Cookies up, Saunas down
Small Cap Earnings Review 12/08/22
Lotus Bakeries - 4430m€
The Belgian bakery, producer of the world famous “Biscoff” cookie, continues to deliver impressive numbers. Volume is up 6% in H1, and price increases protected the margin from inflation taking EBITDA growth to 6% and total organic growth to 14%.
Though the business is famous for its cookie, i’d argue it should be equally famous for its stock, which has compounded to a 11307% percent gain over the past 20 years without ever drawing down more than 30%.
A Coca-Cola recipe/brand type moat, a never-ending international expansion, market share gains and a vertical integration driven operating leverage are the main culprits to which we owe this crime against efficient markets, though a healthy multiple expansion (standing at a forward pe of >40x) has carried the weight in the last few years.
I do think the risk/reward is awful at these levels, but its a great case study on how far something as simple as a good recipe can take you.
Harvia PLC- 412m€
Sauna/Jacuzzi sales are down. I expect this negative 1% quarterly drop in sales accompanied by a more than commensurate drop in earnings to be the first of many, and a common theme in big ticket consumer discretionary companies.
Harvia PLC was one of the biggest covid winners. Asset prices exploding and work from home very logically created an explosion in the demand for saunas, as rich people were stuck at home with loads of cash to spend and less spending options.
If I told you this would be a consequence of a surprise global pandemic, you probably wouldn’t have believed it.
Anyways, I think investors made the mistake of thinking saunas were a secular growth market and extrapolated double digit growth into the future back in 2020/2021, pushing the stock up almost 10x from the march 2020 lows. Now, everyone is coming to the realization that their long term 5% revenue growth guidance is not a joke.
In fact, since Covid brought forward a lot of demand for saunas, perhaps it’s fair that sales will compress for a few years to get back on a 5% organic growth trend. If we adjust for acquisitions, that would put normalized revenue around 120-140m, with normalized net income margins of ~15%.
This would put Harvia at a PE of >20 and would represent >40% drop from LTM net income. Stock could drop another 30% after next earnings, it wouldn’t surprise me.