pig-in-a-poke or piggyback...

Pig-in-a-Poke or Piggyback Plant?

Columbia UniversitySecurities Analysis

John M. Zolidis

March 5, 2020

Presenter Bio – John Zolidis

2

➢Founded Quo Vadis Capital, an equity research consultancy and Registered Investment Advisor (RIA) in 2017

➢Analyst following U.S. consumer sector since 1999

➢Named to Wall Street Journal’s Best on the Street list in 2005

➢Frequently cited in the financial media

➢Education at Kenyon College & Oxford of University (Mansfield College)

➢Former PhD candidate in Philosophy

➢Presented at value investment conferences in Vail, Klosters and Cyprus

➢Based mostly in Paris, France

Pig-in-a-Poke or Piggyback Plant John Zolidis

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About the Quo Vadis Capital, Inc.

3

➢Registered Investment Adviser (RIA) formed in 2017

➢Outsourced analyst model providing research on the restaurant andretail sectors to institutional investors

➢Also provide consulting and advisory to companies

➢Manager of separate investment accounts for individuals

➢Produced out of New York and Paris, France

➢More information at quovadiscapital.com


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http://quovadiscapital.com/

What is a Pig-in-a-Poke?

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What is a Piggyback Plant?

5


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What is the Central Problem of Ethics?

6


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You Still Have to Make Decisions

7


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What is the Most Difficult Problem in Investing?

8


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There is no one right way to analyze companies, construct a portfolio, or adjudicate between investment alternatives

You have to find what works for you and then stick with it

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Our Premise:

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Changes in expectations for future earnings or cashflows are the most reliable predictor for stock priceperformance

My suggestion: Investors should focus on identifyingwhen embedded expectations in an equity could bewrong


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Two Part Process:

11

Part 1) Fundamental Analysis to Determine Our OwnForecasts for Earnings and Cash Flow

Part 2) Valuation Review to Attempt to DetermineWhat’s Priced In


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How do we determine When Future Expectations for Earnings or Cash Flow are Wrong?

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It frequently comes down to doing work that others can’t or won’t

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Unit Level Economic Analysis

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This process was developed for retail and restaurants, butthe idea is applicable for any company or business that canbe divided into component parts


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Further, the task is to take the company’s component partsand run a fundamental analysis at the unit level

Among the fundamental we care about most is evaluatingunit level ROIC


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Simplistic Retail Business Model:

16


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Simplistic Retail Business Model:

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Simplistic Restaurant Business Model:

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CORP. HQMARKETING

&BRANDING

RESTAURANT CUSTOMERS

THE STORE IS THE ECONOMIC ENGINE FOR A RESTAURANT

Produces the “R” in ROIC

COST CENTER


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CORP. HQMARKETING

&BRANDING RESTO

CUSTOMERS

ADDING MORE LOCATIONSCREATES OPPORTUNITY TO

LEVERAGE CORP. HQ & MARKETING SPEND

RESTO

RESTO

RESTO

CUSTOMERS

CUSTOMERS

CUSTOMERS


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CORP. HQMARKETING

&BRANDING

RESTO

CUSTOMERS

RESTAURANT OPERATORS CAN ALSO ENTER INTO FRANCHISE

ARRANGEMENTS TO GROW VIA OTHER’S CAPITAL

RESTO

RESTO

RESTO

CUSTOMERS

CUSTOMERS

CUSTOMERS

RESTO

RESTO

RESTO


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The restaurant and retail business models have in common acentralized cost structure and many locations which can beevaluated independently

First step is to ask whether the “box” is any good


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Two Part Process:

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a) Solve for Unit-Level ROIC



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Comparison of 15 Resto Company Unit Level ROIC

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Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE

Estimated Average Restaurant-Level Lease-adj. ROIC TTM Ending With 3Q19

30.5%

29.2% 29.0%

26.3%

24.7%23.7%

23.0%22.2% 22.1%

20.6%

19.1%18.4%

17.7%

16.3% 16.2% 15.8%

12.0%

17.0%

22.0%

27.0%

32.0%


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Two Part Process:

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b) Evaluate composition of ROIC



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Comparison of 15 Resto Company Unit Level ROIC

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Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19

ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN

RESTAURANT LEVEL MARGINS

ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC

ESTIMATED SALES PER AVERAGE SQUARE FOOT

$1,359

$913 $833 $800 $780

$738 $701 $653 $651

$535 $515 $487 $435 $431

$308 $266

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

28%

25%

24%

21%

19%19% 19%

18%18%

17% 17% 17% 17%

15% 15%

13%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

30%30%

28%

26%25%

24% 23%23%

22%

21%20%

18%18%

17%16% 16%

12%

17%

22%

27%

32% 57%

52%49% 48%

35%33% 33% 31% 30% 30%

24% 23% 23%19% 18%

16%

0%

10%

20%

30%

40%

50%

60%

Two Part Process:

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c) Identify trends in ROIC



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Trend Work For Unit Level ROIC

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Lease-adj. Store Level TTM ROIC

40.0%

38.2%

36.7%

35.2%35.9%

36.8%36.4% 36.7% 37.1% 37.4%

36.7%36.2%

35.8%35.3%

34.3%33.8%

33.3% 33.1% 33.2%

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

Oct1

5 A

Jan1

6A

Ap

r16

A

Jul1

6A

Oct1

6A

Jan1

7A

Ap

r17

A

Jul1

7A

Oct1

7A

Jan1

8A

(1)

Ap

r18

A

Jul1

8A

Oct1

8A

Jan1

9A

Ap

r19

A

Jul1

9A

Oct1

9A

Jan2

0A

Ap

r20

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~700 BPS DECLINE IN UNIT LEVEL ROIC OVER FIVE YEARS

Two Part Process:

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d) Evaluate the causes for changes in ROIC

Part 2) Valuation Review to Attempt to Determine What’sPriced In


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Two Part Process:

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e) Solve for trends and inflection points in Returnon Incremental Invested Capital (ROIIC)



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What Is Return on Incremental Invested Capital (ROIIC)

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ROIIC is a measure of the return generated by most recentdollar a company has invested in its business

For growth restaurant or retail companies, it is the ROICgenerated by the most recently opened locations

ROIIC is the key tool we use to evaluate consensusexpectations and identify when forward estimates are wrong


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Higher Sales & Margins are Driving Rising ROIIC

31


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Lease-Adj. Estimated New Store TTM ROIC

NEW (NON-COMP) UNIT TTM AUV $M ESTIMATED NEW UNIT TTM RESTO LEVEL MARGIN

YOY % CHANGE IN UNITS

$1.62 $1.64 $1.66 $1.66

$1.77

$1.87

$1.98 $1.94 $1.92

$1.20

$1.30

$1.40

$1.50

$1.60

$1.70

$1.80

$1.90

$2.00

$2.10

Mar1

8A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

c19A

Mar2

0E

17.3% 17.7%18.4% 18.6%

20.2%

21.8%

23.7%22.8%

21.4%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

Mar1

8A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

c19A

Mar2

0E

5% 5%

4% 3%

3%2%

3%

5%

6%

0%

1%

2%

3%

4%

5%

6%

7%M

ar18

A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

c19A

Mar2

0E

13.3%13.6%

14.2% 14.3%

15.9%

16.9%

18.1%17.3% 17.1%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

Mar1

8A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

c19A

Mar2

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Rising (or Falling) ROIIC Indicates Structural Change

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Higher productivity and returns at new units typicallycorrelates with

➢Rising EBIT or EBITDA margins

➢Upward revisions to earnings

➢Accelerating growth in earnings

All factors that tend to lead to a positive stock priceperformance and justify higher valuations


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Two Part Process:

33

Part 1) Fundamental Analysis to Determine Our Own Forecasts forEarnings and Cash Flow





e) Solve for trends and inflection points in Return onIncremental Invested Capital (ROIIC)

f) Evaluate existing estimates using ROIC/ ROIIC work

Part 2) Valuation Review to Attempt to Determine What’s Priced In


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Unit Level Economic Analysis – Moving to Part 2

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So we’ve used unit level economic analysis to break acompany into component parts, we solved for ROIC, wedetermined what is responsible for the company’s returnprofile, we conducted a peer group compare and identifiedtrends. We even calculated ROIIC and used this as a tool toevaluate consensus.

Our work showed us that estimates are likely too high or toolow. Are we ready to act on the stock?


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Two Part Process:

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a) Estimate the Value of the Existing Business


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Valuation

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We are not going to address any of the commonly knownvaluation techniques

Each of these generally has its uses but also problems; NoValuation approach works in all cases

Biggest challenge for traditional valuation techniques isaddressing businesses with a lot of potential growth


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Unit Level Valuation Tool

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Created to work with unit level economic analysis as analternative approach for multi-year growth stories

This tool 1) breaks out an estimated value for a company’sexisting business,

and derives what the market is paying for the growthcomponent


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How do we value the existing business?

a) Estimate cash flow produced by operations lessmaintenance capex

b) Assign market multiple to this cash flow/ per share

c) Can use modest risk adjustment

The idea is that a company’s repeatable cash flows shouldtrade at a multiple relatively similar to the overall equitymarket


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Two Part Process:

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b) Derive what the market is paying forgrowth component


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How do we estimate what the market is paying for acompany’s future growth?

a) Use our estimate of the value of the business

b) Subtract from total enterprise value (EV) a stock iscurrently trading


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Two Part Process:

41




b) Derive what the market is paying for growthcomponent

c) Calculate our own estimate for the value offuture unit growth


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How do we independently estimate the value of a company’sgrowth?

a) We run a unit level DCF using our store-level metrics,incorporating any trends from our analysis, and aschedule for future deployment of capital

b) This generates a value of future stores based on cashflow forecasts and discounted for time value


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Two Part Process:

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b) Derive what the market is paying for growthcomponent

c) Calculate our own estimate for the value offuture unit growth

d) Delta in implied market value for growth vs. ourestimate tells us whether shares are over or undervalued


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Case Study #1 Shake Shack

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Two-year return ~100%

45


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SHAK Trade at >100 P/E on 2020 EPS

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What does that indicate to you about investor expectations?


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3/5/2020 AVG. BJRI CAKE CBRL CHUY CMG EAT LK NDLS PLAY RRGB SBUX SHAK TXRH YUMC

Recent Price $30.61 $33.06 $143.28 $19.18 $737.0 $33.2 $39.93 $7.42 $30.74 $21.38 $76.67 $53.51 $56.01 $44.19

Mkt Cap ($B) $0.6 $1.5 $3.4 $0.3 $20.9 $1.3 $9.6 $0.3 $1.0 $0.3 $91.3 $2.1 $3.9 $17.1

ENT VALUE ($B)* $0.7 $1.4 $3.9 $0.3 $20.7 $2.4 $8.8 $0.4 $1.6 $0.4 $108.8 $2.0 $3.8 $15.4

Valuation Metrics*

Vs. 2019E EPS (P/E) 21.2x 14.7 12.7 15.5 19.2 52.5 8.4 N/M 42.8 10.8 34.5 27.1 74.3 22.8 23.8

Vs. 2020E EPS (P/E) 23.2x 15.9 11.9 15.9 17.5 40.1 7.6 N/M 29.2 10.3 50.1 25.5 101.3 20.4 50.8

Vs. 2021E EPS (P/E) 19.6x 14.3 11.0 15.3 15.6 31.6 7.1 24.6 22.4 9.3 40.0 22.3 87.1 18.7 22.3

EV / 2020 Sales 1.3x 0.6 0.5 1.2 0.7 3.3 0.7 5.1 0.8 1.1 0.3 3.8 2.8 1.3 1.9

EV / 2019E EBITDA 10.6x 6.0 6.7 9.8 7.7 29.8 5.6 N/M 10.0 5.8 4.4 18.6 24.2 11.6 10.8

EV / 2020E EBITDA 10.0x 6.0 5.9 9.6 7.2 22.3 5.9 N/M 8.7 5.6 4.6 17.1 22.3 10.8 16.9

EV / 2021E EBITDA 8.6x 5.7 5.6 9.4 6.7 18.5 5.8 15.8 7.7 5.3 4.4 15.5 18.8 10.0 10.1

Free Cash Flow Yield ('20) 6.7% 9.6% 8.6% 6.2% 5.3% 2.7% 14.3% N/A NA 8.9% 14.4% NA 0.8% 3.6% -0.2%

Dividend Yield 1.3% 1.3% 4.2% 3.7% 0.0% 0.0% 4.6% 0.0% 0.0% 0.0% 0.0% 1.7% 0.0% 2.1% 1.0%

Quo Vadis Capital, Inc. Restaurant Universe

Relative Growth, Profitability, Balance Sheet & Valuation Metrics (Consensus Forecasts)

Why are people so excited about SHAK?

47

➢ The company has a hot brand and people love the product (burgers, fries and shakes)

➢ Unit-level metrics are exceptional

➢ The company is growing units at a very fast rate

➢ It is easy to envision SHAK growing its unit base several multiples of the current business

➢ Optionality on the balance sheet

The multiple and the stock performance represent investoranticipation of the long-term growth potential, not near-term margin trends, cash flow, or earnings


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Part 1) A&B Calc & Analyze Unit ROIC: SHAK Ranks Near The Top

48


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Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19

ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN

RESTAURANT LEVEL MARGINS

ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC

ESTIMATED SALES PER AVERAGE SQUARE FOOT

$1,359

$917 $833 $800 $780

$738 $701 $653 $652 $651

$535 $515 $487 $435 $431

$308 $266

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

28%

25%

24%

21%

19%19% 19%

18%18%

17% 17% 17% 17%

15% 15%

13%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

30%30%

28%

26%25%

24% 23%23%

22%

21%20%

18%18%

17%16% 16%

12%

17%

22%

27%

32% 57%

52%49% 48%

35%33% 33% 31% 30% 30%

24% 23% 23%

19% 18%16%

0%

10%

20%

30%

40%

50%

60%

Part 1, C) Identify Trends Unit ROIC: Down ~900 bps from Peak

49


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• Down nearly ~900 bps from PeakLease-adj. Store-Level Estimated Average Store TTM ROIC

32.1%

33.9%34.7%

35.7% 35.7% 35.5%34.7% 34.3%

33.4%32.9% 32.6% 32.9% 32.9% 32.9%

32.2%31.0%

29.7%28.8%

27.6%26.5%

21.0%

23.0%

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

Jun

15

A

Sep15

A

De

c15A

Mar1

6A

Jun

16

A

Sep16

A

De

c16A

Mar1

7A

Jun

17

A

Sep17

A

De

c17A

Mar1

8A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

c19A

Mar2

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Part 1 D&E: Calc New Unit ROIIC: New Units Opening Weaker

50


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Source: Company reports and Quo Vadis Capital, Inc. estimates; Calculated using 24 month delay for new units to enter comp base.

Lease-Adj. Estimated New Store TTM ROIC

ESTIMATED NEW SHAK LEVEL MARGINTTM SALES PER AVERAGE NEW STORE ($M)

RATE OF UNIT GROWTH YOY% CHG QUARTER END

$4.1

$4.0

$3.8

$3.69 $3.7 $3.6 $3.6

$3.4 $3.4

$3.0

$3.2

$3.4

$3.6

$3.8

$4.0

$4.2

$4.4

Mar1

8A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

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Mar2

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DOWN 20% OVER TWO YEARS

32.7% 32.3%

34.4%

36.7%35.8%

40.0%41.1%

31.5%

34.9%

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

41.0%

43.0%

Mar1

8A

Jun

18

A

Sep18

A

De

c18A

Mar1

9A

Jun

19

A

Sep19

A

De

c19A

Mar2

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RATE OF GROWTH WILL SLOW IN 2020

23.6%22.9%

21.7%

20.4%

19.2%18.5%

18.2%17.5%

17.2%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

Mar1

8A

Jun

18

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Sep18

A

De

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Mar1

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Jun

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Sep19

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De

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Mar2

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NEW SHAK MARGIN ESTIMATED BELOW 18-22% TARGET

25.1% 25.1% 25.4% 25.1%

23.7%

21.1%

19.5%19.0%

17.8%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

Mar1

8A

Jun

18

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Sep18

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De

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Mar1

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Jun

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Sep19

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Mar2

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ESTIMATING >700 BPS DECLINE OVER TWO YEARS

Rising (or Falling) ROIIC Indicates Structural Change

51

Lower productivity and returns at new units typicallycorrelates with

➢Falling EBIT or EBITDA margins

➢Downward revisions to earnings

➢Decelerating growth in earnings

All factors that are present in SHAK results


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But what’s priced in at >100 P/E?

52


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Part 2, a) Estimate Value of Existing Biz: Calc at 1/3 of Mkt Value

53


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•Stock FY19 EBIT

CF/ share from

existing biz

Market

Multiple (8%

CF yield)

Estimated

value of

existing biz

Current price

per share

Current

Market Value

% of Market

Value Provided

by Existing Biz

CMG $495 $16.66 12.0x $5,673 $769.76 $21,375

GO $70 $0.76 12.0x $847 $32.71 $2,908

SHAK $28 $1.55 12.0x $713 $56.20 $2,158 33%FIVE $215 $3.43 12.0x $2,305 $98.18 $5,466

OLLI $173 $1.70 12.0x $1,342 $50.00 $3,183

BOOT $78 $1.88 12.0x $662 $28.75 $827

DG $2,279 $7.31 12.0x $22,600 $160.16 $40,777

SBUX $4,624 $4.86 12.0x $69,506 $79.67 $93,509

ULTA $891 $13.89 12.0x $9,625 $268.84 $15,367

Part 2, b) Derive Market Value for Growth Option:~$35 per share of $56 share price

54


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•

Stock

Estimated

value of

existing biz

Net cash

(debt)**

Market EV

($M)

Implied market

value of growth

option per share

% of current

market value

related to

growth

CMG $5,673 $343 $21,032 $15,359 73%

GO $847 ($449) $3,357 $2,510 75%

SHAK $713 $85 $2,073 $1,361 35.44$ 66%FIVE $2,305 $349 $5,117 $2,813 55%

OLLI $1,342 $103 $3,080 $1,738 56%

BOOT $662 ($158) $985 $322 33%

DG $22,600 ($2,797) $43,574 $20,974 48%

Part 2, c) Independently Estimate Value of Growth Using Unit Economics ~$19 per share, Market is overpaying by nearly 2x

55


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Stock

Current

Number of

stores

Discounted

Value of after

tax CF from to-

be opened

stores $M

Estimated per

share value of

new stores

Market's

Valuation of

Growth

Component

% Market is

Overvaluating or

Undervaluing

Growth

Component

CMG 2781 1,651$ $58.19

SBUX 33353 7,302$ $6.13

GO 347 595$ $6.38

DG 16094 4,982$ $19.33

DOL-TSE 1291 897$ $2.82

ULTA 1241 2,186$ $37.84

SHAK 151 734$ $19.15 35.44$ 85%BOOT 261 181$ $6.15

TXRH 498 571$ $8.17

FIVE 894 1,704$ $30.43

OLLI 345 1,223$ $18.62

DLTR 15755 3,691$ $15.54

YUMC 7171 3,997$ $10.33

Recap of Two-Part Process for Shake Shack (SHAK)

56


➢Strong but deteriorating unit level ROIC

➢New units in Terrible downtrend; ROIIC weakening


➢Estimated that current business worth only 1/3 ofmarket value

➢Independently estimated value of new units to beworth roughly ½ what the market is paying


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Conclusion: Shake Shack (SHAK)

57

Investors are materially overpaying for SHAK’s ability to growat more than 100x P/E

See unfavorable trends in ROIC at existing and new unitsdriving downward revisions to Street estimates

Expect valuation contraction as market re-values itsexpectations with updated view of new unit value creation

Conclusion of our work : the stock should be sold


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Is the Market Overvalued?

58

The financial media and others frequently refer to valuationmetrics of the S&P 500 relative to historical averages

But is that a valid way to judge?


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Is the Market Overvalued? S&P500

59

Source: JDP Capital Management


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Is the Market Overvalued? S&P 500

60



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61



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62



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64

Media and others constantly refer to the S&P 500 as if itwere ONE THING

But the reality is that the composition of the S&P500 haschanged dramatically over time with the current weightingfavoring higher margin and lower capex-requiring companies

Comparing valuation measures of the current index to thepast does not yield a valid conclusion about the “marketmultiple”


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Corona Mania: No Thinking or Lateral Thinking

65


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Disclosures

66

General Disclosures:

Quo Vadis Capital, Inc. (“Quo Vadis”) is an independent research provider offering research and consulting services. The research products are for institutional investors only.

The price target, if any, contained in this report represents the analyst’s application of a formula to certain metrics derived from actual and estimated future performance of the company. Analysts may use various formulas tailored to the facts and circumstances surrounding a specific company to arrive at the price target. Various risk factors may impede the company’s securities from achieving the analyst’s price target, such as an unfavorable macroeconomic environment, a failure of the company to perform as expected, the departure of key personnel or other events or circumstances that cannot be reasonably anticipated at the time the price target is calculated. Quo Vadis may change the price target on this company without notice. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources Quo Vadis believes to be reliable; however, Quo Vadis does not guarantee its accuracy and does not purport to be complete. Opinion is as of the date of the report unless labeled otherwise and is subject to change without notice. Updates may be provided based on developments and events and as otherwise appropriate. Updates may be restricted based on regulatory requirements or other considerations. Consequently, there should be no assumption that updates will be made. Quo Vadis disclaims any warranty of any kind, whether express or implied, as to any matter whatsoever relating to this research report and any analysis, discussion or trade ideas contained herein. This research report is provided on an "as is" basis for use at your own risk, and neither Quo Vadis nor its affiliates are liable for any damages or injury resulting from use of this information. This report should not be construed as advice designed to meet the particular investment needs of any investor or as an offer or solicitation to buy or sell the securities or financial instruments mentioned herein. This report is provided for information purposes only and does not represent an offer or solicitation in any jurisdiction where such offer would be prohibited. Commentary regarding the future direction of financial markets is illustrative and is not intended to predict actual results, which may differ substantially from the opinions expressed herein. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

The analyst who is the author of this report does not have a position in shares of the companies that are the subjects of this report. However, Quo Vadis prohibits analysts from trading in a way that is inconsistent with opinions expressed in reports [subject to exceptions for unanticipated significant changes in the personal financial circumstances of the analyst].

This report may not be reproduced in part or in whole. Please do not redistribute this report.

Reg AC Certification:

All of the views expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers. No part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the subject company of this research report.


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Appendix: Characteristics of Successful Long Ideas:

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1) Expected upside to consensus estimates and/ or positiveearnings revisions

2) Rising EBIT or EBITDA margins,

3) A rising trend in ROIC or ROIIC, or stable ROIC at attractivelevels, and

4) Accelerating or maintained growth at attractive levels.


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Appendix: Characteristics of Successful Short Ideas:

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1) Expected downside to consensus estimates and/ ornegative earnings revisions,

2) Contracting EBIT or EBITDA margins,

3) Deteriorating ROIC, an unfavorable trend in ROIIC, pooroverall ROIC profile or poor capital allocation

4) Decelerating growth.


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Appendix: What’s Wrong with Traditional Equity Research

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Most equity research looks and feels the same and is produced with an approach that has not changed in more than 20 years. This research product suffers from:

1. Regulatory constraints: Regulators have codified what should be or not be in a research report, how it can be distributed, even what kind of language to use or not use.

2. Technology has made it obsolete: New sources of information and digital trading have removed any edge analysts had and reduced their ability to execute transactions.

3. Over distribution and public dissemination of ratings: Most shops distribute their product to 1,000s of accounts and publish their ratings and estimates on shared platforms, thereby diluting any advantage this product may have created.

4. Conflicts of Interest: Analysts are conflicted via the requirements of corporate finance departments, upper management directives, the need to obtain NDRs, and demands from institutional sales and trading desks.

5. No edge: Most research consists of earnings previews and reviews and generally just adheres to company guidance without any proprietary process to evaluate forecasts.


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