Yet Another Value Podcast - Hedgeye's Daniel Biolsi on state of the Consumer Staples sector + $COST $ACI $KVUE $HSY $IFF

Episode Date: August 18, 2023

Daniel Biolsi, Head of Consumer Staples sector at Hedgeye, shares his thoughts on current state of the Consumer Staples sector in 2023. For more information about Hedgeye, please visit: https://app.hedgeye.com/insights Chapters: [0:00] Introduction + Episode sponsor: Hedgeye [0:56] State of the Consumer Staples sector [4:04] $COST and BJ's thesis [8:24] Why long Albertson's $ACI + thoughts on acquisition proposed by Kroger [21:14] $KVUE Kenvue thesis [28:04] Hershey $HSY, international expansion, response to short report and GLP-1 drugs [38:39] International Flavors & Fragrances $IFF negative sentiment Today's episode is sponsored by: Hedgeye This podcast is sponsored by Hedgeye. Hedgeye does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out hedgeye at hedgeye.com

This podcast is sponsored by HedgeEye. HedgeI does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out Hedgeai at HedgeI.com. That's HedgeI.com. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have on Daniel Biosi.

Daniel is the sector head of consumer staples at Hedgeai. Daniel, how's it going? Great. Thanks for having me on. Hey, really excited. The past two we've done with Hedge. I've been great. So I'm sure this is going to be as well. Let me start with a quick disclaimer.

Nothing on this podcast is investing advice. That's always true on this podcast, but particularly true today because I think we're probably going to be flipping through a whole consumer's naples sector, which means we'll be talking about several different names. Everybody should just remember not investing advice. Please consult a financial advisor. Anyway, Daniel, I've got some, I've got your coverage list here. I've got some specific names I want to talk to you and ask you questions about.

But I guess just to start, you know, you're the sector. of consumer staples. We're talking mid-August, 2003. What are just kind of your overall thoughts on the sectors, the opportunities, the risk, everything you're seeing in the sector? Just near term or just broadly? Just broadly. So my background is I have done consumer on the buy side for between 15 and 20 years. But I mostly did the discretionary side, a lot less the staple side early in my career. and then I just sort of kept sort of increasing as I, you know, matured as an investor

and appreciated more, you know, how to make alpha in consumer staples. So that's sort of a little bit of background. And I think a lot of people who are maybe used to consumer or dabble in consumer, probably a similar way. Like, they think staples is not volatile enough, not exciting enough, and then the staples are just so boring. And I think it takes a little bit more, you know, maturity, or if you're managing your own capital to realize what consumer staples have to offer, right?

Can I ask you a question on that? Just starting, and this is going to come up on several of the stocks I kind of started prepping on and thinking about. But you mentioned make alpha. And that has generally been my issue with consumer staples. Like, look, there's monster and Celsius, which we can talk about, you know, kick myself all the time for missing both of those. Those were massive growth trends, huge properties. But I look at something like a curing Dr. Pepper, which I just did a podcast on with the guys

from Half Moon. It was a really well-researched podcast. It was a really well-researched idea from them. But my one pushback from them was like, hey, it trades at kind of like 16 to 18 times forward earnings, maybe a little higher. How do you really make Alpha investing in a low single-digit growth business at, you know, kind of a 5% forward earning shield? Right. No, that's a good comment. I'd say like what I try to focus more on like secular growth themes. So I do focus on growth and I really want those compounders, I guess, as the way to say it. Like I hear what you're saying on Carrick Dr. Pepper, but like if you look at like a Costco, for example, that's kind of what I want to repeat. Constellation Brands is something

I own for nearly a decade, right? So if you just get this mid-single, mid-high single-digit top line grower in consumer staples where they have high margins, right, and good returns on capital, you have a compounder, right? So I think most people, probably be surprised at how much they've compounded over like 10 years. And then, you know, if like you live through like the recession or the pandemic, you understand how valuable consumer staples can be in your portfolio, right? Like where everything else is just, you know, getting crushed, right, in the selloffs and your consumer stable companies are going up, right? Like people might actually see their sales accelerate, right? And you can sell it for hire,

generally and you can now buy back those speculative stocks you liked right so i think that's like the real place in your portfolio so you kind of view it as like portfolio portfolio ballast like almost an improvement on bond let me just ask one on Costco because that was at the top of my mind but Costco i everybody loves Costco right charlie munger talks about it all the time everybody kicks themselves hey it was at 200 i could have bought it 300 it's as you and are talking it's like 550, 560, probably 35 to 40 next 12 months earnings. And I look at it and say, okay, no doubt it's a great company. Absolutely no doubt.

You know, that's like a two and a half percent earnings yield. The 10-year treasury yields 4%. Like we're not in a 0% interest rate world anymore. I know plenty of people who have it. I'm going to buy and hold it forever. But I look at it and say, I'm not sure, as you said, it's like maybe mid-single-digit growth at 40, 35 times earnings. how are you going to generate more than, you know, 5% a year going forward at those multiples?

Like the math is just kind of daunting at that level. Yeah, I hear what you're saying at these levels. I point out that I think it is one of the top performing stocks in my coverage unit is one of the very few that I have 52-week highs right now. And I kind of attribute that to speculation that the membership fee is going to go up. So obviously, earnings estimates are going to go up so it doesn't look as expensive on those numbers. That's part of it. And I think, you know, there's this idea that they're continuing to gain share in food retail, which they are, right?

Them and Walmart are like the two big gainers, right? So I think, you know, if you stuck like a simplistic thing in staples with share gainers, you tend to win over time. But, you know, maybe this is an area where you'd be feeding the ducks and buying some things that have sold off recently. You don't cover BJs, I don't think, but I'll ask the question anyway. I know a lot of people who are long BJs as like the discount Costco play, right? right? They say, hey, it's got the Costco model. It's got the membership. Yeah, it's not as good as Costco, but you kind of pay, you pay 15 times earnings for it versus 35 at Costco. And, you know, if you think these stores are just a structural share winner, they should benefit from that.

Do you have any thoughts on the kind of BJ's thesis? Sure. So actually, I do cover it. Oh, I didn't see on your. Oh, we took it off our short list. Okay. So we just recently took it off the short list. And that thesis really premised around how much they benefited from the higher gasoline prices. So gasoline had a sort of a higher spread than normal, right, last year. So I think that was sort of over-earning in that. And so we put it on the short list. But with the, we have more reason to believe that the membership fee increase is going to happen at Costco. So you can't be short, BJs, because if Costco raises it, BJs is going to raise it, even if they don't raise it right away, people are going to expect it to. So we moved it off the short.

I think it would actually work for us on the short side, too. So we had some good alpha and that spread Costco long, BJ short. So right now, it's not on either side. It should probably be on the long side, but it just has been on the short side, and that's one of the toughest things to do, right? Go short to long. So I think there's validity to that.

We had been long BJs in 2022, and I think we did a lot of sort of research on the new store capability of BJs. So if they can continue to open up in these new markets, I think that's where it gets really interesting. And yes, it is a cheaper multiple. So, you know, according to our traffic data that we use with Placer AI, we can see how those new stores were doing. And they were opening at sort of the middle of their chain.

So that I think promised really good prospects for them to continue to open up, right? And they're still able to find these locations just in the middle. And of course, these stores mature over time. It's a different type of retail concept, right? Because you have to actually pay to be a member. Yep. So we were happy with that. And then I think going forward, there's,

They're still going to win. They're concentrating on grocery. So they're winning there. And I think the upside in the near term is from that credit card. And so we're trying to do a little bit more work there. And I think if we got more comfortable with that, it would be on the long side. Every time somebody pitches BJs to me, I just think of my best friend. He moved to a new city.

And I went and visited him after a month. And I was like, oh, he's talking about something. He drove by a BJ's. And he pointed to it and he said, I joined BJs and I'm embarrassed to be a BJs member. But there isn't a Costco around here. If there was ever a Costco, I dropped my membership in a second and joined them instead of BJs. It's like, God damn, that was, that was really just shots fired at BJs. Okay, let me move on to, there are two names in your universe when you sent it to me that just

really jumped out as the most interesting to me. And I'll start with the first one is, I'm guessing, it's probably the one you get pinged on the least, but it's the most interested in me. And that's Albertsons. Albertsons, for those who don't know, has been for about the past year under a merger with Kroger's, which is actually on your short side, so your Long Albertson's search Kroger's. The Albertsons deal, the stock trades for 22 as we speak. If the deal goes through, shareholders would get 27, 25, that might get adjusted for investments. We can talk about

investments. We can talk about the spread. We can talk about the fundamental business, but I'll just pause there and ask, why are you long Albertsons? So my Albertsons long is really predicated on the merger, right? It's right around that. So my sort of position is monitored. is based off food retail winners and losers for right now, which would be short to supermarkets so that we're short sprouts and crogers. Albertsons would be there, if not for the merger, and that's sort of like spread. And then we're long grocery outlet, Walmart, Costco, the gainers, right, in food retail, which is really more of a focus right now where we are in the cycle on discount, on value.

If you're not offering that in grocery, you're losing. And that's sort of where Albertsons is, except I think. think there's so much negativity priced into the merger happening, you know, every time you see any type of hint of the FTC or DOJ looking at this or a union, you know, saying they're opposing it. Every single time the stock doesn't move. So I think all the negativity sort of priced in, right? So the arms are long, Albertsons, Shore Kroger, and they already expect it not to be, or at least to be challenged, right? I think on the merits of the case, that this would be approved because they're already planning on divesting so many stores. Of course, I think it would

help if they had a buyer as opposed to a spinco. I think that's where it gets a little harder because the history of spin co is being able to be there. So if someone like a Hull came and wanted to buy it, I think this merger would be approved and you would make a pretty good return just closing that spread. But if it doesn't, I think there's more optionality for Albertsons than I think the market's giving credit for, I think that's $600 million breakup fee. It's about a dollar per share for Albertsons. I think they could use that and they can go buy like Southeastern grocers, for example.

So a company that tried to go public and just couldn't get the sort of reception for it. And that would be an accretive deal. They can have some synergies. They'd have a little growth story. They have a margin story, et cetera. I don't think people are giving them any credit for anything to happen. And I think the CEO of Albertsons is actually one of the better CEOs in the space and doesn't get really a lot of credit for what he's done. So that's sort of my thing.

I think you have a pretty good floor and no one thinks that's going to happen. No, look, that's what attracted to me there. And I don't have a position yet, but I keep circling around it and wanting to, you know, I just look at it and say, so the deal, the original deal was announced in early 2022, if I remember correctly. They, it was for $34.10 per share, but they got to pay a $6.80. cents special dividend that reduced it. But so if you go before the deal was announced, the stock was around 29, I believe.

So if you just adjust for that dividend, let's call it 22 to make the math really easy. That's where Albertson sits right now. If the deal is blocked, I kind of look at it and say, well, you've got a year of cash flow. Like these things do generate a lot of cash flow. Albertson's pretty levered. So, you know, a lot goes to interest expense, but they have de levered a little bit. They'll get $600 million in break fee. You know, that's about a dollar per share.

Maybe you tax adjust that. Maybe not. But I look at that. I say, I don't know if there's huge. huge fundamental downside here. I know everyone thinks this is going to get blocked and probably rightly, but there is the divest potential. There is the potential they go to court for it. So, yeah, I just look at this. I say, I don't know any arbitrarily talking about it. It feels like you're paying nothing for a shot that we wake up to a divest and a settlement and the stock's

up 22% in a day. What do you think? Let's talk fundamental downside. So stock, as you and I are talking $22 per share. I've got that about last 12 months, four and a half times EBITA, maybe nine times unlevered free cash flow. How do you? kind of think about standalone downside if this deal doesn't go through. Right. So, like, I think Albertson is probably one of the cheapest companies in my coverage universe,

right? And also the expectations. You see where that's done this earning season, especially anything with the low expectations has really been the ones that have gone up, the ones with the higher expectations, the ones that've gone down. So I think it's the same way if this is announced. And so my thinking on the timing of this

is when the FTC announces that they're going to challenge it, that might be the low. So, like, if you're not in yet, that's maybe what I'd be prepared for, because we know it's going to be challenged. The FTC has challenged much worse cases, right? They don't care about losing. It's an interesting FTC, right? Nobody else wants to lose as many cases as they do, and they still think they're winning. So it might as well wait for that in case it scare some people out of it. And, you know, if it doesn't, I think you maybe have like a year ago to court and stuff, but I think, I think what the big thing is, if they can get the unions on board, so if they can find a buyer or they kind of prove out the

spinco, that's the most likely way to make it close. And I do think they want it to close. It's a way to protect the union jobs. We've seen that plenty times. For those who don't know, I think it was Win Dixie. I can't remember for sure, but one of the famous examples of anti-trust remedy failures is it was a grocery store. I'm pretty sure it was when Dixie. I think it was an LA one. Yeah, they were doing a lot. Yes, Save a lot was involved for sure. They were doing a merger. It, you know, mergers, a grocery store, you might think, oh, there's Walmart, there's other people, but actually it really comes down to local economics, right? And if you merge two of the three biggest grocers in a local store, that's not going to be great.

So a lot of times they'll divest packages, right? And I think, again, I think it was Save a lot. They did a hundred store divest. As soon as the divest happened, the divesture was in distress. They went bankrupt like 18 months later. And it was looked at as, this huge antitrust failure. So that's, especially with retailers and grocery stores, that's one of the reasons the buyer really matters why antitrust is so skeptical of these types of divest. But I'm with you. Kroger, if the FTC, if and when they do sue, is Kroger going to take this to court and try to

get this through? They've seen to make that case that they will. I think they have a strong case. Their lawyers, you know, vetted this for a while, right? So I think they divest that it works. And so when we, oh, I was just to say, if you read through the proxy here, the proxy is one of the longer proxies I've read. And I mean, I think it was two months worth of, hey, you know, here's the break fear. Here's the best pacture. Here's how we're thinking about

antitrust. Like they spend enormous amounts of time on antitrust. And that doesn't mean it can't get blocked, right? Because we see all the time. I'm sure Microsoft spent a lot of time on antitrust with Activision and the FTC took them to court. But, you know, they did, it's not like they went into this thinking, hey, this is, we're going to walk through this FTC and get it done. They they knew that there was an issue and they spent a lot of time thinking about it. Right. That was the entire vetting. And, Andrew, one of the interesting things when I was doing the math on this, the way it really works for Kroger is if they can, because they get to pick the stores, right?

They're going to pick the worst one in this market, right? If there's two stores, they're going to pick the one that, you know, is the weakest. The way it really works is if they can grab share from the one that they divest. And there's reason to expect them to be able to do that, right? like if you know you're going to pick the one that's maybe the little worse real estate location the FTC doesn't know what you know right so you're choosing the one you want to divest and then without your network you can gain some of that share back and that's really how the math works for Kroger that's where the upside comes from all of that is definitely true though you know the

FTC has to be sitting there saying hey we know all of that is true so if we let this divest package go through are we getting kind of the bag pulled over our head again And now a quick word from our sponsor. This podcast is sponsored by Hedge-I. Hedge-I does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out Hedge-I at Hedge-i.com. That's Hedge-I.com.

Let's see. In terms of the divesture, so the merger contract makes a carve-out for, hey, if you have to divest, I think it's like more than 100 stores. There's going to be a reduction three times the four-wall EBITA of the divest. in stores. Have you done any math around how much the divesture is going to reduce the payout here? Or is it just too early to tell? You mean to go over? I think it's the 750 source. Is that right? It might be 750. Yeah. I haven't read it. Like if they go over that? Yeah. I didn't spend too much time with that. Kroger's sort of trying to draw like you would expect

a line in the sand saying we don't want to go sort of over this, the deal sort of off. Right. Like you don't want like to enter any negotiation and say we can get pushed, right? So I, I didn't spend much more time on that, but they can obviously make it work a little bit more. But if you look at the markets, there isn't a lot of overlap past that. Like, they've kind of went to the upside case. Like, they'll be literally divesting stores where there's no overlap. Yep. Yep. So I didn't want to spend a lot of time on that.

You know, the other tough thing, and you mentioned earlier is, hey, every ARB wants to wait until the day, the FTC files to buy this, right? You hear this from every ARB, VMware Broadcom, just, you name it. They say, wait until the FTC files. And I do wonder if it creates this rude situation where you want to buy before because nobody will buy before. So you get the free optionality of if the FTC does let it go through. And then if they do suit a block, well, everyone expected. So the stock really doesn't go down that much. That's something I've been kind of toying around and struggling with. Also, I don't do a lot of ARB anymore. I have.

And I'd say plenty of ARBs are involved before the FTC challenges something. Maybe it's changed with the last administration. But, you know, like Constellation brands, for example, when the FTC challenged that one, like Constellation sold to, you know, huge lows. And that's kind of where I got involved. And that's, that starts my history with Constellation in 2013. But people were investing in it from the start. I just think under this administration, like every time I talk to someone about an arbitrage, one of these rocky ones, where it seems pretty clear the FTC is probably going to bring a suit. The response, and it's been right is, hey, you wait till the day the suit is brought to bring it.

But with Albertsons, I guess just to circle back to the fundamental value, this is what, like, let's say this breaks. Where do you think this trades to as a standalone? It is a controlled company, semi-controlled company, kind of still, Mori Liquid. Where do you think this would trade to as a standalone business? So, I mean, less than four times I betah would be, you know, I mean, it could happen. Right. But I think they do have people who am following it and can step in. And if there aren't a lot of arms already in there, you don't have that extra selling pressure, right? The real selling pressure is when they're already involved and they weren't expecting it. So it's an unexpected break or an unexpected suit where you get the, you know, just absolute panic. I think about like our Rogers where everyone thought the deal was going through. And I can't remember the buyer. They walked and the stock goes from 250 to 100 in a day because everybody thought we were closing at 260 and nobody's done any work on it. Yeah. So it's not like. Like this hasn't been. What is Kroger trade at in terms of Vivida?

I mean, I can look that up. They have not traded off as much as you would expect, given their headwinds. It doesn't have to be exact. It's just roughly. Yeah, just typing that in right now. I would think it's a pretty decent multiple, but it's still grocery. It's trading at 11. times earnings and even if it is like 10.5.

10 and a half. So I mean, Albertsons is trading at, I'm sorry, six and a half. Six and a half. So Albertsons is trading at two thirds the multiple. Right now they're trading at two thirds to multiple. Kruger's is, I mean, maybe Kroger's a bit better business, maybe not. We haven't given Albertsons any credit for the termination fee. Okay.

That's, it's one of the ones that my partners would tell you. I email, like, once a month like, hey, Albertsons still hasn't moved. If this deal closes, we're going to get 25%. If it doesn't, like, it doesn't seem like there's a lot of fundamental downside. Nobody wants to own this thing. Any of closing thoughts on Albertson before we move on to something else? I agree with you. It's interesting.

That's why I have it there. And you're right. Almost nobody asking me that. That's what I thought. Let me turn to Kenview. The ticker there is KVUE. I am kind of, I am very interested in this because, For those who don't know, Kenview is a IPO out of J&J, J&J spinning out almost all of their stake.

Basically, as you and I are talking, again, we're talking August 15th, the spin out, the split out, whatever it is. It happens end of this week, early next week. Kenview stock has come under an enormous amount of pressure, volatility, as ARB's kind of try to set up the spinout ratio for Kenview. But I have a lot of people who have said, hey, look at Kenview. This is a good business. The stocks come down kind of 15% over the past month on all this ARB. pressure, all the technical pressure. This is a pretty nice opportunity to pick up a good, a great business at a nice price. And, you know, as that all that volatility flows away. It gets added to

I think it's the S&P 6 or 500. They got out of it. 500. It gets added to the S&P 500. All that technical volatility goes away. Like it's a pretty interesting event-y thesis and it's a pretty interesting kind of long-term comp under thesis. So I don't know a crazy amount about the business. I'll just toss it over to you. It's on your buy list. So do you want me to talk about the spread or what's happening right now or just a business? What are we talking about the business? Because the spread by the time this posts, I mean, look, the spread, it is very popular. There was a Barron's article over the weekend.

You can buy J&J, split it over to Kenview, whatever. We can talk about that, but I'm actually more interested in the fundamentals because I'm guessing you don't have it as a buy just to play the J&J split. Right, I don't. And maybe the one thing I'll say about the spinoff itself is I don't think I've been involved with a spinoff where the parent company goes to such great lengths to help. the spin off company is that already called the child company you know in terms of taking on the legal risk there's a in the baby powder lawsuit right um in terms of giving a discount to put people

into ken view right it's about a 7% discount and being able to sort of elect how many shares of what you want i think gives ken view the the shareholder base that wants it right how many spin codes have you seen where you know it's a different industry so the people who are receiving it don't want it or maybe have to sell it, right? So in this sort of set up Kenview is you couldn't ask for a better spin itself. And even the IPO, J&J sort of underpriced it compared to where their demand was just in order to get it in the right hands and maybe give them a little bit of a profit, right? So they're more interested in building their stake. The IPO price was 22 per share, if I remember correctly, right? Yeah, it was 22 and then it kind of ran up to 26 and

now it's back to 23 on the technical pressure. They reported Q2 earnings. but the earnings were pretty good. So it's not like they whiffed earnings and the stock should have been down or something. Right. Yeah. And so the company itself, you know, just to give you a quick overview,

is the consumer healthcare part. And there's like a new burgeoning industry in consumer staples, like a subsector called Consumer Healthcare. So you have Kenview, now you have Reket. Hallion was a spinoff from some pharmaceutical companies as well. And then you have Parago.

And then you have some existing companies that are like prestige, pbh or some smaller ones so there's enough in the subsector to be followed right and it's sort of a new sector and I think it fits within consumer staples

and I think where this sector can really win and Kenby obviously would be the 800 pound gorilla in the sector is if they can accelerate growth by sort of swapping some pieces so like if I don't know Jane J could focus more on one sector maybe give up oral right oil health care to focus more on, you know, and a gel sex. So something like that, where they're

speeding up the growth rates, you know, increasing the innovation, et cetera. That's where the sector is going to win. And it's also interesting because so many of these companies were sort of like they used just for the cash flow for the parent company. And now what are they going to do, right, when you can focus on their own business. I think they can accelerate the top line and they can have better returns. You can see more innovation, right? And that's the key to be a compounder in consumer staples, but they have great brand, you know, strength, pricing power, but they haven't really used those sort of levers, right? They've just been used as cash cows.

You really not seen sort of the marketing or R&D efforts that I think you can in the future. So I think that's what's really interesting, longer term. And Kenview sort of fits with all that. Like they're going to be the big, you know, any part of what makes the sector work, Kenview is going to have to be a big part of that, right? If it's M&A, which I think we're going to start to see, or more innovation, or more pricing, Kenvue is going to lead that. Look, this is the classic spin-off thing, right?

You've got a Kenview or something that's buried inside of a giant conglomerate, which J&J would certainly qualify as. You spin them out. You give the management team stock options that are struck, you know, hopefully at a nice price from the spinoff. You, and all of a sudden, like, hey, that extra 1% of pricing power or that extra 20 basis points of units or the extra 50 basis points of cost, like under J&J, maybe you're not that incentivized to do it. But now that your standalone, you make a heck of a lot of money for realizing

that. So that's the classic setup. Do you want to talk about, I'm a little hesitant because it's not as timeless, but we're talking Wednesday, August 16th. I keep saying 15th. The exchange offer is going to happen kind of end of this week, early next week. Do you just want to talk about like the technical setup when you're kind of thinking people should get most involved? Sure. Yeah, so by the time people listen to this, I guess it would be mostly over Fridays, the deadline. depending on your broker, you can have a broker that the deadline's already passed where you're supposed to select. It looks like because the dividend is higher at Kenview, it's like three and a half, maybe a whole percent more than Jay and Jay, that I think you're going to get a lot of mom and pop people electing to receive Kenview shares. So I think it's going to be pro rata.

So like if you were. Oh, there's no doubt it'll be pro rata. But it's just a, you know, if you're an R, it's a question of how much is it going to get pro. Yeah, so maybe I saw like 80%ish, I think, is where it was yesterday, at least. And then, you know, the other reason for doing this PINCO is, is J&J's multiple is like 16 times. And you can look at, I have a lot of consumer staples that have the brand strength of something like Tylenol that are probably selling it 16 times EBITDA, right? And that's the whole idea for doing this, is you can create a lot of value with a higher multiple by putting it in the hands of people who will pay up for that, right? so they're going to receive the shares next week yeah yeah it'll be interesting it's definitely one

and obviously anything with an odd lot tender gets on it's on my radar pretty quickly and all the sudden i have 20 people email me there was the baron's article saying do the odd lot tender and i had people coming out there were like hey can you explain odd lot tenders and slittawson's like nobody talk about that odd lot tenders are the golden goose let me turn to different one Hershey's. That is on your bull list. And, you know, I wanted to ask you about it for two reasons, three reasons. A, because I've got a huge sweet tooth that I'm always trying to combat. So anytime we can talk about a sweet tooth. B, I think the stuff we talked about with Costco earlier, where I look at it and I say, hey, nice business, great brands, pretty expensive. And maybe in the long term, some

concerns around, you know, there's the health factors, but there's also Wegovi, which I hear a lot of people talking about, hey, you know, as GLP1 and all these roll out, maybe you wanted to short everything that's snacky foods because it reduces cravings and it reduced, and maybe there's like long-term headwinds there. And then see, the reason I want to talk about, there was a short thesis that was based entirely on Mr. Beast, basically launching a chocolate brand and eating their lunch, which really tickled me and was certainly different. So I wanted to just like roll all those three questions and toss it over to you.

Okay. So let me see if I can remember the order. number one i can repeat any of them but just throwing them all out there yeah so maybe with number one i'll start off why i like it um very low private label penetration in you know chocolate sweets and snacks another reason like harsie is they're they i think the management team has finally become comfortable on how they do acquisitions and snacks so you know they've been very deliberate only done one like every couple years but it's working they're able to you know have a lot of synergies plugging it into their distribution, and they know how it's working. So they've been buying up

brands as well as factory capacity. So they have that extra stool now, right, where they have chocolate, sweets, and now snacks. And then the other aspect for the longer term is international. They're still not anywhere penetrated internationally like they are in the U.S. I know Hershey chocolate's a little bit different than the European chocolate, but it's not just a European chocolate thing, right? So that's what I just... you on the international expansion. Just a quick question for my own notification. I have not studied international consumer staples in depth in a while, but it strikes me say they have international penetration potential. And I hear you on that, but at the same time, it's not like

chocolate is some unknown brand out there, right? Like, Europe. Nestle's everywhere. Cadbury's everywhere. I know Hershey's has some relationship with Cadbury, but, you know, when you say international, I think, oh, well, haven't like people's snack trends already been kind of set international? There's all these international brands. Yes, they can buy, but, you know, it's not like it's Coke in the 30s where, hey, as our boys go over through Europe, they're going to bring Coke with them. And we're like tapping a completely greenfield market in the 1930s, is what it mean there. Right. No, I agree. And I would say, yes, you can buy their, also their distribution, right, if you get in there. And then also we're looking at maybe just don't

think Western European markets, right? If you think of like Latin America, right, there's Africa, there's other ways to market that you win India, China, right? So it's not just competing. against, you know, Nestle in France, right? Great. Anyway, I interrupted you. Please continue. So number two was, number three was Mr. Beast. Number three was the Mr. Beast thesis. So I can skip to that. So I think, if anything, you see some recent controversy of Mr. Beast.

You can see why there's so much, you know, risk, right? Institutional risk by having a brand associated with. like a one person, that's a social media person, right? So if anything, Mr. Beas is not a brand. It's a social media person. And, you know, I think social media, if anything, compresses the life, you know, span of a particular endorser, right? Like, you see the risk of someone like Jared from Subway. You can't put a brand on one person, right? People are humans. You don't do that. Hershey's a company. It's a brand, right? A lot of brands. So, you know, can Mr. Beast you know, dent Hershey in Mars?

No, I don't think so. But they have very little private label penetration in chocolate, and I think that's part of the reason to like it. It's got one of the lowest of anything in food and beverage. I just like, again, I thought the mystery be short thesis was interesting. I hadn't seen it before. I don't really believe it, but I look at something like alcohol, right? Every, every celebrity is launching their own tequila brand.

I saw the Rock's tequila brand might be worth like $4 billion or something, some viral, some tweet went viral. George Clooney has his, Ryan Reynolds has this. And they build them up, but, you know, they are just the brands. And I think they, like the Rock has smartly not said it's the Rock tequila. It's a different brand. So even if the Rock had issues, like maybe there's still some brand value there. But, you know, they're just brands in marketing. And ultimately those, those are just juicy, juicy Baltimore targets.

Because like, even if Mr. Buse was taking a lot of share, somebody else producing it, somebody else distributing it, like Hershey buying them or. another stat buying them it's the ultimate bolt on it would make sense for both parties like that's clearly what you build towards and if they did buy it i think they would create a lot of value from from that type of thing so yeah it also just you know it's just hard for me hershey's been around for 150 years it's hard for i'm not saying a mr beast or some other thing can't take share but to really impact her she you know with the ingrained hey i got reases for Halloween it's it was tough me yeah and they just get so much hype just being on social media compared to what its overall share is like you look at prime hydration and energy drinks like the amount of hype it gets for the

share is so disproportionate i would say the same thing for mr beast and and yeah i think it does work for some spirits i think casamigos is probably the the best situated right it's the least you know sort of tied into you know george cluny himself they have two other partners right so i think they place that well but at the end of the day you still have to be part of that big or network to have anything like that sustain you know the other thing that's tough with it is like you mentioned prime drinks like yes they have huge sellouts when they launch and people go get them but there's a difference between hey i love this person i'm going to go get their drink like right when it works and tries it and try it versus hey i've got 20 years of selling Reese's hey do i like

it do i like it can i find it easily is this type a habit i'm forming and stuff like those are two very different things and that's why a lot of these can be lashing the pants last question Hershey, it was a GLP1 and kind of Wic-O-V-O-Zemic risk in the long-term. So I actually did some analysis recently on this, and yes, I understand the risk for

all food, right? The GLP-1 drugs, we-go-e, it seems to depress your appetite I think anywhere between 25 to maybe a little over 50%. So that's a sort of risk for that consumption. But I think the critical swing factor

in this risk is if it's going to be covered by insurance right because it's a very expensive thing we're talking about you know the big risks from you know student loan repayments or the emergency pandemic snap payments ending this is a thousand dollars a month right it's a sort of a very small group of people who can afford that and this isn't like you take it for one month right so uh i think that's why if it's not covered it's hard to make any case where you can see less than one to two percent calories consumption, you know, disappearing from that. And that's with, you know, a population of people on it, you know, 10 times where it is now. So I think there are reasons to be skeptical of Ozim, but if I could just push back, like, I do hear if it's not covered, people aren't going to get on it.

But at some point, either it will get covered, right? I would actually kind of be surprised based on the evidence that it reduces heart attack risk. I'd be surprised if it didn't get covered at some point. And if it did get covered, certainly the insurers would be able to use their pricing power to push it down. But even if it didn't get covered now because of price, right? Like if you ran this forward five years, then there will be GLP 2 or whatever the new ones are. And I think you would start talking about some of these, like eventually these are going to go generic. like the population will get will get invest we'll get access to these in mass at some point at a reasonable price and like herschise you know you're paying a pretty high multiple like you're you're really relying on the terminal value here and if there is something that's going to cut down on consumption whether it's today tomorrow or three years from now like that does seem like a risk okay so there's a risk aspect to it but i'd say in the next three years the insurers themselves if they covered it would be a much bigger show

short than consumer staples companies, right? I mean, and think of how much that's going to cost. I know you're going to argue that they can get the prices lower, but how much lower are they going to get it, right? So in the next three years, there's probably enough, I don't know their own financials, but there's probably enough market for them to just sell it at this price that they don't need to discount it. So I think the population size that we should probably focus on is what I think 28 million people who have type 2 diabetes, they're also overweight, that sort of group that. And, you know, if you look at the side effects, I think we're just hearing the hype right now.

If you read the side effects, they're real. Oh, I completely agree. Look, I'm always looking to lose five pounds. Like, maybe I should get on Wagobe. And then I was like, you know, 30% of the weight you lose is your muscle mass and everything. I was like, oh, gosh, nope. I think I'll be passing on that one. Right.

So I was surprised, like, just based on consumer surveys already, when people find out that they have to stay on it, that it's showing at less than 20% of the people who are overweight. you know, the BMIs or obese are interested in taking it. So it's not all of them, right? And then if they hear about like any drug, even drug that's supposed to help everybody, just think of like the COVID vaccines, right? There's people who don't want to take it, right? So you have to remember that. But then you have to throw in insurance. You have to throw in these crazy side effects. And we're going to hear more of them over time. That's the nature of drugs and people talking about side effects, right? So the way I looked at it, the next couple years, even without

insurance, you know, swinging through and covering it, it's like a one to two percent calorie impact. And that's with huge adoption from where we are now. And now, a quick word from our sponsor. This podcast is sponsored by HedgeE. HedgeE. HedgeE does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out HedgeE at HedgeE.com. That's HedgeI.com. Let me, last one, and then I will let you go. Let me move on to IFF international flavors.

I only ask, I have done like no work here, but the day that they, so for those who weren't following a week or two ago, they reported earnings. The stock was down a record amount. I mean, this should be a pretty steady, like, non-cyclical business. And one of my friends, when they reported earnings said, I think that's the worst earnings report that I've ever seen. You know, they're down a lot. I could see some investors starting to say, like, I'm just looking at Bloomberg.

for, hey, the stock's in the low 60s, earnings estimates for 2024 are approaching $5 per share. So we're trading at kind of a 13 to 14 multiple, call it if we like undo some of the rounding. That's pretty cheap for what should be an advantage, pretty steady business. You've still got a short buy or a sell bias to it. I guess just toss it over you. If you can, A, tell me how bad the second quarter earnings were and B, why you think that cheapness kind of isn't enough here. So I'd say maybe it's a little bit data. So I was a short bias into the report, right?

I was negatively biased. Like sort of everything that could be going wrong in the macro for them is a headwind, right? So it's naturally, like, I'm going to look if this is worth shorting, you know, actively. And it did. It had one of the worst quarters. They sort of said everything that I was worried about. And so that makes me naturally, you know, inclined to, like, take it off. if they're sort of admitting my, you know,

a whole risk set. So I would say, like, I'm not, I wouldn't be saying I'm short it right now. I was short biased into the event. And, you know, I'm going to look a little closer. It's not on the top of my list in this Q2 earning season because I had best ideas to go through, right?

So I would say everything that's going on in the macro is a headwin for them, you know, in terms of innovation. So their customers are the rest of my consumer staples companies, right? And so, you know, with the inflationary pressures and new product introductions and then Walmart, all target, all the big box stores, reducing inventory levels. And plus, you know, rising input prices, those are all the headwinds for them. And, you know, hit them all. And, yeah, so there's a worth looking at.

I think you have time to look at it. Yeah. But, you know, I'm not trying to say short it right now. I'm just negative for obvious reasons, was negative. if last question then we'll wrap this up you cover about 20 companies that you're positively biased on if I'm just kind of eyeballing the list if an investor was listening to this podcast and was like hey I want to go look at Daniel's like top idea what what's the one they should start with heresy her she okay cool perfect and we don't even need to talk more

about it because we kind of already already covered why cool anything else you want to say before we wrap up or anything I don't know thanks for taking the time to look at consumer staples. Yeah. This has been a ton of fun. Anyone who wants to go follow Daniel, he's on Twitter at its Hedge Eye staple, all people will be able to find it by following my Twitter or we'll put a link in the show needs.

But Daniel, this has been great. I appreciate you coming on and we'll have to have you on again at some point in the future. Thanks, Andrew. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.