In this month's installment of "Short Shrift," we provide subscribers with updates on short ideas under our coverage, as well as the results of our ongoing diligence work. In this issue, QSR, KNSL, and SNA found themselves in the headlines. As well, Antrim has updated diligence work on KNSL and SNA.
Ballard Power Systems is a 40 year old product design, prototyping and engineering firm credited with substantial contributions towards the development of hydrogen fuel cells for use in heavy duty motive applications. The company and its shares have been swept up in a frenzy of investor enthusiasm that coincides with global governments expressing support for hydrogen powered transportation solutions as part of carbon emission reduction policies. Antrim’s research suggests that the company is a sub-scale product design and engineering firm, tasked with scaling up manufacturing of a commodity product in a competitive, cost-conscious industry facing structural overcapacity, and competing directly with better capitalized vertically and horizontally integrated peers (Toyota, e.g.).
Despite our ongoing focus on the identification of profitable ideas for our clients' short book, Antrim continues to believe that opportunities exist on the long side in certain special situations and otherwise unique opportunities. We maintain coverage of two long ideas - DESP, which is a deeply undervalued and misunderstood, high quality, emerging market e-Commerce business, and MIK, which is an e-Commerce resistant (though not immune) specialty retailer that is currently benefitting from a coronavirus related improvement in the Arts & Crafts category, and putting investors through a "short squeeze." Since we initiated coverage on these names earlier this summer, both have been in the news. You can find our thoughts on these developments using the link below:
Click the image or the link below for the first installment of "Short Shrift," which is Antrim's monthly update note on the short ideas under our coverage. In this issue, we discuss QSR, which has reported earnings since our 8/2 initiation, and KNSL, which has reported earnings, raised equity, and lost a chief claims officer since our initiation on July 26th.
We've learned some lessons as we've rolled out coverage at Antrim. Some of our constructive feedback has been easy to implement. Like, why on earth don't Antrim Initiations include an "Issuer Info" section on the very first page? Well now they do. With this post, I'm re-publishing Antrim's previous initiations on Shorts: KNSL, QSR, and TDG with a little formatting change, and the new issuer info section, to make them slightly more accessible. There has been no change to substance or content of the reports.
Download our KNSL Initiation >>
Snap On Inc. is a 100 year old American manufacturer of hand and power tools used primarily by the automotive maintenance and repair end market. The company has developed a reputation for premium priced, high quality, reliable parts, and excellent customer service, provided by its franchised network of mobile “tool truck” product showrooms. Over the last two decades, however, the company has grown increasingly reliant on issuing sub prime dealer credit to its customers in order to finance increasingly expensive tool purchases. Snap On has adopted aggressive accounting policies that disguise lax underwriting standards and elevated credit risk within its credit portfolio. In addition, we believe the company faces competition from lower priced tool offerings, and disruption in its end market as a result of the coronavirus pandemic, and the impact lockdowns have had on miles driven in the United States.
TransDigm Group, Inc. is a manufacturer of engineered parts and components for aircraft original equipment manufacturers (“OEM’s”), as well as for maintenance and replacement in the aerospace aftermarket parts and services business. The company has generated compound EBITDA growth of over 22% annually for the past decade, and now trades at over 18x trailing, “peak” EBITDA, despite severe distress resulting from the coronavirus pandemic and the impact it has had on the air travel industry, as well as the extreme levels of financial leverage and overall indebtedness besetting the company as a result of their pursuit of an aggressive, M&A driven growth strategy. Antrim believes investors have become complacent as it regards the risks to TDG’s business model, and that the company’s M&A strategy and pricing practices are unsustainable.
On Thursday, July 30th, after market close, KNSL reported Q2 EPS of $0.84 per share, $0.15 better than consensus’ (and Antrim’s) estimate of $0.69, on a 41% y/y increase in GWP.
Restaurant Brands International (“RBI” – NYSE:QSR) is a franchisor of quick service restaurants under the Tim Horton’s, Burger King, and Popeye’s Louisiana Kitchen banners globally that was formed in 2014, when Burger King, led by its private equity sponsor, 3G Capital, entered into a merger with the Canadian coffee chain, Tim Horton’s. Since that time, the company has executed on an aggressive turnaround strategy by increasing menu prices to support rental rate increases on franchisees. These increases, coupled with significant financial leverage at the parent and significant leverage at the franchisees, have resulted in strong returns on equity for common shareholders, but leave the company with little margin for error to navigate the economic disruption of the coronavirus pandemic and associated global recession.
Kinsale Capital Group is a mid-cap specialty insurer operating in the Excess and Surplus (“E&S”) lines subsegment of the broader Property and Casualty (“P&C”) insurance industry. The company has generated an ample, “mid-teens” return on equity, and grown revenue at an annual CAGR of 34% over the past three years. That success, together with a float-limiting insider ownership of 7.31% of the outstanding shares, has engendered a committed shareholder base of long-only, “true believers” who have held Kinsale as it has earned inclusion in the S&P Small Cap 600 Index, and rocketed to a valuation in excess of 9x tangible book on the back of new passive shareholder ownership amounting to 27% of the float. This “single stock valuation bubble” has come about just as the coronavirus pandemic and lockdown-induced recession threaten to produce decelerating revenue growth, adverse reserve development, and investment portfolio losses.
