Good Evening!

As the heart of earnings season is upon us, I am excited to take a quick break from the action and share this month’s edition of The Crossover!

In today’s edition, I will be introducing a new stock that is on my radar, sharing some thoughts on one of the few publicly trades sports franchises, checking out a podcast interview from one of Berkshire Hathaway’s next generation of leaders, and a whole lot more.

Showtime!

Three quick housekeeping announcements/reminders before we get started:

1. All opinions in The Crossover are 100% my own.

2. No Artificial Intelligence/ChatGPT is used in writing The Crossover. (Who needs AI when you have AL!)

3. The Crossover is not investment advice and is for education and entertainment purposes solely.

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DEEP DIVE

Bloomin’ Brands & An Activist Stake

Introduction

Over the past several weeks, I have been building a position in Bloomin’ Brands ($BLMN), the resturant holding company behind Outback Steakhouse. My current cost basis is at $26.32.

In a time where the world is focused on the great AI innovations of tomorrow, this bloomin’ boomer is excited about an old school restaurant holding company.

The main catalyst for my intrigue in $BLMN is the activist investor “Starboard Value” who has built a near 10% position in the company. Starboard Value has a phenomenal track record in the restaurant space by leading turnarounds of Darden $DRI (owner of Olive Garden & Capital Grille), Papa John’s $PZZA, and several others notable restaurant chains.

Specifically, Darden is up around 240% since 2014 when Starboard took control of their board (before leaving in 2016) vs. the “Magnificent 7” fueled S&P 500 which is up around 140% over that same time period.

The power of free breadsticks.

Side note: Starboard also had a sizable position in Splunk, a favorite of mine from 2023!

Brief Overview

Bloomin’ Brands was founded in 1988 in Tampa Bay, Florida. Over the past, ~35 years, the Company has grown from one core restaurant chain, Outback Steakhouse, to several chains including, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse & Wine Bar, and others.

At the end of the Q3 ‘23, here were some of the key stats on the amount of restaurants owned by Bloomin’ in the US:

• Outback Steakhouse: 684 (557 owned & 127 franchised)

• Carrabba’s Italian Grill: 218 (199 owned & 19 franchised)

• Bonefish Grill: 175 (170 owned & 5 franchised)

• Fleming’s: 64 (64 owned & 0 franchised)

• Aussie Grill: 7 (7 owned & 0 franchised)

In total, Bloomin has 1,148 resturants in the US. Internationally, the company has an additional 329 restaurants, 153 of which are Outback Steakhouse Brazil, where $BLMN has seen meaningful momentum. The remarkable success of Outback Steakhouse in Brazil is something I will likely focus on in future editions.

For the 39 weeks ended on September 24, 2023, Outback Steakhouse (USA) was responsible for just over 50% of total restaurant sales while Outback Steakhouse Brazil was responsible for a little over 10% of restaurant sales.

In 2023, analysts expect the company to do a meaningful ~$4.6B in sales. However, over the next couple of years, analysts expect only zero-mid-single digit growth.

One of the key reasons behind a not too exciting revenue forecast is the decrease in foot traffic at $BLMN restaurants. Specifically, here were some of the key stats in same restaurant traffic for Q3 YoY in the US:

• Outback Steakhouse: (1.1)%

• Carrabba’s Italian Grill: 3.0%

• Bonefish Grill (0.5)%

• Fleming’s Primesteakhouse (4.1)%

Carrabba’s was a bright spot for the company, but the rest is not looking great. However, it is noteworthy that the company shared that Outback Steakhouse Brazil had a 4.1% increase in traffic.

From a profitability perspective, Bloomin’ shared in their Q3 ‘23 earnings that they expect EPS of $2.80-$2.90 for 2023, a decrease from the prior outlook of $2.91-$3.00 in EPS. At around $2.2B market cap, this means that the company is trading at around an 8-9x PE.

Analysts do expect EPS to slightly increase to a little over $3 in the next couple of years, which I would assume, is fueled by a decrease in shares outstanding from buybacks. $BLMN has bought back shares consistently over the past couple of years leading to a decrease in shares outstanding from 90M to a little over 86M. Specifically, in 2023, the Company has repurchased 2.4M shares at a value of $61M through October 2023. The Company has $79M left on their $125M share repurchase plan.

Bloomin’ does have a meaningful amount of debt as well. They have a $390M revolving credit facility outstanding and 2025 Convertible Senior Notes & 2029 Senior Notes of ~$105M & $300M respectively. Therefore, there is pressure on the company to continue generating FCF to pay down the debt and/or buyback stock to cancel out the dilution.

Finally, The company also pays a $0.24 quarterly dividend representing a ~3.75% yield.

Starboard’s Thesis

After reading the section above, you might be thinking that there is not that much to be excited about. And after typing the section up, I questioned myself if this is an idea that I should still be intrigued by.

The brands are clearly struggling represented by a decrease in traffic, there is basically no revenue growth, and there is meaningful debt. Other than some nice cash flow and a small dividend, what is there to like?

Let’s take a look at some of the key points from Starboard’s phenomenal presentation that starts to point out some reasons that they, and now I, think Bloomin’s brightest days could be in front of them.

Here are a few excerpts:

1. Great Brand & ”Been There and Done That”

First and foremost, Starboard points out that Outback Steakhouse used to be an American staple. This was a fun brand with phenomenal marketing that people loved going out to and experiencing. However, the restaurant experience and consistency has decreased greatly, sending $BLMN down an unclear path. Outside of improving integral processes around food consistency and customer experience, a core priority behind this investment by Starboard is to re-ignite this brand.

Additionally, as mentioned earlier, Starboard is a proven winner when it comes to turning around restaurant chains. There are meaningful similarities between the portfolios of Darden and Bloomin’.

1. Longhorn Steakhouse → Outback Steakhouse

2. Olive Garden → Carrabba’s

3. Capital Grille → Flemings.

This should give the Starboard team an opportunity to replicate their Darden playbook.

Side note: If you are unfimilair with the turnaround story at Darden with Starboard, I recommend checking it out. A full blown proxy fight, Starboard taking full control of the board, and making big, successful changes for their brand. It would make a phenomenal TV show.

2. Peer Valuation Discount

Of course, when it comes to activist investors, there has to be a serious quantitive/fundamental opportunity as well.

Starboard pointed out in the fall, how Bloomin’ was trading at 5x EV/CY24E EBITDA (Enterprise Value/Current Year 2024 Expected EBITDA ), while two of its closest competitors Darden & Texas Roadhouse traded at 10.3x & 9.5x respectfully.

This represented a serious discrepancy and likely displays the current confidence levels — or lack there of— that the market has towards $BLMN.

Interestingly, the Starboard team also highlights how in 2013, before Starboard’s involvement in Darden, $BLMN actually traded at a greater multiple of 8.7x versus Darden’s 8.3x.

Oh how times have changed.

3. Discretionary FCF

The most exciting part of the Starboard thesis to me is how they point out that Bloomin’ Brands is expected to have $526M in Discretionary CF (calculated by taking $338M in projected FCF, adding back $248M in CAPEX and subtracting $60M in Maintenance Capex.)

The TL;DR is the company does a quarter of its $2.2B+ market cap in discretionary cash flow annually and that Starboard feels they can help them allocate this cash flow across different areas in a better way to drive shareholder value.

There are several other points highlighted, but these are the ones that I wanted to touch on today. Make sure to check out Starboard’s full presentation here.

Alan’s Angle

Before we wrap things up for today, I wanted to point out a few things that in my eyes stick out to me about this prospective opportunity:

1. Risk vs. Reward

One aspect about the $BLMN opportunity that excites me is that the risk vs. reward feels skewed greatly towards the reward side. Is there life changing investment upside to $BLMN? I can almost 100% confidently say there is not.

This is not the next Apple ($APPL).

However, the downside feels very much protected with $500M+ in discretionary cash flow and a sharp activist investor meaningfully involved. Additionally, the company having a 3%+ dividend and actively buying back stock should protect the downside as well. Of course, anything can happen, but that is how I see it.

Additionally, an interesting thought exercise that I have conducted several times is comparing this opprotunity to Cava ($CAVA). Cava has an outstanding restaurant profit level margin of 25% and last quarter shared they are growing ~50% YoY.

The falafel fever is real.

However, after all, the company is only expected to do ~$400M in adj. EBITDA in 2032 (according to analyst projections). At a market cap of $5B+, this means that Cava is trading at around 12-13× 2032 adj. EBITDA.

That sounds wild.

Yes. The trajectory is real, the earnings power will be real, and we have seen the magic of fast casual restaurants with Chipotle before. However, I just like the idea of buying a company with a couple hundred million in FCF today, actively returning capital to shareholders, then one that might be somewhere near that figure 8-10 years from now.

2. David George is Back!

One of the critical players in the turnaround of Darden was the Company’s President David George, who worked closely with Starboard over multiple years.

A phenomenal article from 2016 highlights how hard David George and his team worked to turn around Olive Garden. He spent “12 weekends in a row” flying to different Olive Gardens “to work alongside busboys, dishwashers, and cooks” to see and listen to the problems at the Italian restaurants first hand.

George is an incredibly sharp operator and works hard. I love it.

Together, George and his team worked closely with Starboard to ultimately bring the magic back to Olive Garden’s brand and restaurants.

Fast forward to 2023/2024 and Bloomin’ agreed to grant Starboard two board seats. First, Starboard nominated Jon Sagal, Partner at Starboard to the Bloomin’ board.

Who did the second seat go to?

An industry legend that goes by the name of Dave George.

Having an operator like George being heavily involved in the turnaround at $BLMN is exactly what I want to see.

3. The Love of the Brand

Although Outback’s brand is not what it once was, the association and great memories that people have with the brand are still very real — and I think can be re-ignited.

An incredible example of this can be seen from these passion filled comments from Brian Sozzi at Yahoo Finance when he and his team were discussing Starboard’s stake in $BLMN.

Here is what Brian had to say:

“I remember when Outback opened by me, it was something special, it was a 2 hour line, this was over 10 years ago, the steak was awesome, go there now and you get the drooping onion, it is horrible. It is a horrible experience.”

Listen to that passion! There was once magic at the Outback Stakehouse, however, that magic is seemingly gone.

At the same time, Ameircan’s love a good comeback story, and I think that if Starboard can reignite that magic, there will be a whole lot of people like Brian returning to saying “let’s go Outback tonight.”

-Alan

STOCKS & SPORTS

Market Psychology & Manchester United

On November 17th, news broke that British billionaire, Jim Ratcliffe, would acquire 25% of Manchester United ($MANU) from the Glazer family for $33 a share.

The $33 a share price represented a near 80% premium to the stocks closing price the day before of ~$18.50.

What do you think the stock did the next day? Soared?

Not really. The stock was up a nice near 10% on pre-market trading, but I am sure that $MANU bulls were expecting a lot more. Fast forward to early January and the stock is trading @ ~$19.50, further showing the disconnect between the private valuation of sports franchises versus their public stock valuation.

In my eyes, the main reason for this, is the fact that the value from these assets comes from the scarcity of them and demand for them — not the operating income or cash flows of the underlying business. For example, with $MANU, Forbes most recently valued the company at $6B in May 2023 with $108M in operating income which would represent a lofty 60x multiple.

Therefore, until shareholders would see a full sale of the asset, there is a chance that the true value of the underlying assets might not be realized in the public markets.

$MANU is not the only place we see this situation unfold. For example, Madison Square Garden Sports ($MSGS) is the stock of the New York Knicks, New York Rangers, and other minor sports assets. Forbes values them in the private markets at $6.6B & $2.2B respectively, but Mr. Market gives them a ~$4.5B market capitalization — a nearly 50% discount.

From a market psychology perspective, a $MANU or $MSGS situation is just so fascinating. These are clearly assets that are trading at deep discounts to their intrinsic value, but at the end of the day, Mr. Market is telling us that they think you will not see the actualization of this value in the public markets for a long time.

After all, if you were the Dolan family and owned the New York Knicks, why would you sell them?

If you were to buy $MANU or $MSGS at some point, eventually, you will likely see the stocks trade closer to their intrinsic value. However, it could be years and years away. We just do not know.

I do think that $MANU has the better chance of being sold over the next couple of years than $MSGS. However, I will continue to just be a fan of the franchises and from an investment perspective, watch these opportunities from the sidelines.

IN THE MEDIA

Up Next at Berkshire: Todd Combs

Earlier this month, I decided to start taking a look into Todd Combs one of the two expected leaders of Berkshire Hathaway after the Warren Buffet & Charlie Munger era officially comes to a close.

I started learning more about Todd by listening to his recent appearance on “The Art of Investing” podcast.

It was extraordinary and easily, one of the best podcasts I have listened to in quite a while as the podcast was filled with timeless wisdom on life (and investing too!).

I also think that we are all in luck as I get the vibe that Todd likes doing the media circuit a little more than Warren and Charlie do/did.

Below, I pulled out an excerpt of one of my favorite quotes from the podcast:

“I always tell our kids, literally, whatever you want to do in life, you don’t solve for money, you don’t solve for prestige, or adulation, or anything like that. And that takes time and maturity and growth. It also changes over time too, because we all evolve. Nothing is static. So then again, if you invert the concept, I think people tend to think very statically, “oh I am this and this is what I am going to solve for.” But then there is a lot of research…obviously, every single person, likely innate in us somewhere in our DNA, massively underestimates how much their life is going to change going forward — every single person at every age in your life. I would be doing it now, and you do it when you are 40, 50, 60, 70 — it does not get better or anything. You constantly think “oh I recognize there has been a lot of change and I realize that I am different than I was, but now I am set.” People don’t realize that it is constantly wet cement and they think the cement is dried, but it doesn’t. And that is a freeing concept.”

Those Berkshire people just understand the human psyche and nature.

Make sure to check out the full interview here.

GOLDEN NUGGETS

1. Netflix Subscriber Growth

2. Berkshire & American Express = $$$

3. The Value Investing Experience

MEME

A Missed Opportunity…

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.