Topic: How To Invest

Spinoffs & Takeovers Hotline – Friday, November 25, 2022

LAIRD SUPERFOOD INC., $1.37, symbol LSF on New York, is an Oregon-based consumer products company. The business makes plant-based and functional foods. Functional foods are foods aimed at offering health benefits beyond their nutritional value.

Laird launched its IPO and began trading on the New York exchange on September 22, 2020. That’s when it sold 3.0 million shares at $22 a share to raise $66 million. The stock is now down 94%.

The company’s largest institutional investor is Danone Manifesto Ventures—the venture capital arm of France’s Danone S.A. (symbol DANOY on the U.S. over-the-counter market—its main listing is on the Paris stock exchange). Danone has held onto 9.4% interest following the IPO.

Famed surfer Laird Hamilton and fellow surfer Paul Hodgen founded Laird in 2015.

The company’s plant-based products include coffee creamers branded with the Superfood Creamer label; Hydrate coconut water and beverage-enhancing supplements; roasted and instant coffees, teas, and hot chocolate. Creamers represent about 50% of sales.

Laird currently has products available in over 8,100 retail stores, including Costco Wholesale, CVS Health, Kroger and Natural Grocers stores. Costco is the biggest retail customer, representing about 13% of sales.

However, the majority of Laird’s sales are made online, including through Amazon.com and the company’s own website. It also offers a subscription model direct to consumers. In fact, more than 60% of online orders come from subscription and repeat customers.

In January 2022, the company announced Jason Vieth as its new CEO, to replace Paul Hodge Jr., the company’s founding CEO. Vieth joined the company from Sovos Brands, where he was in charge of its Breakfast and Snacks Group. Before that, he spent nearly a decade at WhiteWave Foods in several management positions.

In August 2022, the company reportedly received an unsolicited offer from investment fund EF Hutton SPV I LLC to acquire the company for $3 a share. However, there has been no further communication about the offer from either side.

In October 2022, Laird announced it has entered into a co-packer agreement to outsource the manufacturing of its powdered creamers and hydration products. As a result, the company will be winding down its manufacturing operations in Sisters, Oregon, by the end of 2022.

The move is part of the company’s goal to increase its profit margins while simplifying its business.

In the three months ended September 30, 2022, revenue fell 18.6%, to $8.8 million from $10.9 million a year earlier.

Wholesale channel revenue decreased 32%, driven primarily by lower volumes in warehouse clubs, while online sales declined 8.3% due to lower direct-to-consumer sales; that was partially offset by strong double-digit growth in its Amazon.com channel, reflecting continued momentum with its marketing strategies. The decline in direct-to-consumer reflected a decrease in new customer orders due to planned reductions in marketing spend, price increases implemented at the end of the second quarter and the removal of free shipping for orders under $40. As well, overall pressures on consumer spending stemming from inflationary concerns impacted sales.

Excluding one-time items, Laird lost $5.6 million, or $0.61 a share, in the latest quarter. That’s compared to a loss of $5.4 million, or $0.59.

The company’s balance sheet is sound—it holds cash of $21.0 million, with no debt.

Laird sells into an expanding market for plant-based foods. In addition to shelf space in prominent stores like Costco, it also has a strong online presence. That lets the company get fast feedback from shoppers and provides them with a wider array of information about the health and wellness aspects of its products.

However, it operates in a crowded, innovative field where it has to struggle to maintain a competitive advantage.

OUR RECOMMENDATION: Laird Superfood is a hold, but for highly aggressive investors only.

WERNER ENTERPRISES INC., $43.19, symbol WERN on Nasdaq, is a trucking and logistics company with operations across North America. Based in Omaha, it is one of the five largest truckload carriers in the U.S. It has offices in the U.S., Canada, and Mexico.

On November 7, 2022, the company announced the acquisition of Reed Transport Services Inc. for $112.4 million.

That Tampa-based company is a logistics provider and truckload carrier. It has annual revenue of about $372 million, 90% of which is from freight brokerage and the remainder from trucking.

Operating as ReedTMS Logistics, the new firm has more than 800 customers, with 66% of its revenue from the food and beverage industry. It has an extensive freight brokerage network, with 19,000 active carriers and 70,000 approved carriers.

In the three months ended September 30, 2022, Werner’s revenue jumped 17.7% to $827.6 million from $702.9 million a year earlier. Revenue was higher due to stronger revenue from both its Truckload Transportation Services and Werner Logistics operating units.

Excluding one-time items, the company earned $57.2 million, or $0.90 a share, in the latest quarter. That was up 7.1% from $53.4 million, or $0.79.

ReedTMS Logistics should be a good fit for Warner, strengthening its freight brokerage and logistics business.

Werner’s outlook remains positive, although in the near term, like industry rivals, it faces market conditions that have become more challenging due to the economy and its impact on the freight market.

OUR RECOMMENDATION: Werner Enterprises is okay to hold.

PALO ALTO NETWORKS INC., $172.77, symbol PANW on New York, is a global leader in corporate cybersecurity products. The company has more than 1,260 customers who spend $1 million-plus annually in bookings.

Palo Alto first sold shares to the public at $42.00 and began trading on New York on July 19, 2012.

The company now aims to keep adding cloud-focused software security offerings to its traditional hardware-based firewall products.

On November 17, 2022, Palo Alto announced that it would acquire Israel-based Cider Security for $195 million in cash plus stock awards and stock-based employee compensation that are expected to bring the total price to $300 million.

Cider Security specializes in application security (AppSec) and software supply chain security.

Palo Alto already has a division that focuses on application security, which was in part formed by way of acquisitions. Evident.io, which it acquired in 2018 for $300 million, forms the basis of its Prisma Cloud business, which is focused on end-to-end application security. Cider will bring Palo Alto a product built from the ground up, envisioning more observability and communication between engineers and security teams.

All in all, as a result of this acquisition and others, Palo Alto believes Prisma Cloud now provides the most comprehensive supply chain security solution available.

In the three months ended October 31, 2022, Palo Alto’s revenue jumped 24.8%, to $1.56 billion from $1.25 billion a year earlier. Revenue was higher due to a nearly 30% increase in its subscription revenue over the last year.

Excluding one-time items, the company earned $266.4 million, or $0.83 a share, in the latest quarter. That was up 56.4% from $170.3 million, or $0.55.

Notably, Palo Alto Networks could become a takeover target for a larger rival such as Cisco Systems. That’s not reason enough to buy the shares, but it adds to their appeal.

OUR RECOMMENDATION: Palo Alto Networks Inc. is okay to hold for aggressive investors.

SONOS INC., $17.60, symbol SONO on Nasdaq, makes wireless sound systems and speakers. The company has sold more than 41 million products since the introduction of its first sound system in 2005. They’re used in more than 14.0 million households around the world.

Sonos went public in August 2018, selling 13.9 million of its shares to investors at an IPO price of $15. Although this was below its pre-IPO proposed pricing of $17 to $19, SONOS stock gained 32.7% on its first day of trading. It currently trades at 17.3% above its IPO price.

On November 16, 2022, Sonos announced a new $100 million stock repurchase program. It has no expiration date. The company recently repurchased $150 million of its shares. Since September 2019, it has bought back $250 million of its stock.

In the three months ended October 1, 2022, the company’s revenue declined 12.0% to $316.3 million from $359.5 million a year earlier. Despite the lower sales, Sonos believes that the post-pandemic falloff in sales appears to have bottomed. And even with the slowdown, it has been able to gain market share in the past year.

Excluding one-time items, the company lost $40.4 million, or $0.32 a share, in the latest quarter. That’s compared to a profit of $11.8 million, or $0.08.

Sonos represents one of the largest and fastest-growing brands in the home audio category. Still, in the near term, it faces a still-weak market after the pandemic surge in demand due to lower consumer sentiment, mounting inflationary pressures, and continued supply-chain difficulties.

Meanwhile, Sonos depends on Amazon, Apple and Google in order to continue using their voice recognition technology for its speakers. As well, those companies all make their own speakers (Amazon’s Echo, Google’s Home and Apple’s HomePod) and could easily undercut Sonos’ prices. Investors should also note that Sonos has a hardware-focused business model and lacks ongoing revenue from services or subscriptions.

OUR RECOMMENDATION: Sonos is okay to hold, but only for aggressive investors.

ESTEE LAUDER COMPANIES INC., $220.01, symbol EL on New York, is one of the world’s largest manufacturers of skincare, makeup, fragrance, and hair-care products. Its brands include Estee Lauder, Clinique, M-A-C, Aveda, Smashbox, and many more.

On November 15, 2022, Estee Lauder announced that it had bought the Tom Ford brand for $2.8 billion. It is Estee Lauder’s biggest acquisition in its history.

As part of the deal, Estee Lauder will extend Tom Ford’s licensing agreement with Marcolin S.p.A, a worldwide leading company in the eyewear industry founded in 1961. Estee Lauder will also give a long-term license for all of Tom Ford’s men’s and women’s fashion, plus accessories and underwear, to Italian luxury fashion house Ermenegildo Zegna NV, an existing Tom Ford partner.

Designer and founder Tom Ford will stay as creative director until the end of 2023. Tom Ford is best-known for its menswear, though it also sells womenswear and accessories as well as a fast-growing, high-end line of cosmetics and fragrances. Tom Ford’s beauty business is considered a so-called ultraprestige brand.

The acquisition will build on a longstanding licensing agreement under which Estee Lauder created Tom Ford Beauty in 2006. The brand grew its sales by 25% in fiscal 2022 (June year-end). Estee Lauder believes its sales can grow to $1 billion annually over the next few years.

Luxury conglomerate Kering, whose brands include Gucci and Yves Saint Laurent, had been interested in buying Tom Ford. However, Estee Lauder made an early bid to avoid potentially losing the beauty license.

In the quarter ended September 30, 2022, Estee Lauder’s revenue fell 10.5%, to $3.93 billion from $4.39 billion a year earlier. Sales were lower in its Skin Care, Makeup, and Fragrance segments, offset slightly by higher Hair Care revenues. As well, sales were lower in its Asia/Pacific and Europe regions, while sales in the Americas were flat.

Excluding one-time items, the company earned $495.1 million, or $1.37 a share. That was down 28.4% from $691.7 million, or $2.11.

Estee Lauder’s long-term outlook remains positive. However, the company operates in competitive markets, and while the Tom Ford acquisition adds growth prospects, purchases that big can add risk.

OUR RECOMMENDATION: Estee Lauder is okay to hold.

Estee Lauder recent coverage:

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