COOK - Traeger Stock: Not Touching Here

2023-08-04 18:02:10 ET

Summary

• Traeger, Inc., a company known for its wood pellet grills, went public in 2021 but has faced challenges due to the reversal of pandemic trends.
• The company saw strong growth in 2021, but experienced a slowdown in sales in 2022 as well as experienced huge margin pressure.
• Despite some signs of improvement, the company's financial performance remains underwhelming and realistically lossmaking.

In the summer of 2021, I believed that Traeger, Inc. ( COOK ) was offering slow cooking, but was a hot stock itself. The company had just gone public at the time, so I had some questions on the business and its performance, making me await input on the growth and margin profile of the business.

I am glad that I took a cautious stance on the shares, as the reversal of post-pandemic trends meant that revenues fell to much lower levels, while added and substantial stock-based compensation expenses after the IPO raised the cost base. Even as some emerging signs of life are seen here today, the hole to climb out of is huge, with the Traeger, Inc. risk-reward not looking very compelling here to me.

A Recap

Traeger was using the momentum induced by the pandemic, which fueled demand for outdoor grills with consumers not having many places to spent money (certainly not on services) while spending more time outdoors. The boom, which started in 2020, provided a great window to go public, and that is exactly what Traeger and some of its peers did.

The company is the inventor of the traditional wood pellet grill, an invention which goes back to 1987. Ever since, the company has created a community, lifestyle and movement in cooking, having the mission to make everyone a hero in the backyard. The company sold two million grills in the period 2016-2020, as its clients like the characteristics of the wood pellet, which ignites natural hardwoods in order to grill. The ease and characteristics of this way of cooking offers appeal to users, with characteristics of hardwoods not replaced by, for instance, gas, coal or electrical alternatives.

The company went public at $18 per share, as the company commanded a $2.1 billion equity valuation at that level, with the enterprise valuation coming in at $2.4 billion if we added pro forma net debt.

Pre-pandemic, Traeger posted 2019 revenues of $363 million, on which it posted operating earnings of $43 million, that is if we add back $33 million in amortization charges. 2020 sales rose by 50% to $545 million, with operating earnings rising to $91 million (again after adding back amortization charges), while EBITDA was posted at $116 million. Based on such earnings power, I believed that net earnings came in at just over half a dollar per share, translating into demanding valuations.

The company saw strong growth at the start of 2021 with first quarter revenue more than doubling, yet second quarter growth slowed down meaningfully as operating profits actually fell year-over-year, due to higher sales and marketing efforts. I still believed that the company could post operating earnings around $100 million for 2021, which could translate into earnings of $0.75 per share, yet this would still result in high multiples. Furthermore, I believed that these were peak earnings, certainly as shares rose to $22 on the first day of trading.

Given the many mixed signals around the time of the IPO, as a lot of the demand was clearly driven by the pandemic and related trends, I decided to play it safe, deciding to watch the development unfold from the sidelines.

The Pandemic Reverses - So Do COOK Shares

After shares peaked in the $30s in the summer of 2021, shares quickly fell and traded at just $10 at the start of 2022, falling to just $2 and change during the summer of 2022. Over the past year, COOK shares traded between $2 and $4 per share, and then they jumped 50% over just the last week, showing some signs of life.

Early in 2022, Traeger posted its 2021 results with revenues up another 44% to $785 million, although that the company saw heavy pressure on margins. A GAAP operating profit of $58 million in 2020 turned into a GAAP loss of $58 million, and even if I add back a combined $38 million in amortization charges and a change in fair value of contingents considerations, realistic operating losses still came in at $20 million.

The company itself posted adjusted net earnings of $67 million, equal to $0.60 per share, but this was after no less than 11 adjustments were made to GAAP earnings, as I was certainly not happy to adjust for an $81 million stock-based compensation expense, even as it was likely elevated as a result of the IPO.

Moreover, no quick success was seen as the company guided for 2022 to rise in a modest fashion to $800-$850 million, as adjusted EBITDA was seen at just $70-$80 million, which compares to a $109 million number in 2021.

Forwarding to early 2023, it was obvious (as became obvious during the year) that this guidance was far too optimistic. 2022 sales did end up falling by 16% to $656 million, as adjusted EBITDA fell to $41 million and change. The company reported a sky-high GAAP loss of $382 million, largely the result of a $222 million goodwill impairment charge, among others.

The company posted adjusted losses of nine cents, but again the adjustments were high and plentiful, certainly as stock-based compensation expenses were not coming down. Moreover, lack of profitability is a big issue as net debt ticked up to $441 million.

Worse is that 2023 was set to become a tougher year, certainly on the top line, with sales seen down further to $560-$590 million, with adjusted EBITDA seen up sightly to $50 million, plus or minus five million.

Signs Of Life

In May, Traeger posted a 31% fall in first quarter sales to $153 million, as the company maintained the full year guidance. More promising were the second quarter results with revenues reported down 14% to $171 million, accompanied by modest gross margin expansion, although the company still posted relative large losses.

Nonetheless, the top line was strong enough for the company to raise the full year guidance to $585-$600 million, after the first half of the year is seasonally stronger already. The company now sees adjusted EBITDA at a midpoint of $57 million, a modest improvement as well.

That looks better than it is, as adjusted EBITDA already came in at $43 million in the first half of the year, a period in which the company posted a GAAP loss of $25 million, set to expand in the second half of the year. Net debt ticked down to $422 million, mostly the result of strong working capital management and lower inventory levels.

The 123 million shares now trade at $6, granting the business actually a $750 million equity valuation, or a near $1.2 billion enterprise valuation, still expensive at 2 times lossmaking sales. While the company repots positive EBITDA, the numbers are highly adjusted, with stock-based compensation (for instance) expenses stubbornly trending at $80 million a year, not coming down.

Hence, I am positively surprised by the Traeger, Inc. share price action. While shares ticked up meaningfully, the fundamental improvements (with a minimal hike in the revenue and EBITDA guidance issued) are too small for me. The overall Traeger, Inc. fundamental situation remains too challenging, and I am not yet ready to be involved here, as the situation simply feels a bit too hot.

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