Report
Valens Research

Valens Equity Insights and Inflections - 2021 04 27

Current market expectations for LGIH are overly pessimistic. Markets expect UAFRS-based ROA (Uniform ROA or ROA') to drop to by roughly half, with growth being cut by two-thirds going forward.

The market is not recognizing the secular tailwinds for LGI Homes from its own strategy, or the at-home revolution, and how both will continue to power strong profitability going forward.

As one of the last homebuilders making the shift from a regional homebuilder to a national one, LGI Homes has significant growth trends, thanks to their strong execution for the business also. On top of that, as more people, as part of the At-Home Revolution, are looking to move from the cities to the suburbs for homes, LGI Homes is benefitting, as the entire homebuilding group is, from increasing demand for its starter homes and upgrade homes.

On top of this, management's alignment, focused on margins and growth, is likely to focus management to execute on their strategy, contrary to market expectations.

Also, management is showing growing confidence about how strong their end markets are, how they have the inventory to benefit from booming demand, and about specific markets' robustness.

Considering low market expectations, in terms of pessimism for both growth and Uniform ROA recovery, the company's strong position and strategy, macro tailwinds, and confidence about executing on their strategy for the business, current low equity valuations appear
unreasonable, spelling potential for equity upside

SIX Q4 2020 Embedded Expectations Analysis – Market expectations are for a positive Uniform ROA inflection, but management may have concerns about their Active Pass Base, transformation initiatives, and theme park demand

PEP Q4 2020 Embedded Expectations Analysis – Market expectations are for Uniform ROA to recover, but management may have concerns about Frito-Lay, energy drinks, and Latin America

XOM Q4 2020 Embedded Expectations Analysis – Market expectations are for a positive Uniform ROA inflection, but management may be concerned about operating expenses, emission reduction, and liquidity

LGIH, PEP, SIX, XOM, ABNB, CLX, CSCO, DK, ENR, GO, HIW, LDOS, LYV, MRK, MSGS, PFE, PTON, PUMP, QCOM, SHOO, VAC
Underlyings
Airbnb Inc. Class A

Cisco Systems Inc.

Cisco Systems designs and sells a range of technologies that power the Internet. The company's business is organized into the following three geographic segments: Americas; Europe, Middle East, and Africa; and Asia Pacific, Japan, and China. The company's products and technologies are grouped into the following categories: Infrastructure Platforms; Applications; Security and Other Products. In addition to its product offerings, the company provides a range of service offerings, including technical support services and other services. The company delivers its technologies through software and services. The company's customers include businesses of all sizes, public institutions, governments, and service providers.

Clorox Company

Clorox is a manufacturer and marketer of consumer products. The company sells its products through mass retailers, grocery outlets, warehouse clubs, dollar stores, home hardware centers, drug, pet and military stores, third-party and owned e-commerce channels, and distributors. The company has four reportable segments: Cleaning, which consists of laundry, home care and other products; Household, which consists of charcoal, bags, wraps and containers, cat litter, and digestive health products; Lifestyle, which consists of food products, water-filtration systems and filters, natural personal care products, and dietary supplements; and International, which consists of products sold outside the United States.

Delek US Holdings Inc

Delek US Holdings is a holding company. Through its subsidiaries, the company is engaged in the downstream energy business focused on petroleum refining, the transportation, storage and wholesale distribution of crude oil, intermediate and refined products and convenience store retailing. The company's segments are: refining, which processes crude oil and other feedstocks for the manufacture of transportation motor fuels; logistics, which gathers, transports and stores crude oil and markets, distributes, transports and stores refined products; and retail, which includes the operations of Alon USA Energy, Inc.'s convenience store sites located primarily in central and West Texas and New Mexico.

Energizer Holdings Inc.

Energizer Holdings is a manufacturer, marketer and distributor of household and specialty batteries, portable lights, and automotive appearance, performance, refrigerants and freshener products. The company provides batteries using various technologies including lithium, alkaline, carbon zinc, nickel metal hydride, zinc air, and silver oxide. The company manufactures, distributes and markets lighting products including headlights, lanterns, children's lights and area lights. The company also provides auto care products in the appearance and fragrance categories including protectants, wipes, tire and wheel care products, glass cleaners, leather care products, air fresheners and washes.

Exxon Mobil Corporation

Exxon Mobil operates or markets products in United States and other countries through its divisions and affiliated companies. The company's business involves exploration for, and production of, crude oil and natural gas and manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals and other products. In United States, the company's development activities are focused on the onshore United States, in the Permian Basin of West Texas and New Mexico and the Bakken oil play in North Dakota. Gas development activities are also focused on the Marcellus Shale of Pennsylvania and West Virginia, the Utica Shale of Ohio and the Haynesville Shale of East Texas and Louisiana.

Grocery Outlet Holding

Grocery Outlet is a holding company. Through its subsidiaries, the company owns and operates a chain of grocery stores in the United States. The company offers products in various categories, such as grocery, dairy and deli, produce, refrigerated and frozen, floral, beer and wine, general merchandise, and health and beauty care, as well as fresh meat and seafood; and natural, organic, specialty, and healthy products. As of Mar. 30, 2019, the company operates 323 stores across the West Coast and Pennsylvania, including the company's expansion into Southern California.

Highwoods Properties Inc.

Highwoods Properties is a real estate investment trust. The company owns, develops, acquires, leases and manages properties primarily in the business districts of Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. The company's primary business is the operation, acquisition and development of office properties. The company conducts its activities through its subsidiary, Highwoods Realty Limited Partnership. The company provides a line of real estate services to its customers. The company provides its customers with services such as build-to-suit construction and space modification, including tenant improvements and expansions.

Leidos Holdings Inc.

Leidos Holdings is a holding company. Through its subsidiaries, the company is engaged in a science, engineering and information technology that provides services and solutions in the defense, intelligence, civil and health markets. The company's defense solutions segment deploys solutions in the areas of intelligence surveillance and reconnaissance, enterprise information technology, integrated systems, cybersecurity and global services. The company's civil segment integrates and protects physical, digital and data domains. The company's health segment delivers solutions to federal and commercial customers that are responsible for the health and well-being of people including service members and veterans.

LGI Homes Inc.

LGI Homes is a holding company. Through its subsidiaries, the company is engaged in the design, construction, and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, and Nevada. The company's product offerings include entry-level homes, including both detached homes and townhomes, and move-up homes sold, which are sold under its LGI Homes brand, and its luxury series homes, which are sold under its Terrata Homes brand. The company's homebuilding operations are organized and managed by seven divisions: West, Northwest, Central, Midwest, Florida, Southeast and Mid-Atlantic.

Live Nation Entertainment Inc.

Live Nation Entertainment is a live entertainment company. The company's segments are: Concerts, which involves the global promotion of live music events, the operation and management of music venues, the production of music festivals, the creation of associated content and the provision of management and other services to artists; Ticketing, which is an agency business that sells tickets for events on behalf of its clients and retains a fee, or service charge, for these services; and Sponsorship and Advertising, which employs a sales force that creates and maintains relationships with sponsors that allow businesses to reach customers through its concert, festival, venue and ticketing assets.

Madison Square Garden Sports Corp. Class A

Madison Square Garden Sports is a holding company. Through its subsidiaries, the company is engaged in the sports business. The company owns and operates sports franchises, including the New York Knicks and the New York Rangers. The company also owns and operates Hartford Wolf Pack of the American Hockey League, and NBA G League team, the Westchester Knicks. The company's operations also include CLG, a North American esports organization, and Knicks Gaming, the company's franchise that competes in the NBA 2K League. The company also promotes, produces and/or presents a range of live sporting events including boxing, college basketball, college hockey, bull riding, mixed martial arts, esports, and college wrestling.

Marriott Vacations Worldwide Corporation

Marriott Vacations Worldwide is a vacation company that provides vacation ownership, exchange, rental and resort and property management, along with related businesses, products and services. The company's reportable segments are; Vacation Ownership, which develops, markets, sells, rents and manages vacation ownership and related products under its licensed brands; and Exchange and Third-Party Management, which includes exchange networks and membership programs comprised of exchange, getaways, interval gold and interval platinum, club interval, sales and marketing support for interval international network resorts, and operational support for interval international network resorts.

Merck & Co. Inc.

Merck & Co. is a global health care company that delivers health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The company's segments are: Pharmaceutical, which includes human health pharmaceutical products that consist of therapeutic and preventive agents for the treatment of human disorders, and human health vaccine products that consist of preventive pediatric, adolescent and adult vaccines; and Animal Health, which discovers, develops, manufactures and markets veterinary pharmaceuticals, vaccines and health management solutions and services, as well as a suite of digitally connected identification, traceability and monitoring products.

Peloton Interactive Inc. Class A

PepsiCo Inc.

PepsiCo is a food and beverage company. The company's segments include: Frito-Lay North America, which includes food and snack businesses in the United States and Canada; Quaker Foods North America, which includes cereal, rice, pasta and other food businesses in the United States and Canada; PepsiCo Beverages North America, which includes beverage businesses in the United States and Canada; Latin America, which includes beverage, food and snack businesses in Latin America; Europe, which includes beverage, food and snack businesses in Europe; and Africa, Middle East and South Asia, which includes beverage, food and snack businesses in Africa, the Middle East and South Asia.

Pfizer Inc.

Pfizer is a research-based biopharmaceutical company. The company is engaged in discovering, developing, manufacturing and distributing of healthcare products, including medicines and vaccines. The company manages its commercial operations through three businesses: Pfizer Biopharmaceuticals Group, which includes Oncology, Inflammation and Immunology, Rare Disease, Hospital, Vaccines and Internal Medicine business units, as well as a hospital business unit; Upjohn, which includes the company's solid oral dose brands such as Lyrica, Lipitor, Norvasc, Celebrex, Viagra, and certain generic medicines; and Consumer Healthcare, which is an over-the-counter medicines business.

ProPetro Holding Corp.

ProPetro Holding is a holding company. Through its subsidiary, the company is engaged as an oilfield services company providing hydraulic fracturing and other services to upstream oil and gas companies engaged in the exploration and production of North American unconventional oil and natural gas resources. The company's operations are primarily focused in the Permian Basin. In addition to its core hydraulic fracturing operations, the company provides complementary well completion and production services, including cementing, coiled tubing, flowback services and drilling. The company conducts its business through five segments: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback and drilling.

Qualcomm Inc

Qualcomm is engaged in the development and commercialization of foundational technologies for the wireless industry. The company's segments include: Qualcomm CDMA Technologies, which is a developer and supplier of integrated circuits and system software based on code division multiple access, orthogonal frequency division multiple access and other technologies; Qualcomm Technology Licensing, which grants licenses or otherwise provides rights to use portions of its intellectual property portfolio, which, among other rights, include certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products; and Qualcomm Strategic Initiatives, which makes investments.

Six Flags Entertainment Corporation

Six Flags Entertainment is a theme park operator and also an operator of waterparks. The company's parks provide a selection of thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets. The company holds licenses for theme park usage of certain Warner Bros. and DC Comics characters throughout the U.S. (except the Las Vegas metropolitan area), Canada, Mexico and other countries. The company's licenses include the right to sell merchandise featuring the characters at the parks, and to use the characters in its advertising, as walk-around characters and in theming for rides, attractions and retail outlets.

Steven Madden Ltd.

Steven Madden designs, sources, markets and sells name brand and private label footwear for women, men and children and name brand and private label handbags and accessories. The company licenses its trademarks for use in connection with the manufacturing, marketing and sale of various products by third party licensees. The company's products are marketed through its retail stores and its e-commerce websites within the U.S., Canada, Mexico, the company's joint ventures in South Africa, China, Taiwan and Israel, as well as department stores, specialty stores, retailers, national chains, mass merchants, online retailers and catalog retailers throughout the U.S., Canada, Mexico, certain European nations and Tunisia.

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