Description
No BRO(s). This short and simple write-up. The thesis is NOT on the quality of the concept or business model. BROS is and will likely continue to be a successful growth concept. It is our belief that in a frothy market investors are relying on a 50 million share count vs. the true share count of 167 million. For a QSR concept, the difference between 50 and 167 million shares pushes the valuation from 10x sales to roughly 30x 2021 revenue. Thus, the market is pricing a drive-through coffee QSR business at a valuation of $25 million per location with sales per store of $1 million and EBITDA of $150K per store. The rest is the valuation is for future growth which should be impressive in the 37% in 2022 and 28% in 2023 according to sell-side analysts. But even with this impressive growth, the stock is valued at 18x revenue, 100x EBITDA, and 483x EV/EBIT. Record valuations in QSR CMG, SHAK, and SBUX.
CAPIQ, Yahoo Finance, and (from what I have been told Bloomberg, not a subscriber) all use 49.9 million as the share count for Bros, but from the S-1 it is clear that the other classes of stock converted into Class A shares and the data providers are not collapsing the other share classes into the A-shares.
Only 2.9% of the shares are short given the recent IPO.
The $25 million valuation per store is roughly ($1.6 million) 15x the cost to build or 40x ($635K) with a ground lease.
NOTE: PLEASE MULTIPLY BROS VALUATION BELOW BY 3.34x GIVEN
THE WRONG SHARE COUNT USED:
This is a QSR business: 75% of operating cash flow goes back into CAPEX to build more locations.
One of two things is happening (probably a mix of both): 1) an error from many investors not realizing the share count is really 167 million NOT 50 million as most data providers display and/or 2) Investors believe this is the next Starbux and are paying a valuation of 6x SBUX.
Dutch Bros ticker BROS is being valued at not at what appears to be $3.5 billion or 10x sales but really at 20x forward sales for a QSR business. The old high watermark is Wingstop is valued at 20x sales and 50X EBITDA with 20% top-line growth with 31% EBITDA margins. Bros is valued at 20x sales and 115x EBITDA with 35% top-line growth with 17% EBITDA margins. The highest valuation (outside of WING) restaurant QSR’s concepts trade at 5x sales and 30x EBITDA but nothing at 30x sales. This is due to what we believe is a mistaken share count that shows 49 million vs. 167 million shares outstanding.
This is a pure-play QSR that sells coffee. It is well run and probably has a decent runway of growth ahead but IMHO we are likely pushing 2030 valuations not 2022.
Going out 24 months, and giving the business a value of 5x sales (SHAK/SBUX) comes to $24 or -67% downside from the current $70. Or give BROS 8x 2023 sales and the stock is worth $38 per share.
DISCLAIMER: This does not constitute a recommendation to buy or sell this stock. We are short shares of the company, and we may buy shares or sell shares at any time.
I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
November 12th earnings release with 167 million shares outstanding instead of the apparent 50 million outstanding....BROS would valued at $12bn with $600 million in sales and no FCF.
EPS over the next 3 years: 0.10, 0.22, and .37 cents on $71 stock...it is a QSR concept.
Higher minimum wage