The new management at Krispy Kreme Doughnuts (KKD) has addressed some of the legacy issues around store profitability, high leverage ratios and franchise relations, developing a new store format that allows them to achieve cash-on-cash returns that would enhance new unit growth, says Nick Setyan, Senior Equity Analyst at Wedbush Securities.
“We’ve actually seen on the company side in the U.S. very positive net unit development again, and that’s only going to accelerate going forward. Their same-store sales trends have been outperforming the entire industry for the last three or four quarters. Transactions last quarter were plus-7%, and again, that’s just transactions, excluding any kind of price, and those trends seem to be continuing,” Setyan said.
Setyan says perception of the KKD brand is improving along with transaction trends. He adds that the doughnut company’s international growth has gone uninterrupted for the last six years at above-10%, and Krispy Kreme may see its international momentum continue.
“One of the biggest reasons is that they’ve really figured out how to market in such a way where the customers have a reason to return to Krispy Kreme. The average customer goes in about once a month, and so they’ve figured out a way to really bring Krispy Kreme to top-of-mind of customers,” Setyan said. “The next step will be for the domestic franchisees to start accelerating growth. The net unit closures have continuously declined, and I do believe this year we’ll see net unit additions on the domestic franchisee side.”
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Wright Medical Group (WMGI)‘s acquisition of BioMimetic and its Augment program could drive the company’s stock up 10% or 20% if the Augment product line is approved by the FDA, positioning Wright Medical as a game changer in the medical device space, says Matt Miksic, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“Some are what I would call of game changers, things that may or may not be approved, maybe a little bit more biotech in profile or more binary in outcome, but certainly if they come through this year, they would drive some significant performance in the names involved,” Miksic said. “Another biologic could presumably be a huge home run for [Wright Medical Group].”
Miksic says that Wright Medical has the opportunity to have the second recombinant biologic product approved for use in musculoskeletal surgery after Medtronic‘s $1 billion INFUSE product, yet there is still a possibility that WMGI will not get FDA approval of Augment.
“That will either send the stock up substantially, maybe 10% to 20%, or it will fizzle a little bit, because they’ve made this acquisition and are now holding that regulatory risk,” Miksic said.
Baxter International (BAX) is a game changer in the medical device space, as the data behind its IVIG for Alzheimer’s could send the stock up 10% or 15% in the first quarter, says Matt Miksic, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“Some of our ideas are just as simple as names that are tapping the geographic expansion and growth in emerging markets…certainly if they come through this year, they would drive some significant performance in the names involved. Baxter (BAX) and their IVIG opportunity for Alzheimer’s would be one of those,” Miksic said.
Miksic says that BAX will either go up 10% or 15% on the back of the Alzheimer’s data in the second quarter, or investors will see it slide a bit, possibly 3% to 5%, and this binary event will shape the outcome of the company over the next five years.
“In the case of…Baxter, we have an investment thesis that supports our view on the stocks, whether these things come through or not. The fundamentals of the stories support significantly outperforming our universe, hence our ‘overweight’ rating. Right now, probably $2 or $3 of Alzheimer’s is included in the stock’s current valuation, and that will go away if that project doesn’t work or is delayed. But we would be buyers on that news,” Miksic said.
Panera Bread Co. (PNRA) maintains pricing and earnings targets despite headwinds in the restaurant industry such as health care and minimum wage changes or increases in the price of raw materials, says Nick Setyan, Senior Equity Analyst at Wedbush Securities.
“To start with Panera Bread, I think that the visibility into their same-store sales growth over the not just 2013, but 2014 as well, is within my coverage universe. At the same time, they’re probably the best positioned to benefit from price increases or to take price, and they’re best positioned to have the least inflation on both the commodity-inflation side and on the labor-inflation side,” Setyan said.
Setyan says the management team at PNRA has a track record of executing its strategy successfully in periods where there are pressures in the industry at large, and he expects the leadership at the fast casual restaurant to continue in this path.
“Near term, my checks continue to point to momentum in comp trends, and they consistently have a management team that executes toward their earnings targets, even in any kind of a topline headwind environment. Even when their top line comes in a little bit less than expectations, they tend to meet or exceed their EPS expectations, and in a more defensive environment that’s probably the one thing I would look to the most,” Setyan said.
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Medtronic (MDT) is moving its pipeline away from mature markets and currently leads in some niche indications, but the move is slow and valuation is low, with some obstacles on the way that make some investors sit on the sidelines while Steven M. Lichtman, Managing Director and Senior Analyst at Oppenheimer & Co. Inc., recommends the medical device company.
“The one large-cap name that we have been recommending to investors is Medtronic, predominantly for two reasons: One, expectations have been pretty low for this company over the last few years. Two, their pipeline has a lot of unique factors to it over the next couple of years, and that will allow them to continue their shift away from some of those more mature markets. In particular, they are leading the way in the renal denervation market,” Lichtman said.
Lichtman says medical device companies have seen a stabilization in the U.S., especially in the markets where there was a slowdown on volume and price. He says MDT‘s performance has been slower in the beginning on 2013, but still recommends the stock.
“Medtronic in particular, when they reported earnings a few days ago, seemed to indicate that perhaps things are a little slower in January. Now, one month does not make a trend, but I think that has certainly raised some concern among investors for the whole group,” Lichtman said.
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U.S. Airways Group (LLC)‘s merger with American Airlines results in increased pricing power, economies of scale and higher barriers of entry in the airline industry, thus making LLC a solid value investment according to Warren Barnett, Founder and President of Barnett & Company.
“With the merger of U.S. Airways and American, we will have three carriers in the United States that will control 88% of the passenger revenues by volume,” Barnett said. “The airline industry now has higher barriers to entry than five or 10 years ago. And higher barriers to entry are good for the incumbents.”
This merger is a typical example of consolidation that leads to increased pricing power by the remaining participants, and now the only way to buy stock in the newly combined American Airlines is by investing in U.S. Airways, Barnett says.
“We think that there is significant operating leverage here, as well as the ability to have price discipline and economies of scale,” Barnett said.
Starbucks Corporation (SBUX) and eBay (EBAY) are solidifying their positions in the mobile payment space as they roll out mobile device payment options that give consumers more ways to make payments over the Web or via their smartphones, says Marilou M. Long, Founder and Portfolio Manager at Crossvault Capital Management LLC.
“eBay has PayPal that they’re rolling out to more retailers, and also physical stores that make it easier to have payments over the Web or your mobile device. Starbucks is doing the same thing with their investment in Square,” Long said.
The migration to mobile, whether it’s information or payments, is a major economic theme that Long is following, and she says that individual companies such as eBay and Starbucks are going to see benefits from their enhanced mobile payment offerings.
“First, we start with the top-down; we look at what are the themes, where is revenue going to be growing over the next several years? Once we identify those trends, we start to look for the individual companies that are going to benefit from those trends, and that’s because the earnings tend to follow what’s becoming a bigger piece of the economy,” Long said.
The New York Times Company (NYT) has started to monetize its content and reduced debt to the point it could soon start returning capital to shareholders in the form of dividends, says Bobby Edgerton, Co-Founder, CIO, Executive Officer and Principal at the Capital Investment Companies.
“I’m fascinated with New York Times now. They have the greatest content in the world, and now they are starting to monetize it and not give it away. Their debt has gone from around a billion dollars to half that, and they’ve got about as much cash as debt now. So they could start paying a dividend. It’s a fascinating stuff,” Edgerton said.
The changes at the NYT reflect a change in strategy, and shedding overvalued assets may be part of the path to success the media company may take.
“Talking about The New York Times again, their print is down; print advertising is probably down in half. And the fact that they were heavily indebted and had paid $1.1 billion for The Boston Globe, they are trying to sell it now for about $170 million, they bought at the top. But I look at the change in the company. I look at the exact market value,” Edgerton said.
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Fiesta Restaurant Group (FRGI) currently grows its Pollo Tropical brand in the double digits and accelerates the growth of this Caribbean food brand, and this relatively unknown restaurant currently trades at a discount to peers despite its outperformance, says Nick Setyan, Senior Equity Analyst at Wedbush Securities.
“[Fiesta Restaurant] has two brands: Pollo Tropical is a quick-casual Caribbean brand and Taco Cabana is a quick-casual Mexican offering. The Pollo Tropical unit economics are stellar. They do about a 26% unit level EBITDA margin, which is in line with Chipotle (CMG), and that’s about 600 to 700 basis points above the next best group of competitors, including the likes of Panera Bread (PNRA). Their average unit volumes are actually about $500,000 more than Chipotle. As a new company, they have accelerated the growth of Pollo Tropical to about 10% in 2013; I expect that to continue to accelerate to 15% in 2014,” Setyan said.
Fiesta Restaurant spun out of Carrol’s Restaurant Group (TAST), and it currently trades at a 10% EBITDA discount even after recent strength in the stock price, Setyan says. He also says the Taco Cabana offering has respectable economics, but the main growth engine of the company remains Pollo Tropical.
“I do expect that once investors start paying more attention to this name, as they go in front of investors at conferences, as they do non-deal road shows, as they report a few more quarters of stellar results — its comps have outperformed the casual category for the last three years, and I expect that to continue going forward — as those numbers keep coming out, I would expect that discount to continue to narrow as it has been over the last few weeks. In fact, there is no reason why one can’t argue it should be trading at a premium to the growth group, given those kinds of unit economics and same-store sales growth outperformance,” Setyan said.
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MAKO Surgical Corp. (MAKO) has gained its stock value back in the advanced surgical technology arena and is set to address the health care needs of the future, giving patients and hospitals more predictability and payers more reassurance, says Matt Miksic, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“MAKO, as much as the stock has gotten hurt in the past year, has come way, way in. We think that it’s a robotic-surgery story that’s going to work. We think they’ve proven on themselves in partial knees. I think they are getting better traction in hips. And looking out over the next couple of hills to where health care is going, it’s one of those ‘going where the puck is going to be’ stocks,” Miksic said.
The advanced surgical technology category is an area that will have many opportunities to move surgeons into newer instruments and tools, thereby helping them operate more accurately, consistently and safely, and MAKO is primed to benefit, Miksic says.
“Patients want more predictable outcomes, hospitals want more predictable supply and costs, and I think ultimately payers are going to want some element of reassurance that the implants are put in with some precision. MAKO is a stock that has gotten beaten up; we like it very much this year,” Miksic said.
