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McIntyre Partnerships 1Q20 Commentary: Long Chemours [Analysis]

McIntyre Partnerships 1Q20 Commentary: Long Chemours [Analysis]

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resume in-person classes impact Chemours Top 10 greatest heroes of the coronavirus pandemic

McIntyre Partnerships commentary for the first quarter ended March 31, 2020, discussing how the current crisis will likely impact Chemours (NYSE:CC)’s near-term earnings.

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Q1 2020 hedge fund letters, conferences and more

Performance Review - FY 2019

Through Q1 2020, McIntyre Partnerships returned approx. -56% gross and net. This compares to S&P 500, S&P 600, and Russell 2000 returns including dividends of -20%, -33%, and -31% respectively. The fund is heavily concentrated in Chemours Co (NYSE:CC), whose shares fell 51% in the quarter. The fund has recovered modestly in April.

I could say many things about our returns, but the reality is I decided to place the “big bet” in a “scary looking” cyclical and ran into a market crash equivalent to 1929 and 1987, with market indices down 35-45% and hundreds of stock down far worse than that. I cannot imagine a worse possible near-term market backdrop for my decision – the fund is at its highest potential volatility into the highest period of volatility since 2008. The current marks are what they are. A sudden market crash, for whatever reason, is always a possibility, and I have no real strategy to avoid the mark to market drawdowns that inevitably come with them.

Instead of pontificating on the markets, the focus of this letter is on why I believe CC is fundamentally a safe bet, despite the market reaction, and extremely cheap even in a protracted recession.

Portfolio Review - Exposures and Concentration

At quarter end, our exposures are 105% long, 30% short, and 70% net. Our five largest positions were 90% gross exposure. Our CC investment is exceptionally large and has a significant options component which makes our exposures less meaningful versus the market at present.

Our four largest positions are CC, TPHS, GTX, and Permanent Bank. We have no other investments of notable size.

Portfolio Review  - Existing Positions

Chemours (CC)

Pre-Covid Update

Prior to the current covid crisis, our CC investment was beginning to work. In mid-February, CC rallied sharply on strong Q4 earnings, and the company guided to 2020 FCF of >$2/share and took back share in the TiO2 market, which is central to my thesis. I felt the guidance was conservative, setting CC up for “beat and raise” earnings. In the two months since then, the TiO2 market has shown signs of a rebound with pricing and volume increasing – a good sign the 18 month destock, which was the largest in industry history, was behind us. Even with the global economy coming to a halt in mid-March, TiO2 volumes have remained reasonably strong with competitors and consultants reporting stable volumes in April. While the current crisis will likely impact near-term earnings, I believe my Chemours thesis has begun to play out and results will continue to improve as the economy recovers post-covid.

Simple Pitch

The simple pitch on why CC is safe even in a harsh recession is that its balance sheet and liquidity are very strong, and its operations have robust competitive advantages that drive profits even in a bad environment.

Long-Term Safety

Over the long-term, CC’s business is a necessary part of the economy. In a world of lockdowns, chemical production has been deemed an essential service and CC’s plants remain open. It is not a random coincidence that the business I chose to concentrate our fund in has been deemed essential. If we are to live in a world where we are not all sitting naked in fields, material science a.k.a. the chemical industry is an essential part of our civilization and cannot simply be turned off like a cruise ship or a restaurant. TiO2 is in the paint on your walls, the plastics in your cell phone, and rubber in your shoes. CC’s refrigerants enable the air conditioning we use to cool our homes and keep our produce fresh. CC’s products are fundamental building blocks of society.

Further, I do not believe CC’s businesses are at risk from any secular shifts. TiO2 and refrigerants have no feasible substitutes, i.e. a secular supply shift, and paint and air conditioning demand are not at risk from any long-term change, i.e. a secular demand shift such as the growth of software, shifting millennial buying patterns, etc. While the macroeconomic ebbs and flows can impact Chemours' near-term earnings, over the long run, CC’s products are essential, and demand will return.

When considering the fundamental safety of an investment entering a cyclical downturn, there are two critical and linked factors: the company’s financial strength and operating resilience. The company must have ample liquidity to withstand a shock and must generate strong pre-tax earnings even in a protracted, bad recession. On both metrics, I believe CC is strongly situated. Further, CC’s shares are cheap even in a protracted recession.

Financial Strength

In practical terms, companies go bankrupt when they cannot either cover their interest payments or roll over their debt. While other factors, such as breaking a covenant, can technically tip a company into bankruptcy, such occurrences are rare. It is thus imperative for a business to have cash available to pay operating and financial costs in the event of an economic shock.

To evaluate CC’s liquidity, I conduct a stress test and conclude CC has ample liquidity even in unrealistically extreme circumstances. CC has $1.6B in total liquidity, consisting of $1.1B of cash on balance sheet at present and an additional $500MM in revolver availability. This compares to interest expense of $200-$250MM, depending upon cash and revolver balances. There are no maturities due before 2023. The most restrictive covenant is 2.0x senior secured leverage ratio, which CC would not trip unless EBITDA falls 40% and could be renegotiated in such a case.

In my stress test, I take Factset’s estimates for consensus sales and EBITDA and assume a 50% drop in sales with a 50% decremental margin, and conclude CC has adequate liquidity to weather such a scenario until Q4 2021.

impact chemours

I want to reiterate how tremendously overly punitive I think this scenario is. This model implies a sustained 20-40% drop in TiO2 and refrigerant volumes, which given their essential nature in my opinion implies a 30-50% drop in global GDP. Further, the operating characteristics of CC’s business, particularly their substantial low-cost position in TiO2 and the specialty chemical margins of Opteon, imply a 50% decremental margin is excessive. I use what I consider a wildly pessimistic view to illustrate that, even in the event I am quite wrong on my operating assumptions, CC has ample liquidity to weather the storm.

Operating Resilience

CC’s two main operating businesses are Tio2 and Fluoroproducts. While both product lines are cyclical, CC’s strong competitive advantages drive operating profits even in recession. In TiO2, CC is the low-cost producer due to their scaled operations and a proprietary production process, which creates a sustainable competitive advantage and predictable profits even when TiO2 peers struggle and burn cash. In Fluoroproducts, CC’s patented Opteon brand is the key profit driver and shares a duopoly market with HON, implying strong margins even if volumes drop. These competitive advantages mean that while peak and mid-cycle earnings are cyclical and difficult to predict, CC’s operating profits in a downturn are far more predictable. Unlike many TiO2 peers such as TROX and KRO, CC can run with modest leverage and be confident in their ability to cover costs even in a sharp, sudden downturn like we are currently experiencing.

TiO2

Despite its cyclicality, I consider CC’s TiO2 business to be one of the most robust competitively advantaged businesses I have ever analyzed. TiO2 is a commodity. While there is a sharp quality difference between high-tech Western TiO2 manufacturers and low-tech Chinese manufacturers, Western companies’ TiO2 is effectively interchangeable and Western producers’ margins are broadly similar – except for Chemours. CC operates its plants at a massive scale versus peers and has a proprietary process allowing the company to use a variety of feedstocks not available to competitors, which drives a large cost per ton advantage versus competitors. Here is a chart of CC’s historical margins versus TiO2 peers:

impact chemours

CC has earned on average almost twice the EBITDA margin of competitors despite making functionally similar products. The benefits of this advantage are particularly acute in downturns. In 2008 and 2009, CC’s competitions saw margins and profits sharply contract. As capex typically runs 3% of sales in TiO2 production, most were struggling to breakeven and some filed for bankruptcy. However, CC generated a high-teens EBITDA margin even as competitors were burning cash.

In per unit math, CC’s low-cost position equates to a roughly $300/ton advantage versus peers, or $400/ton EBITDA including $100/ton in D&A/maintenance capex. CC has roughly 1.3MM tons of nameplate capacity which it can operate at a 90% utilization rate. This implies CC can earn $500MM in annual EBITDA in an environment in which literally every other Western TiO2 producer is forced into bankruptcy. In practical terms, given TiO2’s essential nature, TiO2 producers typically trough at cash burn for a quarter or two before capacity closes and some degree of profits returns, thus I consider $500-$600MM in TiO2 EBITDA to be a true trough condition.

CC’s ability to generate significant profits even in conditions where competitors are burning cash is at the core of why I believe CC is a safe investment. I consider this cash flow stream to be one of safest available in the market. While one-time issues, such as CC’s move to fixed volume contracts, a pandemic causing a sudden volume drop, a plant outage, etc. can impact Chemours' near-term TiO2 profits, the sustainable competitive advantage implies this EBITDA stream of at least $500-$600MM will return.

Opteon

Opteon is CC’s patented next generation refrigerant, which results in a 99% reduction in global warming potential versus legacy products and shares a duopoly market with HON’s Solstice product. Opteon is accounted for in CC’s Fluoroproducts segment, which is the company’s other significant EBITDA driver. Prior to covid, Street estimates were for $600-700MM in 2020 Fluoroproducts EBITDA, which I believe was a reasonable range. Covid has thrown that estimate into doubt, and the question is by how much. I estimate Opteon drives at least 50% of segment profits or $350MM of EBITDA. While the majority of Opteon sales are cyclical with global car sales, ex-covid, Opteon was experiencing double digit sales growth and the duopoly market implies limited pricing pressures. In a sharp 20% decline in global auto sales, I estimate Opteon EBITDA would fall at most 20%, yielding $280MM. The rest of the Fluoroproducts segment are legacy refrigerants and fluoropolymers, which are modestly cyclical. For conservatism, I assume a 50% drop in the rest of Fluoroproducts EBITDA, yielding a whole segment trough EBITDA of $450MM.

Whole Company Math

On conservative trough conditions, I estimate TiO2 EBITDA of $500MM, Fluoroproducts of $450MM, and “rest of company” including corporate expense of -$50MM, yielding $900MM of whole co. EBITDA. This compares to 2020 capex guidance of $400MM, which could be reduced to $300MM or less if needed, and $200MM of interest expense, which yields ample coverage. Further, assuming a 20% tax rate, CC would earn FCF of $240MM or $1.50/share in a harsh trough environment, a 15% yield at current prices. I believe CC is a fundamentally conservative bet.

Covid and Economic Thoughts

“In some parts of the country [the pandemic] has caused a decrease in production of approximately 50 percent and almost everywhere it has occasioned more or less falling off. The loss of trade which the retail merchants throughout the country have met with has been very large. The impairment of efficiency has also been noticeable. There never has been in this country, so the experts say, so complete domination by an epidemic as has been the case with this one.” - The Wall Street Journal, October 24, 1918

Some quick covid observations:

  • Covid is likely 2-3x as contagious as the flu
  • Every year 20-35% of the world’s population gets the flu, despite the existence of a partially effective vaccine
  • The record for fastest development of a vaccine is five years
  • While difficult to estimate due to imperfect testing data, most epidemiologists put the disease’s current fatality rate at 2-5x that of seasonal flu if the healthcare system functions
  • In virtually every epidemic, a virus’s virulence diminishes over time
  • Nursing home residents accounts for around 50% of deaths in various European countries and US states
  • For those under 65, and those over 65 without multiple comorbidities, the risk of fatality from infection is similar to driving to work every day

From a personal perspective, every death from this disease is a tragedy and my thoughts are with those who have lost someone. However, from an economic perspective, these deaths in and of themselves are not causing the economic contraction. What is causing the economic damage is our response to this disease, both from government regulations and individuals’ self-imposed social distancing. For investors, what matters is how long the current social distancing can continue and what its impact is to the economy.

I do not believe the social or political capital exists to extend the lockdowns on non-essential services much beyond the present timeline presented by North American and European governments. The extremeness of certain countries’ and the United States’ social distancing rules are simply unsustainable for any length of time. For example, Quest Diagnostics, one of the nation’s largest medical testing companies who has conducted almost half of the commercial covid testing in the USA, saw a greater than 40% drop in overall test volumes in late March and has furloughed a significant part of their workforce. That implies literally millions of delayed or canceled cancer screenings, heart disease checks, etc. From a purely public health perspective, it’s highly unlikely months more of this extreme social distancing would even save lives in aggregate. Fortunately, the tide seems to be turning and many states and countries are beginning to slowly reopen. There are now numerous examples of other countries, such as Sweden and China, who are managing the crisis in a more measured manner without breaking their healthcare systems.

The question then turns to the economic impact. I never really have a strong view on the economy, but something like a very bad Q2 contraction followed by a sharp rebound in H2 seems reasonable. This tracks other pandemics, such as Hong Kong following the SARS outbreak in 2003 and the US after the Spanish Flu outbreak in 1918. Most importantly, there is significant political will to use fiscal and monetary stimulus to right the ship. Here is a quote from Federal Reserve Chairman Jerome Powell on April 9, 2020:

"People are undertaking these sacrifices for the common good. We need to make them whole. We should be doing that, as a society. They didn't cause this. Their business isn't closed because of anything they did wrong. They didn't lose their job because of anything they did wrong."

Restarting the economy in the US and globally will be rocky at first, but I believe the significant political will to fix the situation and the logical benefit from simply reopening businesses will likely make the economic pain short lived. Further, politicians and central bankers are signaling they are prepared to deliver increased aid if the recovery needs further help.

For those interested, here are links to studies of prior pandemics:

Hong Kong 2003 - https://hub.hku.hk/bitstream/10722/88855/1/content.pdf

United States 1918 - https://www.chicagofed.org/publications/working-papers/2020/2020-11

As always, please feel free to contact me with any questions.

Sincerely,

Chris McIntyre

chris@mcintyrepartnerships.com

The post McIntyre Partnerships 1Q20 Commentary: Long Chemours [Analysis] appeared first on ValueWalk.

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Will Powell Pivot? Don’t Count On It

Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For…

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Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For fear of missing out on the next great bull run, many investors are blindly buying into this new Powell pivot narrative.

What these investors fail to realize is the Fed has a problem. Inflation is raging, the likes of which the Fed hasn’t dealt with since Jerome Powell earned his law degree from Georgetown University in 1979.  

Despite inflation, markets seem to assume that today’s Fed has the same mindset as the 1990-2021 Fed. The old Fed would have stopped raising rates when stocks fell 20% and certainly on the second consecutive negative GDP print. The current Fed seems to want to keep raising rates and reducing its balance sheet (QT).

The market-friendly Fed we grew accustomed to over the last few decades may not be driving the ship anymore. Yesterday’s investment strategies may prove flawed if a new inflation-minded Fed is at the wheel.

Of course, you can ignore the realities of today’s high inflation and take Jim Cramer’s ever-bullish advice.

When the Fed gets out of the way, you have a real window and you’ve got to jump through it. … When a recession comes, the Fed has the good sense to stop raising rates,” the “Mad Money” host said. “And that pause means you’ve got to buy stocks.

Shifting Market Expectations

On June 10, 2022, the Fed Funds Futures markets implied the Fed would raise the Fed Funds rate to 3.20% in January 2023 and to 3.65% by July 2023. Such suggests the Fed would raise rates by almost 50bps between January and July.

Now the market implies Fed Funds will be 3.59% in January, up .40% in the last two months. However, the market implies July Fed Funds will be 3.52%, or .13% less than its January expectations. The market is pricing in a rate reduction between January and July.

The graph below highlights the recent shift in market expectations over the last two months.

The graph below from the Daily Shot shows compares the market’s implied expectations for Fed Funds (black) versus the Fed’s expectations. Each blue dot represents where each Fed member thinks Fed Funds will be at each year-end. The market underestimates the Fed’s resolve to increase interest rates by about 1%.

Short Term Inflation Projections

The biggest flaw with pricing in predicting a stall and Powell pivot in the near term is the possible trajectory of inflation. The graph below shows annual CPI rates based on three conservative monthly inflation data assumptions.

If monthly inflation is zero for the remainder of 2022, which is highly unlikely, CPI will only fall to 5.43%. Yes, that is much better than today’s 9.1%, but it is still well above the Fed’s 2.0% target. The other more likely scenarios are too high to allow the Fed to halt its fight against inflation.

cpi inflation

Inflation on its own, even in a rosy scenario, is not likely to get Powell to pivot. However, economic weakness, deteriorating labor markets, or financial instability could change his mind.

Recession, Labor, and Financial Instability

GDP just printed two negative quarters in a row. Some economists call that a recession. The NBER, the official determiner of recessions, also considers the health of the labor markets in their recession decision-making. 

The graph below shows the unemployment rate (blue), recessions (gray), and the number of months the unemployment rate troughed (red) before each recession. Since 1950 there have been eleven recessions. On average, the unemployment rate bottoms 2.5 months before an official recession declaration by the NBER. In seven of the eleven instances, the unemployment rate started rising one or two months before a recession.

unemployment and recession

The unemployment rate may start ticking up shortly, but consider it is presently at a historically low level. At 3.5%, it is well below the 6.2% average of the last 50 years. Of the 630 monthly jobs reports since 1970, there are only three other instances where the unemployment rate dipped to 3.5%. There are zero instances since 1970 below 3.5%!

Despite some recent signs of weakness, the labor market is historically tight. For example, job openings slipped from 11.85 million in March to 10.70 in June. However, as we show below, it remains well above historical norms.

jobs employment recession

A tight labor market that can lead to higher inflation via a price-wage spiral is of concern for the Fed. Such fear gives the Fed ample reason to keep tightening rates even if the labor markets weaken. For more on price-wage spirals, please read our article Persistent Inflation Scares the Fed.

Financial Stability

Besides economic deterioration or labor market troubles, financial instability might cause Jerome Powell to pivot. While there were some growing signs of financial instability in the spring, those warnings have dissipated.  

For example, the Fed pays close attention to the yield spread between corporate bonds and Treasury bonds (OAS) for signs of instability. They pay particular attention to yield spreads of junk-rated corporate debt as they are more volatile than investment-grade paper and often are the first assets to show signs of problems.

The graph below plots the daily intersections of investment grade (BBB) OAS and junk (BB) OAS since 1996. As shown, the OAS on junk-rated debt is almost 3% below what should be expected based on the robust correlation between the two yield spreads. Corporate debt markets are showing no signs of instability!

corporate bonds financial stability

Stocks, on the other hand, are lower this year. The S&P 500 is down about 15% year to date. However, it is still up about 25% since the pandemic started. More importantly, valuations have fallen but are still well above historical averages. So, while stock prices are down, there are few signs of equity market instability. In fact, the recent rally is starting to elicit FOMO behaviors so often seen in speculative bullish runs.

Declining yields, tightening yield spreads, and rising asset prices are inflationary. If anything, recent market stability gives the Fed a reason to keep raising rates. Ex-New York Fed President Bill Dudley recently commented that market speculation about a Fed pivot is overdone and counterproductive to the Fed’s efforts to bring down inflation.

What Does the Fed Think?

The following quotes and headlines have all come out since the late July 2022 Fed meeting. They all point to a Fed with no intent to stall or pivot despite its effect on jobs and the economy.

  • *KASHKARI: 2023 RATE CUTS SEEM LIKE `VERY UNLIKELY SCENARIO’
  • Fed’s Kashkari: concerning inflation is spreading; we need to act with urgency
  • *BOWMAN: SEES RISK FOMC ACTIONS TO SLOW JOB GAINS, EVEN CUT JOBS
  • *DALY: MARKETS ARE AHEAD OF THEMSELVES ON FED CUTTING RATES
  • St. Louis Fed President James Bullard says he favors a strategy of “front-loading” big interest-rate hikes, repeating that he wants to end the year at 3.75% to 4% – Bloomberg
  • FED’S BULLARD: TO GET INFLATION COMING DOWN IN A CONVINCING WAY, WE’LL HAVE TO BE HIGHER FOR LONGER.
  • “If you have to cut off the tail of a dog, don’t do it one inch at a time.”- Fed President Bullard
  • “There is a path to getting inflation under control,” Barkin said, “but a recession could happen in the process” – MarketWatch
  • The Fed is “nowhere near” being done in its fight against inflation, said Mary Daly, the San Francisco Federal Reserve Bank president, in a CNBC interview Tuesday.  –MarketWatch
  • “We think it’s necessary to have growth slow down,” Powell said last week. “We actually think we need a period of growth below potential, to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect…to get inflation back down on the path to 2 percent.”

Summary

We are highly doubtful that Powell will pivot anytime soon. Supporting our view is the recent action of the Bank of England. On August 4th they raised interest rates by 50bps despite forecasting a recession starting this year and lasting through 2023. Central bankers understand this inflation outbreak is unique and are caught off guard by its persistence.

The economy and markets may test their resolve, but the threat of a long-lasting price-wage spiral will keep the Fed and other banks from taking their foot off the brakes too soon.

We close by reminding you that inflation will start falling in the months ahead, but it hasn’t even officially peaked yet.

The post Will Powell Pivot? Don’t Count On It appeared first on RIA.

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Why You Should Not Worry About Disney and Netflix Stock

The two streaming giants have struggled but investors should not be too concerned.

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The two streaming giants have struggled but investors should not be too concerned.

During the lockdown/quarantine days of the pandemic, we all apparently rode our Peloton (PTON) - Get Peloton Interactive Inc. Report bikes while binge-watching streaming videos. As soon as we finished that, we headed onto a Zoom Video  (ZM) - Get Zoom Video Communications Inc. Report call, presumably before ordering food delivery and later having a Teladoc (TDOC) - Get Teladoc Health Inc. Report appointment

That may not have actually been your direct experience, but it's how the stock market performed. People bought so-called "stay-at-home" stocks because we all were, well, stuck at home. Of course, at some point we weren't stuck at home, and sentiment on those stocks changed.

The challenge for investors is sorting out the real narrative from the false one. 

At-home-exercise bikes were never going to replace gyms once people could go out again, and the audience for a premium-priced product was limited when gym memberships can cost as little as $10 a month.

Telemedicine has a bright future, but it has limits and it may prove an area where the brand name does not matter.

Streaming video is different, however, and while Netflix (NFLX) - Get Netflix Inc. Report and Walt Disney (DIS) - Get The Walt Disney Company Report stock are down roughly 40% and 55% respectively over the past 12 months, there are a lot of reasons shareholders need not be concerned.

Netflix/TS

Netflix Has a Correctible Problem  

While Netflix grew steadily for a long time, no product has an endless upward trajectory. The company lost subscribers in its most recent quarter, but that comes after it added more than 36 million customers in 2020 and another 18 million in 2021. Even with its Q2 2022 drop of about a million subscribers, the company still has 220 million paying customers.

That's a huge number and it's not likely to get all that much bigger or all that much smaller over the next few years. The reality is that Netflix has left its growth phase and has moved into its fiscal responsibility phase.

Now, instead of producing $200 million movies and throwing them at the wall, the company has to be smarter about its content investments.

"So our content expense will continue to grow, but it's more moderated as we adjusted for the growth in our revenue," Chief Financial Officer Spence Neumann said during the company's second-quarter-earnings call.

"And we think we've gotten a lot smarter over the last decade or so being in the originals business as to where we can direct our spend for most impact, highest impact, and highest satisfaction for our members." 

Nobody at Netflix wants to say "we're going to make fewer shows and focus on having hits," but Netflix has reached the retention stage of its business. It needs to have enough content its customers want to see coming up to keep people from quitting.

That may not be an easy transition, but it's one the company is likely to make, where it can be comfortably profitable around its current customer base. 

Disney Has Nothing to Worry About     

Disney is obviously much more than a streaming company, but Disney+ has been a massive driver for the company. Its growth was accelerated by the pandemic, but every family and any adults who like Marvel and Star Wars were always going to subscribe.

Fans of the company's huge franchises are simply not going to skip the biggest shows coming out of those universes. 

Disney, unlike Netflix, does not have a too-much-content problem. It knows its customer base and understands that while "Falcon and the Winter Soldier" might draw a bigger audience than "Ms. Marvel," both drive audience to the service.

Disney may struggle with what's a theatrical release and what goes to streaming, but it has hit franchises that have stood the test of time. That's not going to change just because lockdowns have ended and we have other entertainment choices.

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Bed Bath & Beyond stock should be worth $4 only: Baird

Bed Bath & Beyond Inc (NASDAQ: BBBY) has been on fire over the past couple of weeks, but that “frenzy” is unlikely to last for very long, says…

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Bed Bath & Beyond Inc (NASDAQ: BBBY) has been on fire over the past couple of weeks, but that “frenzy” is unlikely to last for very long, says Justin Kleber. He’s a Senior Equity Research Analyst at Baird.

Bed Bath & Beyond stock could tank 55% from here

On Tuesday, he downgraded the Bed Bath & Beyond stock to “underperform” and reiterated his price target of $4.0 a share that represents about a 55% downside from here. In a note to clients, Kleber said:

This frenzied move has been driven by non-fundamentally focused market participants. With market share losses accelerating and BBBY burning cash, fundamental risk/reward looks unattractive.

The meme stock, he added, has to sharply improve its EBITDA to justify its current $2.30 billion enterprise value – but that’s unlikely to happen in this macroeconomic environment.

Versus its year-to-date low, Bed bath & Beyond stock is currently up more than 100%.

Why else does he dislike Bed Bath & Beyond Inc?

In its latest reported quarter, the American chain of domestic merchandise retail stores lost $2.83 a share (adjusted) – more than double the $1.39 that analysts had expected. Kleber is also bearish on the Bed Bath & Beyond stock because:

Supply chain disruptions have exposed BBBY’s antiquated infrastructure and wreaked havoc on the business at the same time the company’s pivot toward owned brands has not resonated with customers.

The retailer will likely remain challenged as demand for home goods continues to normalise following two years of pandemic-driven boost, he concluded.

In June, the Union-headquartered company named Sue Gove its new CEO (interim) tasked with fixing the liquidity concerns. Most recently, Bed Bath & Beyond was reported considering private loans to optimise its balance sheet.

The post Bed Bath & Beyond stock should be worth $4 only: Baird appeared first on Invezz.

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