by Travis Johnson, Stock Gumshoe | November 3, 2023 4:05 pm
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Source URL: https://www.stockgumshoe.com/2023/11/friday-file-buying-a-couple-disappointments-plus-quarterly-updates-galore/
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Well done on sharing your thinking so clearly, Travis Your love for Markel shining bright.
Thanks again for the update, Travis!
Any views on the Brookfield tender offer?
Wrote about that a couple weeks ago, short answer is I don’t see any real upside or downside in it. I didn’t tender.
You don’t mention PAR as an unfortunate timing buy around 40.
It lost 20% in a hurry, and is now around 32.5 or so. Any thoughts about
how you are dealing with this?
I’m not ever betting on what a stock is going to do over a few weeks, but I was surprised to see PAR give up their Burger King gains so quickly.
We’ll learn a lot more when they report next week — I expect investors will be very focused on what they say about the likely pace of sales into the BK locations. They haven’t shared any of those details or projections since the announcement.
I think they have a great multi-year opportunity in front of them, but they could certainly disappoint investors if they forecast a slow rollout of Brink and Menu to BK locations.
Trade Note: Burned but still on the right track.
Toast (TOST) reported a slowdown in their revenue growth, and guided for revenue that will be slightly lower than analysts had expected in the fourth quarter, so the stock took a big hit. The tough news is that consumers are pulling back a little bit, and restaurant price inflation is slowing down, which reduces overall revenue, so the sales per location actually fell slightly in this quarter (though overall growth was still strong, since they added another 6,000+ locations)… the positive news is that they are still growing quickly, with broad exposure to the growing sales of restaurants across the US (they’re now just about hitting 100,000 locations, more than 10% of all restaurants in the US), and they have the inherent leverage of their payment processing revenue for all of those customers that acts somewhat like a “royalty” on restaurant sales. They’re also always iterating to build the platform, so they’ve recently added more software modules to cover different types of facilities, like restaurants who also have retail sales, bakeries & cafes, hotel food services, etc., and customers are continuing to add to their Toast “stack” of software products for both front and back of house and for financial management of food service facilities.
Growth is slowing, but still strong — their subscription revenue grew 46% in the third quarter, which is mostly the subscription fees for their various software offerings (43% of their customer locations use at least six of their “elective” software products, beyond the core payments platform), and their “FinTech gross profit” grew 36%, which is mostly their share of the fees for credit card processing. Their total annualized recurring revenue, which includes both of those things, is now at $1.2 billion, so that number has grown 44% over the past year. Margins are continuing to improve, so adjusted EBITDA hit $35 million in the third quarter, which is only the second time they’ve had a positive number in that column… but investors are worried because they guided to lower Adjusted EBITDA in the fourth quarter, which is pretty seasonally weak. This is also the second quarter that they’ve reported positive free cash flow, so they’re essentially on track with what we’ve long been told to expect, that this is the year that Toast hits the right scale and fixes its overspending habits and becomes consistently profitable, with margins likely to improve as the customer base continues to grow and as their “upsell” kicks in to sell additional software products (and more hardware, though hardware is at best break-even for Toast) to existing customers.
I can see the reasons for caution, nobody likes a slowdown and it’s pretty clear that consumers pulled back a little bit in the third quarter, as inflation continued to bite into spending, and might pull back further still… but I still think Toast is on the right track, and has incredible potential to really lock up a huge percentage of the US restaurant technology market with their focused and restaurant-friendly products and their increasingly effective sales teams, and I think the long-term value of that payment processing revenue (and steady software subscription revenue) is under-appreciated, even if sometimes restaurants as a whole see a little dip in sales which cuts into the payment processing income.
I didn’t see anything in the results or the conference call that changed my thinking about the potential for Toast to grow into something much more substantial over time, as the customer base keeps growing and the margins keep improving… particularly because they continue to grow their customer base very strongly despite persistent worries from investors about tough competition from folks like NCR’s Aloha and Square and others,. So I increased my TOST position by about 20% at $14.10 today, during what I think is an overreaction to a weak quarterly forecast for a company that has been pretty consistently looking better over the past four quarters. My TOST holdings are still in the red, and it’s still less than a 1% position.