“Hidden” Balance Sheet Shorts
High and volatile inflation, historically, means wider swings in corporate profit margins. Uncertainty rises, companies stockpile more inventory, COGS is more volatile and difficult to manage. We saw this in the 1970s “stagflation”. US corporates are sitting on historically high profit margins today. Will that last? If it doesn’t, one potential source of short ideas are companies that have levered up their balance sheets against unsustainably high profit margins. These stocks wouldn’t look highly levered on a ND/EBITDA basis, but if profit margins start to revert lower, “normalised” leverage might be much higher than investors realise. Names of potential interest using OWS's short screener tool include Constellation Brands, Lincoln Electric, Parker-Hannifin, TransDigm and Union Pacific.
Edition: 210
- 02 May, 2025
Industrials
Paragon Intel is positive on UNP’s new external CEO, Jim Vena, who took the reins earlier this year after a 17-month search. They believe the industry veteran will surprise sceptics by balancing early gains in operating efficiencies with volume gains driven by better service in a tougher labour and regulatory environment. Paragon’s research includes interviews with Vena’s former colleagues who worked with him for more than 90 years combined - there was only one critic - who cautioned that he lacks experience dealing with US regulators.
Edition: 175
- 08 December, 2023
Industrials
Robert Crimes initiates coverage with a Buy rating and TP of $384 (100% upside) - this follows Insight’s recent work on CN Rail (TP C$341, +120%) and CPKC (TP C$218, +108%). Railroads is now their preferred Infrastructure sub-sector, which is set to benefit from the “New Golden Age of Rail” driven by favourable environmental credentials and increasing cost advantage vs. road. While UNP has underperformed its peers regarding network fluidity, volumes, EBITDA growth and safety, Robert expects its new CEO to improve performance.
As infrastructure specialists, Insight focuses on lifetime free cash flows with detailed DCFs / DDMs and IRR-Ke valuations. Their CN Rail initiation report from earlier this year provides a useful example of a 'typical' Insight report and can be accessed by clicking here.
Edition: 161
- 26 May, 2023