If anything is good for pounding humility into you permanently, it’s the restaurant business. Anthony Bourdain
If there is one thing most people like to do, it is eat. In my household, food rules. My wife and daughter love to research the specific item, think about it, discuss it, and then analyze the taste of the end product. There is nothing as satisfying as a good home cooked meal. If it includes a fabulous dessert, even better. Cooking at home is time consuming. Busy people often do not have the amount of time necessary to plan and execute a wonderful meal. The same can be said of other consumption based products like beverages, desserts, beer and wine, or spirits. Over the last fifty years, the United States saw a dramatic shift in consumption patterns towards out of home alternatives. Eating at fast food restaurants changed the way people eat, drink, and entertain. Many companies have benefited from the shift, and I’m sure you are very familiar with their names. The investment world is constantly looking for growth opportunities, and food and beverage is ripe for hunting. Unfortunately, very few succeed in a way which, shall we say, satisfies the appetite of investors. Still, there are some big winners so hope springs eternal. On that note, let us bring up two recent IPO’s: Portillo’s (Restaurant- PTLO) and Dutch Brother’s (BROS).
On Thursday, Portillo’s sold 20 million shares to public investors at an exit price of 20.00 per share. It closed yesterday at $37.43. In case you are not aware of the merits of Portillo’s, it is well known in the Midwest as it originated on the streets of Chicago as a hot dogs stand. It serves hot dogs, Italian beef sandwiches, wings, beer, fries, and plenty more. One of the legendary aspects of Portillo’s is it’s cake shake, where they seemingly put a whole chocolate cake into a container for the patron to indulge. Public investors have found the IPO tasty, and it’s billion dollar value prices in plenty of growth. Portillo’s has 67 locations in nine states. The company owns all it’s locations and has never closed one in over fifty years of existence. Clearly, it is a fine operator. It plans on increasing the number of units by ten percent per year. On the surface, none of this seems exceptional, so why is there such enthusiasm for it’s stock? If one looks at per unit volume of sales per restaurant, guess which company has the highest volume? The big P. Better than Chick Filet? Yes. Better than In and Out? Yes. Better than Five Guys? Yup. Better than McDonald’s? Yes. With big margins and plenty of growth ahead, Portillo’s looks pretty appealing, until, well, one looks a little deeper at the capital structure. What gives?
When you flip open the prospectus, one of the fine details is that a private equity company will still own a controlling position even after the 20 million shares came public. More disconcerting is public shareholders own less than 50% of the economics, so by owning stock, you only are entitled to less than one half of the profits. Hmm, not so good. Looking further, there is a tax receivable agreement between the private equity group and the company where the sponsor gets 85% of all the tax benefits over a decade long period. How much is the TRA (tax receivable agreement) worth? A lot, let’s call it, well, one hundred million dollars. So, it appears the real winners in the Portillo’s IPO, are, the private equity sponsor. Imagine that. Does this mean owning stock in the big P is going to prove a poor investment over a long period of time? I don’t know, but my own feeling is if you watch it, and are very patient, you will get a better entry point. Portillo’s is a business very much worth owning, it’s a question of getting a much better price so you can take a big bite.
Consistent with the quick service restaurant theme, another legendary chain went public recently, Dutch Brothers Inc. It is a purveyor of coffees and other sugary drinks in a drive thru only format. Anecdotally, BROS has locations in Las Vegas. Every single one of them is busy when they are open. Drive through lines are doubled up, and consistently the traffic is impressive. What is also remarkable is how the stock has performed as BROS is now worth over ten billion dollars. The value is more than Shake Shack, Jack in the Box, and Dave and Buster’s combined. Investors obviously are enamored with the relatively minimal market penetration and ability to grow the unit count. Similar to Portillo’s, a multi vote capital structure makes ownership weighted toward the founders. The profitability and growth of BROS makes it another entity worth watching, but patience will be required. The current price makes a buyer today facing the prospect of a bitter brew.
In other market news, SNAP reported earnings which missed estimates and warned about future quarters. Blame was traced to Apple’s security options in it’s latest update. Next week, Facebook and Google will also report and they sold off on Friday on guilt by association. Those reports will be watched closely next week by all investors because of their huge market values and corresponding weights in the major indexes. Johnson and Johnson, another mega cap entity, reported nice numbers with major help provided by their Covid vaccine. Oil prices continue to stay firm as black gold broke $85 a barrel. Many believe $100 is inevitable because of the minimal investment to find additional supply over the last decade. In the circus of Washington D.C., it appears a two trillion dollar spending package will get cooperation by Senators Sinema and Manchin. New taxes on the seven hundred billionaires in the country looks to be part of the deal. Hard to see how that is not discriminatory and would probably wind up in the Supreme Court. On that note, it’s time to settle in for a nice home cooked meal.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.