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Hedgeye's Daniel Biolsi on state of the Consumer Staples sector (podcast #188)
Daniel Biolsi, Head of Consumer Staples sector at Hedgeye, shares his thoughts on current state of the Consumer Staples sector in 2023.
This podcast is sponsored by Hedgeye.
Hedgeye is an investment research firm that delivers high-conviction investment ideas through fundamental, quantitative, and Macro analysis. Our guest today is Hedgeye Consumer Staples analyst Daniel Biolsi. This follows prior podcasts we’ve had with Industrials analyst Jay Van Sciver and Retail head Brian McGough. I think the depth and quality of their analysis always shines through in these conversations.
If you’d like access to Hedgeye’s favorite long and short stock ideas, check out The Call @ Hedgeye, their daily stock investing webcast featuring Brian, Jay, and the entire stock analyst team.
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Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript
Transcript begins below
Andrew: Hello, and welcome to Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have on Daniel Bosi. Daniel is the Sector head of Consumer Staples at Hedgeye. Daniel, how's it going?
Daniel: Great. Thanks for having me on.
Andrew: Hey, really excited. The past two we've done with Hedge High have been great, so I'm sure this is going to be as well. Let me start with the quick disclaimer. Nothing on this podcast is investing advice. That's always true on this podcast, but particularly true today because I think we're probably going to be flipping through a whole consumers naval sector, which means we'll be talking about several different names. Everybody should just remember not investing advice. Please consult a financial advisor. Anyway, Daniel, I've got your coverage list here. I've got some specific names I want to talk to you and ask you questions about. But I guess just to start you're the sector head of Consumer Staples. We're talking mid-August 2023. What are just kind of your overall thoughts on the sectors, the opportunities, the risks, everything you're seeing in the sector?
Daniel: Just near term or just broadly?
Andrew: Just broadly.
Daniel: So my background is I've done consumer on the buy side between 15 and 20 years. But I mostly did the discretionary side a lot less the the staple side early in my career. And then I just sort of kept sort of increasing as I matured as an investor and appreciated more how to make Alpha in consumer staples. So that's sort of a little bit of my background. And I think a lot of people who are maybe are used to consumer or dabble in consumer, probably a similar way. Like they think staples is not volatile enough, not exciting enough. And then the staples are just so boring and I think it takes a little bit more maturity or if you're managing your own capital to realize what consumer staples have to offer. Right?
Andrew: Can I ask you a question on that? Just starting, and this is going to come up on several of the stocks I kind of started prepping on and thinking about, but you mentioned Make Alpha, and that has generally been my issue with consumer Staples. Like, look, there's Monster and Celsius, which we can talk about kick myself all the time for missing both of those. Those were massive growth trends, huge properties. But I look at something like a Keurig Dr. Pepper, which I just did a podcast on with the guys from Half Moon. It was a really well researched podcast. It was a really well researched idea from them. But my one pushback from them was like, Hey, it trades at kind of like 16 to 18 times forward earnings, maybe a little higher. How do you really make Alpha investing in a low single digit growth business at kind of a 5% forward earning shield?
Daniel: Right. No, that's a good comment. I'd say like what I try to focus more on like the secular growth themes. So I do focus on growth and I really want those compounders, I guess is the way to say it. Like, I hear what you're saying on caring Dr. Pepper, but like, if you look at like a, like a Costco for example, that's kind of what I want to repeat. Constellation Brands is something I own for nearly a decade, right? So if you just get this mid to high single digit, top line grower in consumer staples where they have high margins, right? And good returns on capital, you have a compounder, right? So I think most people probably be surprised at like how much they've compounded over like 10 years. And then if like you live through like the recession or the pandemic, you understand how valuable consumer staples can be in your portfolio, right? Like where everything else is just getting crushed, right? And the sale offs and your consumer stables companies are going off, right? Like you might actually see their sales accelerate, right? And you can sell it for higher generally, and you can now buy back those speculative stocks you liked, right? So I think that's like the real place in your portfolio.
Andrew: So you kind of view it as like portfolio ballasts.
Andrew: Like almost a improvement on bond. Let me just ask one on Costco, because that was at the top of my mind, but Costco, everybody loves Costco, right? Charlie Munger talks about it all the time. Everybody kicks themselves, Hey, it was at 200, I could have bought 300. As you and I are talking, it's like 550, 560, probably 35 to 40 next 12 months earnings. And I look at it and say, okay, no doubt it's a great company. Absolutely no doubt that's like a two and a half percent earnings yield. The 10 year treasury yields 4%. Like we're not in a 0% interest rate world anymore. I know plenty of people who have it, I'm going to buy and hold it forever, but I look at it and say, I'm not sure, as you said, it's like maybe mid single digit growth at 40, 35 times earnings. How are you going to generate more than 5% a year going forward at those multiples? Like the math is just kind of daunting at that level.
Daniel: Yeah, I hear what you're saying at these levels. I point out that it, I think it is one of the top performing stocks in my coverage universe. It's one of the very few that are 52 week highs right now. And I kind of attribute that to speculation that the membership fee is going to go up. So obviously earnings estimate's going to go up. So it doesn't look as as expensive on those numbers. That's part of it. And I think there's this idea that they're continuing to gaining share in food retail, which they are, right? It's them and Walmart are like the two big gainers, right? So I think if you stuck like a simplistic thing in Staples with Share gainers, you tend to win over time. But maybe this is an area where you'd be feeding the ducks and buying some things that have sold off recently.
Andrew: You don't cover BJ's, I don't think, but I'll ask the question anyway. I know a lot of people who are long BJ's like discount Costco play, right? They say, Hey, it's got the Costco model, it's got the membership. Yeah, it's not as good as Costco, but you pay 15 times earnings for it versus 35 at Costco. And if you think these stores are just a structural share winner, they should benefit from that. Do you have any thoughts on the kind of BJ's thesis?
Daniel: Sure. Actually I do cover it.
Andrew: Oh I didn't see it. Great.
Daniel: Well we took it off our shortlist. So we just recently took it off the shortlist and that thesis was really premised around how much they benefited from the higher gasoline prices. So gasoline had a sort of a higher spread than normal last year. So I think that was sort of over earning in that. And so we put it on the short list, but we have more reason to believe that the membership fee increase is going to happen at Costco. So you can't be short BJ's because if Costco raises a BJ's is going to raise it, even if they don't raise it right away, people are going to expect it to. So we moved it off the short. Actually worked for us on the short side too. So we had some good alpha in that spread Costco, long BJ short.
So right now it's not on either side. It should probably be on the long side, but it just been on the short side and that's one of the toughest things to do, right? Go short to long. So I think there's validity to that. We had been long BJ's in 2022, and I think we did a lot of sort of research on the new store capability of BJ's. So if they can continue to open up in these new markets, I think that's where it gets really interesting. And yes, it is a cheaper multiple. So according to our traffic data that we use with Placer ai, we can see how those new stores were doing and they were opening sort of the middle of their chain. So that I think promised really good prospects for them to continue to open up, right?
And they're still able to find these locations and just in the middle. And of course, these stores mature over time. It's a different type of retail concept, right? So you have to actually pay to be a member. So we were happy with that. And then I think going forward, they're still going to win. They're concentrating on grocery, so they're winning there. And I think the upside in the near term is from that credit card. And so we're trying to do a little bit more work there, and I think if we got more comfortable with that, it would be on the long side.
Andrew: Every time somebody pitches BJ's to me, I just think of my best friend. He moved to a new city and I went and visited him after a month and I was like, oh, just talking about something. He drove by a BJ's and he pointed to it and he said, I joined BJ's and I'm embarrassed to be a BJ's member, but there isn't a Costco around here. If there was ever a Costco, I'd dropped my membership in a second. And joined them instead of BJ's. It's like, god damn, that was really just shots fired at BJ's. Okay, let me move on to there are two names in your universe when you sent it to me that just really jumped out as the most interesting to me. And I'll start with the first one, I'm guessing it's probably the one you get pinged on the least, but it's the most interesting to me. And that's Albertsons. Albertsons for those who don't know, has been for about the past year under a merger with Kroger's, which is actually on your short side. So your long Albertsons search, Kroger's. The Albertsons deal, the stock trades for 22 as we speak. If the deal goes through, the shareholders would get 27/25. That might get adjusted for divestments. We can talk about divestments, we can talk about the spread, we can talk about the fundamental business. But I'll just pause there and ask, why are you long Albertsons?
Daniel: So Mike Albertsons Long is really predicated on the merger, right? It's right around that. So my sort of position is Monitor is based off food retail winners and losers for right now, which would be short, the supermarkets, so that we're short Sprouts and Kroger's, Albertsons would be there if not for the merger and that sort of like spread. And then we're long Grocery outlet, Walmart, Costco the gainers, in food retail. Which is really more of a focus right now where we are in the cycle on discount on value, if you're not offering that in grocery you're losing. And that's sort of where Albertsons is, except I think there's so much negativity priced into the merger happening. Every time you see any type of hint of the FTC or DOJ looking at this, or a union saying they're opposing it every single time, the stock doesn't move. So I think all the negativity sort of priced in, right? So the arms are long Albertsons, short Kroger, and they're already expect to be challenged, right?
Daniel: I think on the merits of the case this would be approved because they're already planning on divesting so many stores. Of course, I think it would help if they had a buyer as opposed to a Spinco. I think that's where it gets a little harder because the history of Spinco is being able to be there. So like if someone like ahold came and wanted to buy it, I think this merger would be approved and you would make a pretty good return just closing that spread. But if it doesn't, I think there's more optionality for Albertsons than I think the market's getting credit for.
I think that $600 million breakup fee, it's about a dollar per share for Albertsons. I think they could use that and they can go buy like Southeastern Grocers for example. So a company that tried to go public and just couldn't get the sort of reception for it, and that would be in a creative deal. They could have some synergies, they'd have a little growth story, they have a margin story, et cetera. I don't think people are giving them any credit for anything to happen. And I think the CEO of Albertsons is actually one of the better CEOs in the space and doesn't get really a lot of credit for what he is done. So that's sort of my thing. I think you have a pretty good floor and no one thinks it's going to happen.
Andrew: No. Look that's what's attracted to me there, and I don't have a position yet, but I keep circling around, I just look at it and say, so the original deal was announced in early 2022, if I remember correctly. It was for $34 and 10 cents per share, but they got to pay a $6 and 85 cents special dividend that reduced it. Before the deal was announced, the stock was around 29, I believe. So if you just adjust for that dividend, let's call it 22 to make the math really easy, that's where Albertson sits right now. If the deal is blocked, I kind of look at it and say, well, you've got a year of cash flow. Like these things do generate a lot of cash flow. Albertson's pretty leveraged. So a lot goes to interest expense, but they have de deliberated a little bit.
They'll get $600 million in break fee. that's about a dollar per share. Maybe you tax adjust that, maybe not. But I look at that and I say, I don't know if there's huge fundamental downside here. I know everyone thinks this is going to get blocked and probably rightly, but there is the best potential there is the potential they go to court for it. So yeah, I just look at this and I say, I don't know any ARBs really talking about it. It feels like you're paying nothing for a shot that we wake up to a divest and a settlement and the stock's up 22% in a day. What do you think? Let's talk fundamental downside. So stock, as you and I are talking $22 per share, I've got that about last 12 months, four and a half times EBITDA, maybe nine times unlevered free cash flow. How do you kind of think about standalone downside if this deal doesn't go through?
Daniel: Right. So I think Albertson's probably one of the cheapest companies in my coverage universe, right? And also the expectations, you see where that's done this earning season, especially anything with the low expectations has really been the ones that have gone up and the ones with the higher expectations and the ones that gone down. So I think it's the same way if this is announced. So my thinking on the timing of this is when the FTC announces that they're going to challenge it, that might be the low. So like, if you're not in yet, that's maybe what I'd be prepared for because we know it's going to be challenged. The FTC has challenged much worse cases, right? They don't care about losing, it's an interesting FTC, right?
Andrew: Oh, okay.
Daniel: Nobody else wants to lose as many cases as they do, and they still think they're winning. So it might as well wait for that in case it scares some people out of it. And if it doesn't I think you maybe have like a year go to court and stuff, but I think what the big thing is if they can get the unions on board, so if they can find a buyer or they kind of prove out the Spinco, that's the most likely way to make it close. And I do think they wanted to close, it's a way to protect the union jobs. we've seen that plenty times
Andrew: For those who don't know. I think it was Win Dixie, I can't remember for sure, but one of the famous examples of antitrust Remedy Failures is it was a grocery store. I'm pretty sure it was Win Dixie, I could be mistaken,
Daniel: But I think it was an LA one.
Andrew: Yeah, they were.
Daniel: Save A Lot.
Andrew: Yes, Save A Lot was involved for sure. They were doing a merger, a grocery store, you might think, oh, there's Walmart, there's other people. But actually it really comes down to local economics, right? And if you merge two of the three biggest grocers in a local store, that's not going to be great. So a lot of times they'll divest packages, right? And again, I think it was Save A Lot, they did a hundred store divest as soon as the divest happened. The divestiture was in distress. They went bankrupt like 18 months later, and it was looked at as this huge antitrust failure. Especially with retailers and grocery stores, that's one of the reasons the buyer really matters why antitrust is so skeptical of these types of divest but I'm with you. Kroger if the FTC even if when they do sue, is Kroger going to take this to court and try to get this through?
Daniel: They've seen to make that case that they will, I think they have a strong case. Their lawyers have vetted this for a while, right? So I think they divest that it works.
Andrew: Oh, I was just going to say, if you read through the proxy here, the proxy is one of the longer proxies I've read. And I think it was two months worth of, hey here's the breakthrough, here's the best picture. Here's how we're thinking about antitrust. Like, they spend enormous amounts of time on antitrust. And that doesn't mean it can't get blocked, right? Because we see all the time, I'm sure Microsoft spent a lot of time on antitrust with Activision and FTC took them to court. It's not like they went into this thinking, Hey, we're going to walk through this FTC and get it done. They knew that there was an issue and they spent a lot of time thinking about it.
Daniel: Right. That was the entire vetting. And Andrew, one of the interesting things when I was doing the math on this, the way it really works for Kroger is if they can, because they get to pick the stores, right? They're going to pick the worst one in this market, right? If there's two stores, they're going to pick the one that is the weakest. The way it really works is if they can grab share from the one that they divest, and there's reason to expect them to be able to do that, right? Like, if you're going to pick the one that's maybe a little worse real estate location, the FTC doesn't know what you know, right? So you're choosing the one you want to divest, and then without your network you can gain some of that share back. And that's really how the math works for Kroger. That's where the upside comes from.
Andrew: All of that is definitely true though, the FTC has to be sitting there saying, Hey, we know all of that is true. So if we let this divest package go through, are we getting kind of the bag pulled over our head again? Let's see, in terms of the divestiture, so the merger contract makes a paragraph four, hey, if you have to divest, I think it's like more than a hundred stores, there's going to be a reduction three times the four wall EBITDA of the divested stores. Have you done any math around how much the divestiture is going to reduce the payout here? Or is it just too early to tell?
Daniel: You mean to go over I think it's the 750 stores,
Andrew: Is that right? It might be 750. Yeah. I haven't read.
Daniel: Like if they go over that.
Daniel: I didn't spend too much time with that. Kroger's sort of trying to draw, like you would expect a line in the sand saying we don't want to go sort of over this, the deal's sort of off, right?
Daniel: Like you don't want like to enter any negotiation and say we can get pushed. Right? So I didn't spend much more time on that, but they can obviously make it work a little bit more. But if you look at the markets there, isn't a lot of overlap past that. Like they've kind of went to the upside case. Like it'd be literally divesting stores where there's no overlap.
Daniel: So I didn't want to spend a lot of time on that.
Andrew: You know the other tough thing, and you mentioned earlier is, hey, every ARB wants to wait till the day the FTC files to buy this, right? You hear this from every ARB; VMware, VMware Broadcom, you name it, they say wait till the FTC files. And I do wonder if it creates this weird situation where you want to buy before, because nobody will buy before. So you get the free optionality of if the FTC does let it go through, and then if they do pseudo block, well everyone expected. So the stock really doesn't go down that much. Like that's something I've been kind of toying around and struggling with.
Daniel: Well, so I don't do a lot of ARB anymore. I have, and I'd say plenty of ARBs are involved before the FTC challenges. Something, maybe it's changed with the last administration, but, like Constellation Brands for example, when the FTC challenged that one like constellation sold to huge lows. And that's kind of where I got involved and that's starts my history with Constellation in 2013. But people were investing in it from the start it's announced.
Andrew: Oh, people invest. I just think under this administration, like every time I talk to someone about an arbitrage, one of these rocky ones where it seems pretty clear the FTC is probably going to bring a suit. The response and it's been right, is hey, you wait till the day the suit is brought to bring it. But with Albertsons, I guess just to circle back to the fundamental value, this is what, like, let's say this breaks, where do you think this trade suit as a standalone, it is semi controlled company kind of still more illiquid. Where do you think this would trade you as a standalone business?
Daniel: So, I mean, less than four times EBITDA would be I mean, it could happen, right? But I think they do have people who been following it and can step in and if there aren't a lot of arms already in there, you don't have that extra selling pressure, right? The real selling pressure is when they're already involved and they weren't expecting it.
Andrew: It's an unexpected break or an unexpected suit where you get just absolute panic. I think about like our Rogers where everyone thought the deal was going through and I can't remember the buyer they walked and the stock goes from 250 to 100 in a day because everybody thought we were closing at 260 and nobody's done any work on it. Yeah. So it's not like this hasn't been, what is Kroger trade at in terms of EBITDA?
Daniel: Alright. I mean I can look that up. They have not traded off as much as you would expect given their headwinds.
Andrew: It doesn't have to be exact, it's just roughly
Daniel: Yeah, just typing that in right now. I would think it's a pretty decent multiple, but it's still grocery. It's trading at 11 times earnings and EVD is like 10 and a half.
Andrew: 10 and a half. So I mean, Albertsons is trading at?
Daniel: Oh, I'm sorry, six and a half.
Andrew: Six and a half. So Albertsons right now they're trading at two thirds the multiple, maybe Kroger's a bit better business, maybe not. We haven't given Albertsons any credit for the termination fee. Okay. It's one of the ones that my partners would tell you I email like once a month like, Hey, Albertsons still hasn't moved. If this deal closes, we're going to get 25%. If it doesn't, like, doesn't seem like there's a lot of fundamental downside. Nobody wants to own this thing. Any other closing thoughts on Albertsons before we move on to something else?
Daniel: I agree with you, it's interesting. That's why I have it there. And you're right, almost nobody asked me that.
Andrew: That's what I thought. Let me turn to KVUE, the ticker there is K V U E. I am very interested in this because for those who don't know, KVUE is a IPO out of J and J. J and J spinning out almost all of their stake. Basically, as you and I are talking again, we're talking August 15th, the spin out, the split out, whatever it is, it happens end of this week, early next week, KVUE stock has come under an enormous amount of pressure volatility as ARBs kind of try to set up the spin out ratio for KVUE. But I have a lot of people who have said, Hey, look at KVUE. This is a good business. The stocks come down kind of 15% over the past month on all this ARB pressure, all this technical pressure. This is a pretty nice opportunity to pick up a good, a great business at a nice price. And as all that volatility flows away, it gets added to, I think is it SP 6 or 500, they got added?
Andrew: It gets added to the SP 500. All that technical volatility goes away. Like it's a pretty interesting event thesis and it's a pretty interesting kind of long-term compound thesis. So I don't know a crazy amount about the business. I'll just toss it over to you. It's on your buy list.
Daniel: So do you want me to talk about the spread or what's happening right now or just the business?
Andrew: Why don't we talk about the business? Because the spread it is very popular. There was a Barron's article over the weekend. You can buy J and J, split it over to KVUE, whatever. We can talk about that. But I'm actually more interested in the fundamentals because I'm guessing you don't have it as a buy to play the J and J split,
Daniel: Right, I don't. And maybe the one thing I'll say about the spinoff itself is I don't think I've been involved with a spinoff where the parent company goes to such great lengths to help the spin off company. Is that what you call it the child company? In terms of taking on the legal risk, in the baby powder lawsuit, right? In terms of giving a discount to put people into KVUE, right? It's about a 7% discount. And being able to sort of elect how many shares of what you want, the shareholder base that wants it, right? How many spin codes have you seen where, it's a different industry so the people who are receiving it don't want it or maybe have to sell it, right? So in this sort of setup, KVUE is you couldn't ask for a better spin itself and even the IPO,J and J sort of underpriced it compared to where their demand was just in order to get in the right hands and maybe give them a little bit of a profit, right? So they're more interested in building their stake.
Andrew: The IPO price was 22 per share, if I remember correctly, right?
Andrew: Yeah, it was 22 and then it kind of ran up to 26 and now it's back to 23 on the technical pressure. They reported Q2 earnings, but the earnings were pretty good. So it's not like they whiffed earnings and the stock should have been down or something,
Daniel: And so the company itself, just to give you a quick overview is the consumer healthcare part. And there's like a new burgeoning industry in consumer staples, like a sub-sector called consumer healthcare. So you have KVUE now you have Recit, Haleon was a spinoff from some pharmaceutical companies as well. And then you have Parago and then you have some existing companies that are like Prestige, PBH or some smaller ones. So there's enough in the sub-sector to be followed, right? And it's a sort of a new sector and I think it fits within consumer staples. And I think where this sector can really win and can view obviously would be the 800 pound gorilla in this sector is if they can accelerate growth by sort of swapping some pieces.
So like if, I don't know, J and J could focus more on one sector and maybe give up oral healthcare to focus more on Ngel six[?]. So something like that where they're speeding up the growth rates increasing the innovation, et cetera. That's where the sector's going to win. And it's also interesting because so many of these companies were they use just for the cash flow for the parent company, and now what are they going to do, when you can focus on their own business, I think they can accelerate the top line and they can have better returns. You can see more innovation, and that's the key to be a compounder in consumer staples. But they have great brand strength, pricing power, but they haven't really used those sort of levers, right?
They've just been used as cash cows. You really not seeing sort of the marketing or R and D efforts that I think you can in the future. So I think that's what's really interesting longer term and KVUE sort of fits with all that. Like any part of what makes the sector work, KVUE is going to have to be a big part of that, right? And if it's M and A, which I think we're going to start to see, or more innovation or more pricing, KVUE is going to lead that.
Andrew: Yeah, look, this is the classic spinoff thing, right? You've got a KVUE or something that's buried inside of a giant conglomerate, which J and J would certainly qualify as you spin them out, you give the management team stock options that are struck hopefully at a nice price from the spinoff and all of a sudden like, hey, that extra 1% of pricing power or that extra 20 basis points of units or the extra 50 basis points of cost, like under J and J, maybe you're not that incentivized to do it, but now that you're standalone, you make a heck of a lot of money for realizing that. So that's the classic setup. Yeah. I'm a little hesitant because it's not as timeless, but we're talking Wednesday, August 16th, I keep saying 15th the exchange offer's going to happen kind of end of this week, early next week. Do you just want to talk about like, the technical setup when you're kind of thinking people should get most involved?
Daniel: Sure. Yeah, so by the time people listen to this, I guess says it'd be mostly over Fridays, the deadline. Some depending on your broker, you can have a broker that the deadline's already passed where you're supposed to select. It looks like because the dividend is higher at KVUE, it's like maybe a whole percent more than J and J, I think you're going to get a lot of mom and pop people electing to receive KVUE shares. So I think it's going to be pro rata.
Andrew: There's no doubt it'll be pro rata, but if you're an ARB, it's a question of how much is it going to get Pro rat?
Daniel: Yeah. Maybe I saw like 80 percent-ish I think is where it was yesterday at least. And then the other reason for doing this FinCo is J and J is multiple is like 16 times. And I have a lot of consumer staples that have the brand strength of something like Tylenol that are probably selling at 16 times EBITDA, right? And that's the whole idea for doing this, is you can create a lot of value with a higher multiple by putting it in the hands of people who will pay up for that, right? So they're going to receive the shares next week.
Andrew: Yeah, it'll be interesting. It's definitely one and obviously anything with an odd lot tender gets on my radar pretty quickly, And all of a sudden I have 20 people emailing me. There was the Barron's article saying, do the odd-lot tender. And I had people coming out that were like, Hey, can you explain odd-lot tenders and slit offs? I was like, shh, nobody talk about that. Odd-lot tenders are the golden goose. Let me turn to a different one, Hershey's, that is on your bull list. And I wanted to ask you about it for two reasons, three reasons. A, because I've got a huge sweet tooth that I'm always trying to combat. So anytime we can talk about sweet tooth. B, I think the stuff we talked about with Costco earlier where I look at it, I say, Hey, nice business, great brands pretty expensive and maybe in the long term some concerns around there's the health factors, but there's also Wegovy, which I hear a lot of people talking about, Hey as GLP-1 and all these rollout maybe wanted to short everything that's snacky foods because it reduces cravings and and maybe there's like long-term headwinds there.
And then see the reason I want to talk about there was a short thesis that was based entirely on Mr. Beast basically launching a chocolate brand and eating their lunch, which really tickled me. And was certainly different. So I wanted to just like roll all those three questions and toss it over to you.
Daniel: Okay. So let me see if I can remember the order.
Andrew: I can repeat any of them, but just throwing them all out there.
Daniel: So maybe with number one, I'll start off why I like it. Very low private label penetration, chocolate, sweets and snacks. Another reason I like Hershey is I think the management team has finally become comfortable on how they do acquisitions and snacks. So they've been very deliberate, only done one like every couple years, but it's working. They're able to have a lot of synergies plugging it into their distribution and they know how it's working. So they've been buying up brands as well as factory capacity. So they have that extra stool now, where they have chocolate, sweets and now snacks. And then the other aspect for the longer term is international. They're still not anywhere penetrated internationally like they are in the US. I know Hershey chocolate's a little bit different than the European chocolate, but it's not just a European chocolate thing, right?
Andrew: Can I just pause you on the international expansion? Just a quick question for my own edification. I have not studied international consumer staples in depth in a while, but it strikes me say they have international penetration potential. And I hear you on that, but at the same time, it's not like chocolate is some unknown brand out there, right? Like Europe, Nestlé's everywhere, Cadbury's everywhere. I know Hershey's has some relationship with Cadbury, but when you say international, I think, oh well, haven't, like people's snap trends already been kind of set international, there's all these international brands, yes, they can buy, but it's not like it's Coke in the thirties where, hey, as our boys go over through Europe, they're going to bring Coke with them and we're like tapping a completely greenfield market in the 1930s is what it mean there?
Daniel: Right. No, I agree. And I would say yes, you can buy also their distribution, right? If you get in there, and then also we're looking at maybe just don't think Western European markets, right? Like if you think of like Latin America, right? There's Africa, there's other ways to market that you win India, China, right? So it's not just competing against Nestle in France, right?
Andrew: Right. Anyway, I interrupted you. Please continue.
Daniel: So number three was Mr. Beast.
Andrew: Number three was the Mr. Beast thesis.
Daniel: So I can skip to that. So I think if anything you see some recent controversy of Mr. Beast, you can see why there's so much institutional risk by having a brand associated with like a one person that's a social media person, right? So if anything, Mr. Beast is not a brand, it's a social media person and I think social media, if anything compresses the life span of a particular endorser, right? Like you see the risk of someone like Jared from Subway, you can't put a brand on one person, right?
Daniel: People are humans. You don't do that. Hershey's a company, it's a brand, right? A lot of brands. So can Mr. Beast dent Hershey in Mars? No, I don't think so. But they have very little private label penetration in chocolate, and I think that's part of the reason to like it. It's got one of the lowest of anything in food and beverage.
Andrew: Again, I thought the short thesis was interesting. I hadn't seen it before, I don't really believe it, but I look at something like alcohol, right? Every celebrity is launching their own tequila brand. I saw the Rocks tequila brand might be worth like $4 billion or something, some tweet went viral. George Clooney has his, Ryan Rumbles has his, and they build them up. But they are just the brands and I think like The Rock has smartly not said it's the rock tequila, it's a different brand. So even if the Rock had issues, like maybe there's still some brand value there, but they're just brands in marketing and ultimately those are just juicy, juicy bolt-on targets because like, even if Mr. Beast was taking a lot of share, somebody else is producing it, somebody else distributing it like Hershey buying them or another snack buying them, it's the ultimate bolt-on it would make sense for both parties. Like that's clearly what you build towards. And if they did buy it, I think they would create a lot of value from that type of thing. So yeah, it's just hard for me. Hershey's been around for 150 years. I'm not saying a Mr. Beast, or some other thing can't take share, but to really impact Hershey the ingrained, Hey, I got Reese's for Halloween. It was tough for me.
Daniel: Yeah. And they just get so much hype just being on social media compared to what its overall share is. Like you look at prime hydration and energy drinks, like the amount of hype it gets for the share is so disproportionate. I would say the same thing for Mr. Beast. And yeah, I think it does work for some spirits. I think Casamigos is probably the best situated, right? It's the least sort of tied into George Clooney himself, they have two other partners, right? So I think they place that well, but at the end of the day, you still have to be part of that bigger network to have anything like that sustain.
Andrew: The other thing that's tough with it is, like you mentioned prime drinks like, yes, they have huge sellouts when they launch and people go get them, but there's a difference between, hey, I love this person, I'm going to go get their drink, like right when it works and try it versus, Hey, I've got 20 years of selling Reese's. Hey, do I like it? Can I find it easily? Is this a habit I'm forming and stuff. Like, those are two very different things and that's why a lot of these can be flash in the pan. Last question on Hershey, it was GLP-1 and kind of Wegovy and their risk in the long term.
Daniel: So I actually did some analysis recently on this, and yes, I understand the risk for all food, right? The GLP-1 drugs as Wegovy it seems to depress your appetite, I think anywhere between 25 to maybe a little over 50%. So that's a sort of a risk for that consumption, but I think the critical swing factor in this risk is if it's going to be covered by insurance, right? Because it's a very expensive thing we're talking about the big risks from student loan repayments or the emergency pandemic snap payments ending. This is a thousand dollars a month, right? It's a sort of a very small group of people who can afford that. And this isn't like you take it for one month, right? So I think that's why if it's not covered, it's hard to make any case where you can see less than 1 to 2% calories consumption disappearing from that. And that's with a population of people on it 10 times what it's now.
Andrew: So I think there are reasons to be skeptical of Oz, but if I could just push back, like I do hear if it's not covered, people aren't going to get on it, but at some point either it will get covered, right? Like I would actually kind of be surprised based on the evidence that it reduces heart attack risk. I'd be surprised if it didn't get covered at some point. And if it did get covered, certainly the insurers would be able to use their pricing power to push it down. But even if it didn't get covered now because of price, right? Like if you ran this forward five years, then there will be GLP two or whatever the new ones are. And I think you would start talking about some of these, like eventually these are going to go generic, like the population we'll get access to these en mass at some point at a reasonable price. And like Hershey's you're paying a pretty high multiple, like you're really relying on the terminal value here. And if there is something that's going to cut down on consumption, whether it's today, tomorrow, or three years from now, like that does seem like a risk.
Daniel: Okay, there's a risk aspect to it, but I'd say in the next three years, the insurers themselves, if they covered it, would be a much bigger short than consumer staples companies, right? And think of like how much that's going to cost. I know you're going to argue that they can get the prices lower, but how much lower are they going to get it, right? So in the next three years, I don't know their own financials, but there's probably enough market for them to just sell it at this price that they don't need to discount it. So I think the population size that we should probably focus on is what I think 28 million people who have type two diabetes that are also overweight, that sort of group And if you look at the side effects, I think we're just hearing the hype right now. If you read the side effects, they're real.
Andrew: I completely agree. Look, I'm always looking to lose five pounds, like maybe I should get on Wegovy and then I was like 30% of the weight you lose is your muscle mass and everything. I was like, oh gosh, nope. I think I'll be passing on that one,
Daniel: Right. I was surprised, like just based on consumer surveys already, when people find out that they have to stay on it, it's showing at less than 20% of the people who are overweight, the BMIs or obese are interested in taking it. So it's not all of them, right? Even drug that's supposed to help everybody, just think of like the COVID vaccines, right? There's people who don't want to take it, right? So you have to remember that, but then you have to throw in insurance, you have to throw in these crazy side effects and we're going to hear more of them over time. That's the nature of drugs and people talking about side effects, right? So the way I looked at it the next couple years, even without insurance, swinging through and covering it, it's like a 1 to 2% calorie impact. And that's with huge adoption from where we are now.
Andrew: Last one and then I'll let you go. Let me move on to IFF, international flavors. I have done like no work, so for those who weren't following a week or two ago, they reported earnings, the stock was down a record amount. I mean, this should be a pretty steady, like, non-cyclical business. And one of my friends, when they reported earnings said, I think that's the worst earnings report that I've ever seen. They're down a lot, I could see some investors starting to say like, I'm just looking at Bloomberg. Hey, the stock's in the low sixties or earnings estimates for 2024 are approaching $5 per share. So we're trading at kind of a 13 to 14 multiple call it, if we like induce some of the rounding that's pretty cheap for what should be an advantaged pretty steady business. You've still got a sell bias to it. I guess just toss it over you if you can A, tell me how bad the second quarter earnings were and B why you think that cheapness kind of isn't enough here.
Daniel: So I'd say maybe it's a little bit data. So I was short bias into the report, right? I was negatively biased. Like sort of everything that could be going wrong in the macro for them is, is a headwind, right? So it's naturally the, I'm going to look if this is worth shorting actively, and it did, it had one of the worst quarters. They sort of said everything that I was worried about. And so that makes me naturally, inclined to like take it off if they're sort of admitting my whole risk set. So then I'm, so I would say like I'm not, I'm wouldn't be saying I'm, I'm shorted right now. I was okay short biased into the event and, I'm going to look a little closer. It, it's not on the top of my list in this Q two earning season because I had best ideas to go through, right?
So I would say everything that's going on in the macro is a headwind for them in terms of innovation. So their customers are, are the rest of my consumer staples companies, right? And so with the inflationary pressures and new product introductions and then Walmart, the all or target all the big box stores, reducing inventory levels and plus rising input prices, those are all the headwinds for them and they hit them all. So is it worth look looking at? I think you have time to look at it.
Daniel: But I'm not trying to say short it right now, I'm just negative for obvious reasons was negative.
Andrew: Last question then we'll wrap this up. You cover about 20 companies that you're positively biased on. If I'm just kind of eyeballing the list, If an investor was listening to this podcast and was like, Hey, I want to go look at Daniel's like top idea, what's the one they should start with?
Andrew: Hershey, okay. Cool.
Daniel: That's the top of my list.
Andrew: Perfect. And we don't even need to talk more about it because we kind of already covered why. Cool. Anything else you wanted to say before we wrap up or anything?
Daniel: No. Thanks for taking the time to look at consumer staples. [crosstalk],
Andrew: Yeah. This has been a tone of fun. Anyone who wants to go follow Daniel, he's on Twitter at It's hedge eye staple. Or people will be able to find it by following my Twitter or we'll put a link in the show needs. But Daniel, this has been great. I appreciate you coming on and we'll have to have you on again at some point in the future.
Daniel: Thanks, Andrew.