consumer sale. This is making sure new data doesn’t come to light and can result in the removal of the drug after it was originally approved.

The point being, after years of lab work, clinical human trials which can take three or more years and which have a 1.5 out of 10 pass rate, will be then approved for sale in the US. Meanwhile, approval for other nations is handled separately. Some countries faster than others, but with AbbVie they primarily sell and make their revenue in the US.

AbbVie is in an expensive and risky business, but if you get it right, you have the exclusive rights to your drug and depending on what you are treating could sell for thousands of pounds peruse.

Let’s breakdown the key focus areas.


Source: AbbVie Corporate Presentation

The immunology focus is all about, biologics and small molecules in rheumatology (skeleton and joints), dermatology (skin, hair, and membranes) and gastroenterology (digestive system.) AbbVie medicines in immunology currently treat +1million patients in 15 indications worldwide.

Oncology is related to treatments for two types of leukaemia (cancer), host disease (you get a transplant or craft and your body attacks it), two types of lymphoma (cancer) and macroglobulinemia (cancer.)

Neuroscience is all about your brain. Alzheimer’s, to Parkinson’s, to schizophrenia. It’s a complex area with a very broad scope of diseases they treat and develop for.

Eye Care is the one I haven’t had to do as much Googling about. Glaucoma, retina-related diseases, and even just age-related degeneration.

Virology is the study of viruses. Currently, they are working towards eliminating hepatitis C, with AbbVie’s drug being the main treatment.

They have three smaller areas which are cardiology (heart diseases), general medicines (e.g. making over the counter or medicines which aren’t locked behind IP), and women’s health (specialist medicines.)

Slightly outside of these is the final focus and comes with the business they recently purchased. Aesthetics is all about cosmetic surgery and alterations. Body contouring, facial injectables, plastics, regenerative medicine, and skincare. This is a natural extension of their skillsets and business but less wholesome than the others if you wanted to fund the cure for all cancers.


Source: AbbVie Merger Information

What About The Fundamentals?

In a sector with a high failure rate, expensive research costs, and a highly competitive industry, I was expecting a debt-heavy risky R&D burning investment.


Source: Genuine Impact

Rather it’s a defensible, high earning, large, dividend-paying, high performer. Colour me impressed. Let’s dive into some of the real details behind the relative assessment.

Starting with the quality, how well run is this company and do they look after their shareholders? Looking at the revenue AbbVie brought in $34bn last year, with a gross margin of 77.6%. In terms of rolling out the drugs they have approved they have an efficient process and the cost of revenue is under control. My biggest fear is the R&D expenses to keep discovering new drugs eating away at the gross margin. The profit margin, however, is an extremely impressive 23.69%.

To give you a flavour of the break down here is the latest quarterly report.


Source: AbbVie Q1 2020 Report

In terms of putting their money to work, they currently have an ROIC (return on invested capital, a.k.a how they use their own money) of 13.38%, meaning for every $100 they put into the company they make back $113~.

I also mentioned a dividend. In terms of looking after their shareholders, they have a 5.67x EPS and a quarterly dividend which yields 5%. This dividend has been growing for the last six years and has increased by 19% since last year. They are currently paying out 79.37% of their earnings back to shareholders. Their gains and successful trials will be fed directly back to investors.

Testing new drugs is expensive and capital intensive.


Source: AbbVie Latest Debt Update

However, they have some sizable long term debt, and they currently sit in too much debt to assets (109%.) This situation wasn’t helped by taking out a large chunk of additional financing to buy the other firm this year. Currently, this debt sits at $98bn, almost three times AbbVie’s annual revenue. Short term this is $3bn this year, with the rest far in the future. However, one slip up or major drug being pulled could switch AbbVie into a debt spiral.

The risk is 50% of their drug revenue (which is the main source currently) is coming from HUMIRA, a drug which reduces pain and inflammation in people who suffer from a range of autoimmune diseases. This is a reoccurring purchase for patients as it is not a cure, only relief. However, this means any advancements in a cure, better or safer alternatives, or a change in FDA ruling, 50% of their revenue would be at risk of vanishing overnight.


Source: Google Finance

In terms of the current share price, they have seen a COVID-19 related dip and quickly recovered. I was taken back when I saw the value ratios.

Given the high profitability, I shouldn’t be too surprised but it was interesting to see a PE ratio of 15.88x. After looking at the debt and revenue breakdown I can see a decent amount of market risk here, and it would make sense for the market to slightly lower their expectations.

I would take the value rankings with a pinch of salt in this case. The quick recovery while still being at a discount makes it seem like the market has a cap on what they expect regardless of the companies earnings. This reflects the fragile nature of the pharma business.

Latestly I wanted to check out the target price and analyst ratings for AbbVie.


Source: Genuine Impact

The analysts are not only in favour of AbbVie some from the Hold camp have moved over as well. Even with the market risks and market slowdown, AbbVie has the balance sheet to keep moving forward and keep caring for its shareholders.

However, a buy rating doesn’t mean the share price is going to be moving around any time soon.


Source: Genuine Impact

In this case, we have a smaller share price increase compared to the rest of the market, but high revenue and EPS targets which are likely to be hit. However, hitting these targets doesn’t mean the share price will shoot up, in this case, the targets are very high, you can see relative to the rest of the market the percentage year on year increase is aggressive. The lower share price growth might indicate less confidence in hitting these targets or a market that expects this level of growth based on new drugs currently in trial.

To turn this into actional numbers we are currently sitting around $90.50 a share and the average target price is $97 a share. For a year increase, there are more aggressive investments out there, but few will increase by this much and still pay an increasing quarterly dividend.

Why A Buy?

In terms of risks we have a concentration of revenue, we have an expensive R&D program, an industry of M&A which requires financing, and some looming debt which only increases.

When you look at a drug company there are two things to keep in mind. If they are profitable they have a market lead, somewhere. Price movement is driven less by earnings and spend, and more by successful trials.

Looking at the fundamentals tells us the company can keep going and has a steady stream of income, the price comes from the potential. By being a market leader and having a profit-generating drug already in use, they can build on this and expand the range of solutions offered.

We can also see through acquisitions they are looking to expand and branch out into complementary areas and help even out their revenue concentration.

While there is a higher degree of risk with any drug manufacturer (and lots of legal battles) this one has a route to success to build upon, and that sets it apart from some of their competition.

Let me know what you think, this one has a bit more of a qualitative feel to it due to the nature of the industry. Where is AbbVie on your wish lists, something you hold already, or a sector you don’t get involved in?

Thanks for reading!

11 Likes

Currently hold Abbvie, wish I picked up a few more in the last few weeks.

Overall I am quite positive towards healthcare as a sector, as it has some major companies with solid dividends. Plus the one thing that everyone will always prioritise to buy regardless of their budget is medicine, which makes it very safe.

I have requested for a biopharma etf to be added in Freetrade, that would be the best for me as I cannot pretend to be an expert and pick the one company that might discover a life changing drug

Link below, please vote!

https://community.freetrade.io/t/ishares-nasdaq-biotechnology-ibb

2 Likes

Thank you yet again for your excellent work.

I’ve been looking at this company for a while and would look good next to my other stocks.

1 Like

I voted. Always great to have more ETFs so you can focus on themes and sectors rather than individual picking!

Thanks everyone for the great feedback so far! After a nice refreshing weekend of socially responsible distancing I am looking forward to doing some analysis!

I will go through the suggestions and see what looks exciting today :mag:

3 Likes

Unite Students - UTG (Buy)

Thank you @don_quixote for the suggestion to have a look at this stock.

We were all students once, but investing in your old accommodation to try and relive your uni days isn’t a smart decision. Which is why I’ll be looking at Unite Group as a business case to see if this is a long term investment, or debt explosion waiting to happen.

unite logo

What Does Unite Do?

Unite group, which you likely know by their trade name Unite Students or even Liberty Living, is the UK’s largest owner, manager, and developer of purpose-built accommodation for university students.

unite students
Source: Unite FY 2019 Report

With a growing number of 18-year-olds going to university and roughly 80% of these students requiring some kind of accommodation, there is a clear demand for a provider who appeals both to students and universities.

Unite primarily focus on collecting rent on their beds. They will build or outfit a building as student accommodation, either as an independent place for the students to live (prime location) or in partnership with the university (in some cases guaranteeing rentals.)

I mentioned two brand names before. In 2019 Unite Students brought Liberty Living. The combined force and synergies mean they can offer even more beds and share their successful strategies between the brands.

unite merge
Source: Unite FY 2019 Report

If you have had the pleasure of staying in these properties you would have personality experienced what is, for most, excellent service and fantastic living space. That said this isn’t cheap student accommodation, and Unite faces strong competition from home shares. It is, therefore, no surprise that Unite targets “high and mid-ranked Universities”, i.e. places where the students are more likely to be able to afford additional services and a higher standard of living.


Source: Unite FY 2019 Report

What sets Unite apart is its strategic universities partnerships. In a highly competitive environment, universities increasingly recognise the

importance of high-quality accommodation in their ability to attract and retain students and ensure their satisfaction. Universities typically seek to guarantee accommodation for all first-year and international students, recognising that housing helps students settle.

What has impressed me with their business is the expansion into apps and digital offerings. Going beyond just a comfortable place to live, into an ecosystem, think WeWork with their communities and how they handle businesses. Anything which means you can manage more people/beds with less staff and overheads, plus get faster feedback and engagement, as well as push for student referrals to drive even more business, are all fantastic signs.

As you know, going to university is a multiyear endeavour. However, accommodation is normally only offered for first years (halls) and then you move out with friends.

unite beds
Source: Unite FY 2019 Report

Luckily only 35% of the beds been occupied are only on a year contract. All bed contracts include an annual increase to match inflation as well. Reservations for the 2020/21 academic year are currently around 73%, even with COVID-19, this high number is being driven by the success of their local marketing operation in China. These aren’t cheap beds, so they focus on the value add, easy of use, the ecosystem, to justify additional value beyond a bed and four walls.

The Risk Of COVID-19?

It’s rare these days to find that COVID-19 isn’t the biggest risk or concern for a business in the short term. Due to the nature of higher education, everything is still planned to go ahead.

In the immediate term cancellation requests mean Unite is forgoing rent on around 43,000-46,000 beds representing around 62-65% of all owned and managed beds. This is going to pose a heavy hit to their quarterly income. For that reason, the credit facilities have all been drawn down and all executive pay cut.

While Unite hasn’t furloughed any staff (contractors all gone though) they have applied for COVID Corporate Financing Facility which they hope will bring in an additional £50m, as of the time of writing the BoE has confirmed they are eligible but not for how much.

All 2020 projects (new builds where they are converting it into student accommodation) has been suspended. This impacts three different lots, while two lots have been pushed into 2022. This creates a £67m saving right now, but it has only been delayed.

Looking ahead, however, reservations for the 2020/21 academic year are currently at 80%, compared with 81% at the same time last year. Unite is seeing healthy levels of demand from UK students. While they still get enquiries from international students the demand has slowed.

Nomination agreements account for 70% of reservations secured for 2020/21 with over two thirds now contracted, including multi-year agreements and single-year extensions which have already been signed. Additionally, a few universities have already begun to allocate students to Unite for the new academic year.

If Unite ends up with beds are not taken up by universities, they will shift the sales focus to a direct-let basis. Targetting students who are living in house shares, which is an existing marketing angle. I suspect it will mean deeper discounts to ensure beds are not empty.

I mentioned COVID-19 isn’t the biggest issue this year for Unite and the reservations allude to this as well. Brexit is the issue.

The UK is the second most popular international destination for students (after the US). Applications for international students are up 8% for the 2020/21 academic year. The government has become more supportive of growth in international students, setting a target to increase international students by a further 115,000 students (a 25% increase) by 2030 and extending post-study work visas to two years. Most importantly of all EU students funding arrangements for the duration of their study confirmed for 2020/2021.

However, international growth is not going to be coming from the EU. Not for Unite. Following Brexit, there is a risk that tuition fees for EU students will rise from £9,250 to the higher rates currently paid by non-EU students, as well as EU students no longer having access to a tuition fee loan. As a result, Unite is forecasting a 30% decline in EU undergraduates by 2023, equating to a fall of around 2% of total students. Long term this is the biggest risk to Unite’s model. That and debt.

What About The Fundamentals?

Now we know a bit more about what Unite does, let’s see how that translates into facts and figures.


Source: Genuine Impact

All things considered, this is a relatively poor shape for a company to be in. Getting the fundamental ranks gives me a relatively high level feel for the company and what I need to double-check. In this case, there are a lot of red flags. Poor quality, poor value, and a poor momentum rank.

Starting with the quality aspects, the financial strength and shareholder returns, they have entered COVID-19 with the wrong foot.


Source: Unite FY 2019 Report

Unite has enjoyed reliable revenue growth until recently. They were hit by Brexit uncertainty and then again by buying Liberty before COVID-19. The last three years the gross profit has increased, they have a gross margin of 78.87%, this is a strong position to be in and speaks volumes about the effectiveness of their operations.

In previous years the company was talking additional revenue outside of their core rental business. Operating expenses were reported as negative, which results in profit margins above 100%. Historically they have shown a strong balance sheet but this is two expensive years back to back.

One of the first images I’ve included shows 20/21 the 18-year-old population is at its lowest. While this also impacts universities who will be trying to attract overseas students, it means the pressure is on for Unite as well.


Source: Wallmine Dividend

In terms of paying back to shareholders, they do have a dividend which is increasing. Two payments a year with a yield of 3.82% isn’t bad, it’s not the best in the market but it’s above average. The dividend is still on the table for now, but if 20/21 represents a poor year for international students I would expect management to bite the bullet and cut the dividend. Though the pressure of having nine years of dividend growth is a lot to give up.

I’ve mentioned debt a few times as well. Unite targets an LTV ratio of 35% and net debt to EBITDA of around 7x. Right now they are in excess due to bringing onboard Liberty.

unite debt
Source: Unite Group Debt Information

I do like the fact that no more than 20% of Unite’s debt matures in any one year and they maintain a weighted average unexpired term of between 5 and 10 years. Debt control is a big focus for the business due to how leveraged their operations can be, refitting and redoing buildings is a long term bed filled with shorter-term residents.


Source: Google Finance

Even with a post-COVID-19 dip we have not seen the share price fully recover, and looking at the value ration we start to see the risks investors are not so confident with.

We are looking at a forward P/E of 50.51x, and price to sales of 15.71x. This is an expensive purchase, even in this market. What will make you wake up in the morning is their assets. While they measure their debt against revenue, we haven’t touched on the assets they currently hold.

With over £5bn in assets, this is their biggest strength. The book to share ration is a punchy 848.97x. While the earnings and the price you are paying might not make this an attractive purchase, you might sleep better knowing that the buildings and sites they own have retained their value.

Even if we account for COVID-19 and Brexit and say we wipe out 30% of the market value of their assets, we are still worth more than the outstanding shares. Keep in mind this number recently almost doubled due to the Liberty purchase.

In terms of future growth and returns, even with a poor value offering on show, and a tougher period ahead, the future does look bright for Unite.


Source: Genuine Impact

With above-average share price growth, along with above-average EPS and revenue growth, this is encouraging to see. Even with Unite reducing some of their estimates for FY2020, we are still seeing growth.


Source: Market Beat

Currently, the average target price sits around £10.76 per share, representing just shy of 20% increase in a single year. Even when accounting for their downward projections and conservative estimates, the sell-side analysts still feel bullish on Unite.


Source: Genuine Impact

With over 60% of analysts rating this as a buy, and the rest being a hold, we see strong sentiment towards future growth and returns. With Unite’s development pipeline extending until 2023, this means over new 5,000 beds, a 6.5% increase in capacity as well as additional furnished buildings and assets on the balance sheet.

Why A Buy?

Unite is a bit of a mixed bag when it comes to fundamentals. Loaded with debt relative to their revenue, but strong with long term assets. They have a dividend in place which they are keen to keep expanding, but they are overpriced compared to their earnings.

With COVID-19 putting a cloud on their Liberty purchase recovery, and 2020/21 student numbers expected to be lower, there are bumpy roads ahead.

What we do have is a premium solution for housing which is focused on direct partnerships with both individuals and universities. Even now universities are having to cover the committed rent by students, which represents 21% of their beds currently. Expanding their capacity and guaranteed rents, while investing in innovation to drive down the costs of maintenance and support, means we can start to move that gross margin needle even more.

I’ve said in the past I’m bullish on TW, the same goes here. The assets they hold are the saving grace in my mind. The growing dividend is unlikely to be cut due to shareholder pressure, after eight years of growth are you going to stop now unless you have to?


Source: Unite FY 2019 Report

With the expectation of higher education growing, and governments stepping in to ensure affordable education as it’s a political focus, we can expect a steady stream of new university students to replace the old.

While students believe that university is the ultimate answer, we’ll always need firms like Unite. This is a rough year for them, and that makes them a distressed buy to me. Tough times ahead, but one they are well prepared for.

Let me know what you thought, have you been looking at Unite? Let me know if you think I missed anything or any parts of my analysis I can improve upon.

Thanks for reading and stay safe!

9 Likes

Hey, FYI the title says HOLD but think you meant BUY :slight_smile:

1 Like

Absolutely spot on! :rofl:

I’ve changed that, good spot :male_detective:

1 Like

Thanks so much, always interesting to see further analysis on a company!

1 Like

Hi,

Reading your research and pieces has been really interesting and I have learnt loads! (Actually it made me sign up on the community, just to say thanks!)

Keep up the good work. I would suggest a company but I am sure you have lots in the pipeline already!

7 Likes

Got some juicy and trendy ones for you - Splunk and Tradedesk! Looking into them and would be nice to hear your take on the stocks

2 Likes

Thanks for all the great feedback!

I’m glad you joined @Twh87! Welcome! Always feel free to suggest any companies you would like me to look at, if I don’t I’m sure someone else will, plus it’s great to hear what everyone is looking at.

Those suggestions look good @SpyrosL, Tradedesk has been on my radar meaning this might be the perfect excuse!

1 Like

The Trade Desk - TTD (Hold)

Thank you @SpyrosL for the great suggestion.

With COVID-19 slowing down advertising budgets, and political tensions around the use of advertising, remarketing, and customer data, it is a tense time to be assessing a company involved in the world of marketing. However, that is what I intend to do. Look at the fundamentals and figure out if this is a long term business worth investing in.

What Does Trade Desk Do?

The Trade Desk is a company which helps advertisers get more for their money. By using proprietary data, brands can use a fully automated, or programmatic means, to purchase advertising on various media to find consumers that fit.

If you have never heard of programmatic advertising, the example you will know (and maybe not love) is Google and Facebook advertising. These are both examples of programmatic adverts. You see ads based on real-time data, your demographic, current trends, budgets, time of day, and even based on your local weather. These ads launch in seconds can be turned off at any point in time, and most importantly, are measurable.

Programmatic advertising came into its own after the 2008 recession when companies suddenly had to prove how they use their advertising budgets and what works. Data led advertising has been disrupted over 10 years ago, and we are very much looking at the decline at “spray-and-pray” advertising, traditional TV ads which can’t be measured or interacted with, static billboards, even your regular poster pinups.


Source: Smart Insights

Trade Desk came to live in 2009, and they still have the founder running the business. They saw early opportunities for a data lead advertising platform. Their solution allows for programmatic ads across a range of mediums, they integrate into the likes of Google, Facebook, TikTok, even Connected TV (CTV is streaming with ads.) As a customer, you use Trade Desk to set up your target customers, how you want to reach them, dynamic define budgets and create a single advertising experience across multiple channels. In return, Trade Desk takes a cut of the fees paid. The key is volume. The more ads you run, the more people that see it, the more targetted your adverts the price increases.

This isn’t a typical advertising company where you score a handful of massive long term contracts. They need volume and engagement. Advertisers can very easily get started, but just as easily stop. This is the double edge sword of programmatic advertising.


Source: The Trade Desk Q1 Announcement

With offices in various cities in North America, Europe, Asia and Australia, Trade Desk considers themselves a technology company that empowers buyers of advertising. They offer a self-service cloud-based platform where customers (buyers) can create, manage, and optimize data-driven digital advertising campaigns across ad formats, including display, video, audio, native and, social, on a multitude of devices, such as computers, mobile devices, and connected TV. A whole lot of tech powering your complete digital advertising strategy with less staff. You can see why this is such an attractive proposition to their customers. If traditional TV ads require signed agreements months in advance and offer no measurement or data feedback, you can see the appeal.

What Do The Fundamentals Tell Us?

While doing some research into Trade Desk I spent some time reading their prepared statements, and quarterly reports. One aspect of the business stood out to me. They value above all else, self-sustainability, which directly relates to keeping the company cash-rich and resistant.


Source: Genuine Impact

It’s always good to see intent translating into fact. From a relative perspective, Trade Desk is in the top 20% of companies in terms of their financial strength, but are extremely expensive, and have weak future growth. Let’s dive into the raw number to better understand why this is, and what this means as an investment.

It’s worth noting the company has been hit hard by COVID-19. While they opened the year on a high (33% ahead) this quickly dried up as all advertisers pulled their budgets. Some customers completely stopping all expense, while others moved to a light brand presence rather than a promotional stance. This meant April has some horrific numbers to report, while it stabilised and is slowly coming back, their business is at a low right now.


Source: Trade Desk Q1 Revenue

From a revenue standpoint, we have seen a quarter on quarter reliable increase. COVID-19 means the last reported quarter and likely the next we will see a decrease in their revenue figures.

trade revenue
Source: Wallmine

Taking a step back to the annual figures, Trade Desk claim their biggest strength is their financial position. With a profit margin of 16.39%, this isn’t the most impressive in the market and it highlights some big R&D tech spending. While they might sit in the advertising space they are truly a tech investment. Like most tech investments they pour money into R&D to keep their competitive edge. Such heavy investment into innovation and staying ahead, as well as big spending on marketing, it’s very fair to say Trade Desk doesn’t have a defensible moat in the sense they could ease their additional spending and retain their position. While customer churn might impressive, this could be disrupted by newer more operational efficient entries.

What did impress me was the debt management. The last few technology companies were drowning in debt. Trade Desk has drawn down $143m under their credit facility as a precautionary measure, leaving them with an impressive $325.2m in cash and cash-like investments.

Even accounting for this the quarterly numbers still appear very stable, with a debt to assets of 61.86%


Source: Wallmine

In terms of liabilities, the only debt on the Q1 sheet is the credit facility drawdown. The real risks come in the expenses and liabilities from their customers who have different terms, creating $947.9m in accounts receivable with $663.4m in accounts payable. The result is a particularly debt-free business, which explains the extremely strong financial strength of the business. Rather than owning to suppliers, it’s chasing your customers to pay the bills before you incur the costs.


Source: Yahoo Finance

In terms of a value purchase. We are trading at all-time high levels, with a P/E ratio of 113.67x, and with the more generous price to sales ratio of 19.67x. As Trade Desk is a technology company, how much is that tech worth? They are not unique in the market, and they face threats from the very networks they collaborate with.

In my mind, you don’t have to worry about Warren Buffett suddenly showing up and sinking a few million into Trade Desk. While the company is extremely proud of its ability to self fund their growth and development, that has been realised by the rest of the market some time ago.

A few weeks ago this would have been a more interesting momentum play, but only at the lowest points would this have been a viable value investment. A few companies I’ve looked at have claimed they are more like industry X but make no mistake, Trade Desk is a technology company.

To round out the assessment we must gauge the momentum and future growth potential of Trade Desk. I’ll be leaning on the sell-side analysts for this view.


Source: Genuine Impact

The analysts have been shifting from a strong buy in the previous months to settling on some slight optimism but largely a hold rating. What I found interesting was the number of share price targets which have been hit or are now close, meaning the analyst needs to reassess. Given what is happening in the market, I can forgive the sell-side analysts for being busier than usual.

To help take their views into context with where we are now, I wanted to judge the future revenues, EPS, and target price.


Source: Genuine Impact

With a better than average expected growth, but an extremely low expected return means the market considers Trade Desk’s future revenue to be in line with expectations and very achievable, this also correlates with the speedy share price recovery.

I wanted to see the target prices myself before making any final decisions.


Source: Market Beat

The average target price is a 12.70% decrease. With such a speedy and aggressive bull run, Trade Desk has blown away expectations. What we are left with is a bunch of unknown positions. The fundamental calculations aren’t adding up and we are now investing based on business as usual meaning we will open the advertising taps with greater gusto.


Source: Trade Desk Q1 Revenue

With such a heavy dependency on America, we are seeing riots, fears about a deadly second wave of COVID-19, and even political advertising on social media being dragged back into the limelight. Is this the time to be bullish on businesses returning to heavy pre-COVID advertising numbers?

Why Do I Think A Hold?

If I looked at Trade Desk a few weeks ago I like to think I would have had a different view, but right now this is an extremely overbought and expensive stock, that is already brushing against its peak.

I would not be as pessimistic as to call this a sell, the company has almost no debt and has done an excellent job of controlling its contracts to provide a steady and reliable income. If you are invested there is no harm in ridding this out while the company carries on its growth.

As a new potential investor, I’ve missed the boat and don’t like to look of the ocean right now. Advertising will open back up when companies want to promote their social messages but the spend and volume will be way below what we have seen in the past. We are facing more and more reasons for businesses to delay and play carefully in the US, while Trade Desk might be a winner in their space that doesn’t mean they have an easy ride for the next six months.

It’s worth keeping an eye on them to see if the price cheapens, but I would worry they could be losing their competitive edge without endless investment into their data abilities. With no dividend and a negative targeted share price, there isn’t anything which is indicating a meaningful payoff for me as a shareholder. For now, I’ll keep my money for a different opportunity.

Let me know what you think of the analysis, anything I missed or you would want more detail on? I’ve been having a great time looking at these different stocks, and I always love to hear your thoughts.

Thanks for reading and stay safe!

8 Likes

@jcksmith850 thanks for the welcome. OK be interesting to hear your thoughts on National Grid (£NG) and Evraz Steel (£EVR).

Once again great stuff you’ve done, thanks!

1 Like

Thanks for the interesting reading material.

I’d love to hear your thoughts on Contour Global (£GLO).

1 Like

Thanks for the great feedback and suggestions!

Hope everyone has been enjoying the write ups as much as I enjoy researching them!

It’s always interesting to see everyone’s views and moves. Plus the markets being so violate adds some extra difficulty to everything :rofl:

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Beyond Meat - BYND (Hold)

While I have been unlucky with Beyond Meat, it might be the stock for you.

Now that the first wave of hype has died down around Beyond Meat, we can take a step back and look at the fundamentals in a bit more detail. What makes Beyond tick, and are they set up for the future?

What Does Beyond Meat Do?

They are one of the fastest-growing food companies in the US, offering a portfolio of plant-based meats. There are a few players in this space, but Beyond has taken the approach of building meat directly from plants. In the fake-meat market, there are several blockers to converting traditional meat-eating customers, taste, texture and other sensory attributes. While at the same time aiming for the nutritional and environmental benefits of plant-based meat products.

While Beyond has their production facilities, they also co-manufacturer with other firms, this is how they have expanded into Canada and the Netherlands.

I’m going to list all the planet-based alternatives as we are here as investors, the important bit to understand is how they separate their business lines and revenue streams.


Source: Beyond Meat Q1 2020 Announcement

The business is split into four areas, first by Geography. With a strong home base, almost three-quarters of revenue comes from the US. The rest is simply classified as international.

If you have ever looked at Beyond’s financials and these numbers seem wrong, they have recently reclassified international to include Canada, before this was considered part of the US (not sure how the Canadians felt about that.) The big figure to keep a close eye on is the international one. The CFO is extremely bullish about the Asian market, while there was a meat shortage scare in Asia that caused a brief rally for Beyond, this was speculation. However, the partner tests in the Asian markets have shown high demand either because of novelty or genuine customer desire to have an impact, whatever the reason, they will be entering Asia with a strong brand.

The other dimension of the business is how they distribute the products. Retail simply covers direct to end consumer sales, as well as supermarkets. The key difference is you are buying the branded product packaged up to prepare at home.

Foodservice means whenever you sell the product to a business who will prepare the product or alter it in some way before selling that onto the end customer. e.g. going to a bar and ordering a Beyond Burger with chips. The business who brought the burger from Beyond Meat would show up under the foodservice distribution channel.

With these two pieces of information, we can already tell Beyond’s distribution and geographic positioning. At home, there is a big focus on selling to customers to enjoy at home, with some partnership tests e.g. KFC. Outside of the US, the biggest push is through foodservice companies.

Now that Canada is included as international, that would skew the retail figures. Being the second market they started pushing their retail offering, it has had far more time to develop and benefit from the American marketing.

How Has COVID-19 Impacted Beyond Meat?

COVID-19 has impacted us all different, and seeing how companies have reacted is telling of managements style and positioning. Beyond has kept its manufacturing fully operational and sent head office staff to work from home.

Innovation and R&D have both slowed down. As this is a company seeking to break new ground it’s innovation efforts are key to its future growth. In-person and feet on the ground marketing efforts have been frozen, however, marketing and promotion is by no means taking a break.

The real risk here is the protein and ingredients they source are globally distributed, meaning they are feeling the squeeze from any overseas sources.

However, one risk has already been felt. The foodservice business. Restaurants and the whole food preparation as an industry has taken a nosedive. While Beyond opened the year with very strong momentum and a string of exciting new partnerships, stay at home orders flattened these plans.

However, this has led to an increase in people shopping and buying food themselves. Causing a bump in retail orders. This has offset some of the negative impacts but make no mistake, Q2 2020 is going to make for some bleak reading. Beyond has already signalled that Q2 will be worse than Q1 as their revenue is crushed but R&D and most activities have carried on, in short, they are in a cash burn situation expected to impact the whole of 2020.

If you are a big Beyond fan and wanted to know why there are no new partnerships or marketing, don’t be surprised if they are delaying these until closer to the end of 2020 to create a more impactful 2021.

What About The Fundamentals?

I held Beyond Meat a while ago, and brought in around the hype as a momentum-based investment, I ended up locking in a nasty loss, meaning I am even more interested in how this looks compared to the rest of the market.


Source: Genuine Impact

Underperforming the rest of the market, and grossly overvalued is about what I expected. However, if we want to understand what is going on with Beyond we need to dig into this some more.

It’s no secret that Beyond Meat isn’t a profitable company. But I want to see for myself what this means for their accounts and where the money is going. Last quarter Beyond brought in $354.76m and posted a loss of -$3.97M.

I am extremely off-put by the 33.49% gross margin. The cost of simply producing the goods is extremely high, leaving almost no room for any other activities or investment into scaling the business. All it takes is for a key supplier to increase their prices to force this gross margin as tight as possible. In terms of risks to the business, the scalability is at risk which such high production costs. Keep in mind the gross margin doesn’t include R&D, marketing, one-off costs, or even admin activity. This should be the costs directly related to creating revenue.

If you are a dab hand at statistics you would have worked out the profit margin is -4.18%, meaning we are loss-making.


Source: Beyond Meat Q1 2020 Announcement

Now the quarterly report does show a small profit being made (there were some interest payments about half the value of the profit and a very very tiny amount of tax.) Which is great to see, but we already know they had a better than expected start to the year, with next quarter being a very serious drag. If it was not for COVID-19 Beyond was on the edge of posting it’s first annual profit.


Source: Wallmine

Historically Beyond has struggled as it chased market share and brand promotion. With no dividend and a high growth strategy, and another year of losses ahead of us, there is little value as a shareholder. While Beyond is in this growth stage investors are taking a very long term view or holding for shorter-term share price improvement based on optimism.

One thing that did stand out to me was the debt control. In the cash screenshot, we can see the assets to debt being relatively well managed with a sudden boost in financing. I wanted to look at the recent quarters to understand what is happening in the short term.

$246.4m in cash, and $120.7m in inventory against $71.9m in current liabilities, with most of this, focused on accounts payable. Looking at the longer-term debt I only see $43.4m on the balance sheet. All in all, they aren’t as leverage as I would expect from a high growth company.


Source: Wallmine

I mentioned Beyond is very overvalued right now. After covering their finances this shouldn’t be a big surprise.

beyond one year
Source: Yahoo Finance

We have a price to sales ratio of 24.33x, price to book of 22.47x, even the price to earnings to growth is a nasty 8.30x. In terms of buying Beyond based on their inventory or assets, it just doesn’t justify the entry price.

Low-value high growth companies are very common, which represents the high level of risk involved with this strategy. Either we’ll see the explosive increase in debt (thankfully they are low on debt so this is an option in a pinch) or a ramp-up in R&D spending resulting in more years of cash burn and loss-making.

I’ve been told I can’t look at high growth, speculative, young companies like Beyond Meat in the same way as an established player. However, without the fundamentals and judging what risks we are comfortable taking, what will be basing our investment decisions on? As someone burnt once by Beyond Meat these valuations and deep speculative bets are a warning.

However, I am not an expert, that much should be clear. With that in mind, what do the sell-side experts have to say about Beyond Meat?


Source: Genuine Impact

I am slightly surprised at the even split of analyst ratings. I wanted to dig into this some more, as analysts don’t all rate at the same time, and given the market, a lot of them have been extremely busy.

We only have 9 analysts who have posted new guidance within the past month. Given how explosive the share price has been this does leave us behind a bit.


Source: MarketBeat

Ignoring the differences in analyst numbers, the striking aspect to me is the overwhelming sell shift and the lower target price. With the average coming in at a 30% discount on the price right now.

We have Bank of America setting a target price of $68 a share but on the other hand, BTIG believes it’ll be $173 (both lower than what I paid but I’m not upset at all.) The range is huge. With spotty fundamentals, an extremely painful incoming 2020, and no clear dominant player in the market, this is a hard stock to judge.


Source: Genuine Impact

The future share price returns are a complete unknown, with poor confidence where it will be. Putting a value on the company results in an overvalued mess, but buying into the hype sets us up for 50% return expectations, with very little in between.

What we do agree on is the high growth of revenue and potential EPS in the future. We know 2020 is going to be another year of struggle, but looking past that we have seen great historic growth and we know they are on the edge of posting their first profitable year.

A Sell or A Hold?

As a recommendation, I would go with a hold stance. I sold out and locked in a loss because I wanted to deploy my money elsewhere. Unless you have that level of confidence then I wouldn’t see a strong reason to redeploy your capital.

If you are comfortable with a five-year horizon then Beyond is well placed to expand and become a profitable player who can optimise their operations. There is scope for improvement.

I would strongly advise against a buy. 2020 is going to be disappointing, the next three quarters will be lower than expected. Beyond have even said they will push a lot of their strategy into 2021 and accept this will be a weaker year. If you are keen to buy into Beyond Meat, there will be better opportunities. As long as you are a long term believer then there is nothing for you to do, but if you brought into the hype, you will find a faster recovery elsewhere in the market.

This has been a very tricky stock to judge, and I always love to hear your feedback! Let me know if Beyond on your watch list? Or maybe you already brought in?

Stay safe and thanks for reading!

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@jcksmith850 I’ve been listening a lot to Cathie Wood from Ark invest. Would be interested in your analysis of Illumia, CRISPR Therapeutics &/or Invitae. I think you have some exposure to these from your investment in Scottish Mortgage Investment Trust

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If you want a good one ITM Power - no idea what is happening there

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Great suggestions and thank you reading! I’ll have a look around and see what makes for some exciting analysis.

I gave this a quick look and it was pretty wild. The coverage is low too with analysts being very split on them, and the fundamentals at a glace are in pieces. I don’t think I’ve covered an energy sector company like this before so this would be flexing some new bits of my brain!

I’ll catch up with the news and see what’s the most interesting!

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