ADVWW - Curreen Capital - Advantage Solutions: A Capital Light High Returns Business

2023-07-29 06:15:00 ET

Summary

• Advantage Solutions is a capital light business that manages in-store sampling programs and earns high returns on capital.
• The company came public as a SPAC, which is usually unattractive, but Advantage Solutions is an excellent business that is undervalued.
• The company faced challenges due to COVID-19, but it has the potential to return to strong profitability and growth.
• We see ADV as an excellent business that is working to fix temporary problems.

The following segment was excerpted from this fund letter.

Advantage Solutions ( ADV )

Advantage Solutions works with brands and stores to sell products through stores. The company is one of the largest managers of in-store sampling programs in the U.S. (for example, would you like to try this new brand of: cheese/chips/dip/etc.) Advantage Solutions was a SPAC-merger completed in October 2020. Advantage Solutions is a capital light business that earns high returns on capital. It has a meaningful debt load, though the debt lacks onerous covenants and does not come due for several years. Advantage Solutions uses its free cash flow to repay debt and acquire smaller competitors. The company currently trades at an attractive upside-to-downside ratio.

We added to our position in Advantage Solutions (3% of our fund), paying $1.55/share. Advantage Solutions warrants special attention, because the company came public as a SPAC, and this is the first SPAC that we have bought. SPACs are sometimes known as “blank-check” companies, and I tend to think of them as an unattractive place to look for investments. Over the past few years, many SPACs appeared, overpaid for questionable assets, and as a whole – lost money for investors who bought them.

This is usually not an attractive hunting ground for Curreen, but SPACs burned enough investors that at least one baby was thrown out with the bathwater.

Advantage Solutions was the kind of ugly duckling that we love – an excellent business, misunderstood enough to be far too inexpensive, with the additional positive of both the CEO and Chairman buying the stock.

The company markets products that are sold in stores. It is one of the largest U.S. providers of in-store sampling (for example: would you like to try this amazing cheese?). Advantage Solutions also does in-store aisle checks for brands (to ensure that they are getting the display prominence that they paid for), provides in-store marketing displays, and represents brands at store headquarters to get the brands’ products onto store shelves.

Historically this has been an excellent business earning high returns on capital, with free cash flow driving growth through acquisitions. Then COVID hit. Many of Advantage Solutions’ in-store services evaporated, and revenues and profits dropped. As COVID receded, the higher cost and increased difficulty in hiring entry-level employees (the boots on the ground in the stores) continued to pressure the company’s profit margins and has hampered its ability to grow.

Advantage Solutions also has a large debt burden, as its grow-by-acquisition model was not solely financed with free cash flow. The good news on this debt is that it has few financial covenants that will force the company to go hat in hand to its lenders if operating profits continue to be weak (the lenders probably do not see this as good news), and its debt does not begin to mature until 2028.

At first glance, Advantage Solutions looks like a troubled SPAC, with weak operating results and an overlevered balance sheet. I see it as an excellent business that is working to fix temporary problems, with covenant-light debt that gives it the time it needs to return to strong profitability and potentially even restart its growth-by-acquisition engine.

The price we paid was less than 10x my estimate of trough cash earnings (acquisition amortization reduces GAAP-accounting figures), and I expect meaningfully higher earnings in the coming years. If the future turns out worse than I expect, our low purchase price offers a lot of protection.

While I remain very cautious, our fund continues to look for compelling investments—mostly among spinoffs, self-tenders, and other corporate actions—and the market continues to create new opportunities. Sometimes, as Advantage Solutions shows, in unexpected places.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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