Report
Valens Research

Valens Equity Insights and Inflections - 2018 02 14

NFLX currently trades at historical highs relative to UAFRS-based (Uniform) Earnings, with a 74.6x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to increase from 20% in 2016 to 59% in 2021, accompanied by 25% UAFRS-based Asset growth going forward. However, analysts have less bullish expectations, projecting Uniform ROA to reach just 25% by 2018, accompanied by 28% Uniform Asset growth. Moreover, Valens' qualitative analysis of the firm's Q4 2017 earnings call highlights that management has concerns about costs and pricing as well as their investments. At current valuations, markets are pricing in a near-best-case scenario for NFLX, and considering management concerns about their fundamental outlook, any negative surprise could lead to material equity downside.

GPK Q3 2017 Embedded Expectations Analysis – Market expectations are for record-high Uniform ROA, but management has concerns about costs, margins, and their planned partnership with IP

JACK Q4 2017 Embedded Expectations Analysis – Market expectations are for record-high Uniform ROA, but management has concerns about industry trends, franchising, and their initiatives

NAV Q3 2017 Embedded Expectations Analysis – Market expectations are for increasing Uniform ROA, and management is confident about industry conditions and cash flows

GPK, JACK, NAV.
Underlyings
Alphabet Inc. Class A

Alphabet is a holding company. Through its subsidiaries, the company is engaged in a collection of businesses, which its primary business is Google. The company reports all non-Google businesses collectively as Other Bets. Google's main products and platforms are Android, Chrome, Gmail, Google Drive, Google Maps, Google Play, Search, and YouTube. The company also provides advertisers with tools that help them attribute and measure their advertising campaigns. In addition, Other Bets includes Access, Calico, CapitalG, GV, Verily, Waymo, and X, among others. Other Bets primarily engages in the sales of internet and TV services through Access as well as licensing and research and development services through Verily.

Avis Budget Group Inc.

Avis Budget Group is a provider of mobility solutions through its three brands, Avis, Budget and Zipcar, together with several other brands. The company has two segments: Americas, which provides and licenses the company's brands to third parties for vehicle rentals and ancillary products and services in North America, South America, Central America and the Caribbean, and operates its car sharing business in certain of these markets; and International, which provides and licenses the company's brands to third parties for vehicle rentals and ancillary products and services in Europe, the Middle East, Africa, Asia and Australasia, and operates the company's car sharing business in certain of these markets.

Delta Air Lines Inc.

Delta Air Lines provides scheduled air transportation for passengers and cargo. The company serves the Transatlantic, Transpacific and Latin America markets directly on the company and through joint ventures with airline partners. Internationally, the company has hubs and market presence in Amsterdam, London-Heathrow, Mexico City, Paris-Charles de Gaulle and Seoul-Incheon. These arrangements are commercial joint ventures that include joint sales and marketing coordination, co-location of airport facilities and other commercial cooperation arrangements. The company has other businesses arising from its airline operations, including providing maintenance and engineering support for its regional aircraft.

DENTSPLY SIRONA Inc.

DENTSPLY SIRONA is a manufacturer of dental products and technologies. The company's Consumables segment is responsible for the design, manufacture, sales and distribution of the company's dental consumable products which include preventive, restorative, endodontic, and dental laboratory products. The company's Technologies and Equipment segment includes responsibility for the design, manufacture, sales and distribution of the company's dental technology and equipment products and healthcare consumable products, including dental implants, computer-aided design/computer-aided manufacturing systems, orthodontic clear aligner products, imaging systems, treatment centers, instruments, and consumable medical device products.

FedEx Corporation

FedEx provides transportation, e-commerce and business services through companies under the FedEx brand. These companies are included in the following segments: Federal Express Corporation, including TNT Express B.V., is an express transportation company; FedEx Ground Package System, Inc., which is a provider of small-package ground delivery services; FedEx Freight Corporation, which is a provider of less-than-truckload freight services; and FedEx Corporate Services, Inc., which provides sales, marketing, information technology, communications, customer service, technical support, billing and collections services, and certain back-office functions.

Floor & Decor Holdings Inc. Class A

Floor & Decor Holdings is a holding company. Through its subsidiaries, the company is a specialty retailer of hard surface flooring and related accessories. The company's customers include installers and commercial businesses, Do It Yourself customers and customers who buy the products for installation. The company's primary product categories include Tile, Wood, Laminate/Luxury Vinyl Plank, Natural Stone, Decorative Accessories, and Installation Materials and Tools. In addition to its stores, the company's website FloorandDecor.com showcases its products, provides informational training and design ideas and has its products available for sale, which a customer can pick up in store or have delivered.

Foot Locker Inc.

Foot Locker is a retailer of athletically inspired shoes and apparel. The company's reportable segments are: North America and International. The company's North America operating segment includes the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as its Eastbay business that includes internet, catalog, and team sales. The company's International operating segment includes the following banners operating in Europe, Asia, Australia, and New Zealand: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses.

Graphic Packaging Holding Company

Graphic Packaging Holding is a provider of paper-based packaging solutions for a range of products to food, beverage, foodservice and other consumer products companies. The company's segments are: Paperboard Mills, which produces primarily coated-recycled paperboard, coated unbleached kraft paperboard, and solid bleached sulfate paperboard; Americas Paperboard Packaging, which includes paperboard packaging, primarily folding cartons, sold to Consumer Packaged Goods (CPG) companies, and cups, among others; and Europe Paperboard Packaging, which includes paperboard packaging, primarily folding cartons, sold primarily to CPG companies serving the food, beverage and consumer product markets in Europe.

Honeywell International Inc.

Honeywell International is a technology and manufacturing company. The company has four segments: Aerospace, which supplies products, software and services for aircrafts; Honeywell Building Technologies, which provides products, software, solutions and technologies including building control and optimization, energy management, access control, video surveillance, fire products, and remote patient monitoring systems; Performance Materials and Technologies, which develops and manufactures chemicals and materials, process technologies and automation solutions; and Safety and Productivity Solutions, which provides products and software that improve productivity, workplace safety and asset performance.

Jack in the Box Inc.

Jack in the Box operates and franchises Jack in the Box? quick-service restaurants (QSRs). Jack in the Box restaurants provide a selection of products including burgers like its Jumbo Jack? and product lines such as Buttery Jack? burgers. The company also provides breakfast sandwiches with cracked eggs, tacos and curly fries, along with sandwiches, salads and real ice cream shakes, among other items. The company allows its guests to customize their meals and order any product, including breakfast items any time of the day (or night). The company operates and franchises Jack in the Box QSRs, primarily in the western and southern United States, including in Guam.

Lear Corporation

Lear is a supplier to the automotive industry. The company supplies seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to automotive manufacturers. The company has two segments: Seating, which consists of the design, development, engineering, just-in-time assembly and delivery of seat systems, and the design, development, engineering and manufacture of seat components; and E-Systems, which consists of the design, development, engineering and manufacture of electrical distribution systems, and electronic control modules, electrification products, connectivity products and software solutions for the cloud, vehicles and mobile devices.

Lennar Corporation Class A

Lennar is a homebuilder in the United States, an originator of residential and commercial mortgage loans, a provider of title insurance and closing services and a developer of multifamily rental properties. The company's homebuilding operations include the construction and sale of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through unconsolidated entities in which it has investments. The company operates under the Lennar brand name. The company creates and participates in joint ventures that acquire and develop land for its homebuilding operations, for sale to third parties or for use in the ventures' own homebuilding operations.

Navistar International Corporation

Navistar International is a holding company. Through its subsidiaries, the company is a manufacturer of International? brand commercial trucks, proprietary diesel engines, and IC Bus? (IC) brand school and commercial buses. The company's segments include: Truck, which manufactures and distributes trucks and buses along with production of proprietary engines; Parts, which provides proprietary products to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business; and Global Operations, which consists of the operations of its subsidiary, International Industria Automotiva da America do Sul Ltda that manufactures and distributes mid-range diesel engines.

Netflix Inc.

Netflix is engaged in subscription streaming entertainment service including TV series, documentaries and feature films across a variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, without commercials. Additionally, several members in the United States subscribe to the company's DVD-by-mail service. The company improves its streaming content with a focus on a programming mix of content. The company's members can download a selection of titles for offline viewing. The company operates its business as a global operating segment.

SOUTHWEST AIRLINES CO

Southwest Airlines operates Southwest Airlines, a passenger airline that provides scheduled air transportation in the United States and near-international markets. The company has Boeing 737 aircraft in its fleet and serves destinations in various states, the District of Columbia, the Commonwealth of Puerto Rico, and other near-international countries such as Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. The company principally provides point-to-point service, which allows for direct nonstop routing. The company also provides a suite of digital platforms to support Customers' needs prior to and during the course of their travel.

SUPERVALU INC.

Supervalu is a distributer of grocery and other products and provision of logistics and professional service solutions to retailers across the U.S. The company's business is classified into two reportable segments: Wholesale, which provides wholesale customers a variety of food and non-food products, including national and regional brands, and the company owns lines of private label products, as well as providing an array of professional services that provide wholesale customers with solutions; and Retail, which provides grocery offering and, depending on size, a variety of additional products, including general merchandise, home, health and beauty care, and pharmacy.

Ulta Beauty Inc

Ulta Beauty is a beauty retailer that provides cosmetics, fragrance, skin care products, hair care products, and salon services. The company's stores are primarily located in locations such as power centers. The company provides a range of services in all of its stores. The company's stores, website, and mobile applications provides more than 25,000 products from approximately 500 beauty brands across all categories and price points, including its own private label, the Ulta Beauty Collection. The company provides a portfolio across five primary categories: cosmetics; skincare, bath and fragrance; haircare products and styling tools; salon services; and other, which includes nail products and accessories.

Verizon Communications Inc.

Verizon Communications is a holding company. Through its subsidiaries, the company provides communications, information and entertainment products and services to consumers, businesses and governmental agencies. The company has two reportable segments, Verizon Consumer Group (Consumer) and Verizon Business Group (Business). The company's Consumer segment provides consumer-focused wireless and wireline communications services and products under the Verizon brand and through wholesale and other arrangements. The company's Business segment provides, among others, wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services.

W R Grace & Co

Grace (W.R.) is engaged in the production and sale of specialty chemicals and specialty materials through two reportable business segments: Grace Catalysts Technologies and Grace Materials Technologies. Grace Catalysts Technologies includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications. Grace Materials Technologies includes specialty materials, including silica-based and silica-alumina-based materials, used in consumer/pharma, chemical process, and coatings applications. The company conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.-Conn.

Walgreens Boots Alliance Inc

Walgreens Boots Alliance is a holding company. Through its subsidiaries, the company is engaged in retail and wholesale pharmacy. The company's operations are organized into three divisions, which are also its reportable segments: Retail Pharmacy USA; Retail Pharmacy International; and Pharmaceutical Wholesale. The Retail Pharmacy USA division has pharmacy-led health and beauty retail offerings. The Retail Pharmacy International division has pharmacy-led health and beauty retail businesses. The Pharmaceutical Wholesale division, which mainly operates under the Alliance Healthcare brand, supplies medicines, other healthcare products and related services to pharmacies, doctors, health centers and hospitals.

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Valens Research

In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:

  • GAAP and IFRS have failed to provide rules for reliable financial statement reporting
  • Stock analyst recommendations are not grounded in disciplined financial analysis
  • Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
  • Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available

We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.

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  • The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming

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