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Or, there is a tide in the affairs of consumer discretionary.

I particularly liked Papa John's for various reasons. But they have debt, tariff exposure, and should probably cut their dividend to de-lever. But that is why they are cheap and I was considering averaging down.

But https://www.investing.com/equities/52-week-low (apologies for the low quality 52-week low link) is a veritable who's who of restaurants, beverages, and packaged food.

I think PZZA has a lot to like, but I could say similar about CPB, GIS, HSY, KFT, KO, MDLZ, PEP, QSR, SJM, UTZ, WEN, YUM, et al... it seems like the entire industry is a falling knife and I would be poorly advised to fight the tape on any one of them. I'm curious about others' thoughts.

I have purchased shares in HSY, PEP, and QSR.

This weekend, I plan to write up my thesis on PEP and QSR. Doing so will help clarify my thoughts and create a personal record.

Regarding HSY, I’m somewhat influenced by Buffett and his board. Buffett often emphasizes the stickiness of consumer behavior when it comes to candies, which suggests that the business is sustainable. I believe that any issues with cocoa prices will resolve within a few months to a year.

My position in these stocks is relatively small because I need to learn more about the company. I bought shares to take a deeper interest in their operations.

Additionally, I bought KOF because it appears to have a strong competitive moat. I prefer KOF over the other three stocks, although it is still an initial position for me.

I want to do a quick write-up (chat gpt makes writing so much easier - thank you AI community - my life is so much easier because of you all :-) )
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KOF
Strengths

Market Leadership: The largest Coca-Cola bottler worldwide by sales volume, representing 12.2% of the Coca-Cola system's global volume in 2023. The other big one is one in Europe. In US I am not sure if Coke wholly owns its bottler or what.

Operational Scale: KOF has 56 bottling plants and 251 distribution centers, distributing approximately 4 billion unit cases annually, a scale that creates significant barriers to entry for competitors in my opinion.

Financial Metrics:Total revenues of Ps. 245 billion in 2023 with a gross margin of 45%, operating margin of 14%, and net margin of 8%—indicative of an efficient and profitable business model. The revenue has been growing 10% range. I am not very clear on volume trends.

ROE: Being a capital-intensive business, I would have expected lower ROE/ROIC. KOF has maintained a ROE of 13-14% over the past few years, which is solid for a manufacturing company.

Economic Moat:
Gvien the scale and size I imagine someone trying to compete with this business will require financial heft, advanced manufacturing skills, and Coca-Cola's endorsement. This business has competitive advantages in the beverage industry that should be sustainable for next 10-20 years.
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Fair Value and Valuation

Morningstar puts fair value estimate to $92 per ADR (was reduced due to Mexican peso depreciation)
The current valuation implies a P/E of 15x and EV/EBITDA of around 7x based on 2024 estimates. Seems to be prices reasonably well for a good growing business.
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Market Share by Region


Mexico: 49.6% of total revenue
Brazil: 25.5%
Colombia: 7.4%
Guatemala: 6.0%
....
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Risks

Dependence on Coca-Cola Company:
KOF relies heavily on Coca-Cola for concentrate purchases and strategic decisions. Any adverse changes in this relationship or pricing structure is bad bad for business.

Shifting Consumer Preferences:
Health concerns regarding sugar-sweetened beverages and environmental issues, such as plastic waste is always something front and center. Though the zero calorie, water, energy drink is also picking up, but coke brand product itself is like 60% of the volumn.

Water Scarcity and Supply Chain Issues:
Water, essential to KOF's products, is increasingly scarce. Rising costs of raw materials like PET resin and sugar, as well as supply chain disruptions, could pressure margins. They report working on increasing warehouse coverage, but infrastructure risk is a big risk in number of these countries.

Currency Depreciation:
This is front and center. Currency Depreciation reduces reported profits for U.S.-based investors (revenues are all generated in foreign currencies.) Despite hedging efforts, currency remain a significant risk. Peso has fallen due to tariff threats and interest rates in US and all analyst believe it is not going back up anytime soon given the US interest rate is likely staying high for next 12 to 24 months at least. The fall in stock price is highly correlated to peso depreciation
About 17.6% of KOF’s cost of goods sold is tied to the U.S. dollar, reducing exposure to currency fluctuations in costs.
15.8% of KOF's debt is denominated in USD, so debt wise not a big deal

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I have started position around 15% of where i would want to end up. Started at $76. Currently at $74.5. I personally like the business as it is easy to understand and very competition proof.

Thank you for this! KOF looks compelling.

I think KO traded assets with what is now the large European bottler. I'd looked into Coca-Cola Enterprises (CCE) at one point, and had lost track: In 2010 KO bought CCE's North American operations, and KO spun off their European bottling operations to "New CCE". Someone clearly had a sense of humor with naming companies. New CCE merged with two other European bottlers and is now Coca-Cola Europacific Partners (https://finance.yahoo.com/quote/CCEP/). In addition to KOF and CCEP, there are Coca-Cola Enterprises https://finance.yahoo.com/quote/COKE) and Coca-Cola Bottlers Japan Holdings (https://finance.yahoo.com/quote/CCOJY/). They have quite varied investment characteristics.

Interesting idea. If data aggregator sites are to be trusted, it looks like almost 18% of the float of PZZA is sold short (or 10% of shares outstanding). That's... high. And the shorts are willing to cover a 4.5% dividend to do it. Is it reasonable to infer near term operating results might not be stellar? GAAP EPS is all over the place, but what's it reasonable to pencil in, $2.50- $3 / year for the next few years? They run a lot of debt, are you at all concerned about that?

Hi CapitalAlligator, I apologize for not having time to reply as thoroughly as I'd like. But I agree with all your points.

The short interest really troubles me. As you noted, with PZZA having a 5% yield, it is an expensive short. I think they are factoring in a suspension or cut in the dividend. I think the strongest reason for the short case, as you also noted, is debt related; they have $17M cash on hand and the same aggregators say $1B in debt. They are paying $45M annually for the common stock dividend and their past buybacks were badly timed and indicate poor judgement. The CEO transition doesn't help.

But that is why - to me, at least - an otherwise decent chain costs 12-15 times earnings and 9 EV/EBIDTA. I think they are fixable and have room to grow. For various reasons I also tend to like companies that pay substantial dividends (BRK notwithstanding), which PZZA would be even if it halved theirs.

Regarding debt, they have $400M at 3.875% maturing in 2029 and $332.4M on their revolving credit facility with $273.2M left per the last 10-Q (https://ir.papajohns.com/financials/sec-filings/co...). It sounds like they are meeting their credit covenants currently.

I think PZZA is a risky choice, though, and wouldn't want to persuade others to follow me.

Like homosapien, I also have picked up a small HSY position, and I'm worried I have tunnel vision with a couple of falling knives and might be missing the reasons for industry-wide headwinds that should make me reevaluate. I don't know what those might be, unfortunately. GLP-1 agonists? Economic softness? Tariff related inflation?

I truly asked out of plain old curiosity and ignorance.

Selling Markel on March 6 (no...I didn't get the high price but not too far below) funded HSY (averaged in at $153) and BUD (averaged in at $51). I've also added to Pepsi, Coke, and bought Constellation on the tariff and RFK fears.

Maybe it shows my age but I like these businesses. For me I was thinking- my logic- was based in terms of "in a period of bad business or weakness Markel could sell for $2050 five years from now while HSY (et als in their own price ranges) would likely sell for $250 in a period of weakness five years out."

Sorry...wrong thread.

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