Luckin Coffee: An Unlucky Investment?

Chinese coffee chain Luckin Coffee (LKNCY), a company with negative margins, shouldn’t be trading at a higher multiple than Starbucks (SBUX), according to Quo Vadis president John Zolidis. I am Read More... The post Luckin Coffee: An Unlucky Investment? appeared first on TipRanks Financial Blog.

Luckin Coffee: An Unlucky Investment?

Chinese coffee chain Luckin Coffee (LKNCY), a company with negative margins, shouldn’t be trading at a higher multiple than Starbucks (SBUX), according to Quo Vadis president John Zolidis.

I am bearish on this stock. (See Luckin Coffee stock charts on TipRanks)

Disconnect between Market Valuation and Fundamentals

Zolidis, who sounded the alarm early about the ailing chain’s woes, made this comment following LKNCY's filing of a 10k for 2020 and settling of various lawsuits. At the same time, the company did not provide any quarterly P&Ls.

“The bottom-line is that LKNCY is currently valued by the market at $5B, which is roughly 5x our 2022 revenue estimate,” Zolidis said. “This is despite the fact that 2020 EBITDA margins were negative 39%. Even if we take the best quarter of 2020, we estimate a RLM of 1% and an EBITDA margin of negative 20%. Also worth noting, LKNCY burned through $1.1B of fraudulently acquired funds in 2019 and 2020.”

Luckin has no analyst following on Wall Street. TipRanks assigns a Smart Score of 5 to the company, citing decreased hedge fund activity, low investor and blogger sentiment, and lack of fundamental and insider data availability.

Meanwhile, TipRanks cites the rise of risks surrounding the company. The company has cited a total of 101 potential risks.

A Change in Strategy

For years, the Beijing-based coffee chain was opening coffee shops at a feverish pace, trying to match and surpass industry leader Starbucks.

The problem is that the two companies have different store concepts. Starbucks' store concept is the “third place,” a comfortable place where people can enjoy mixed espresso drinks with friends and associates away from home and work. This store setting makes the demand for Starbucks products inelastic, meaning that it can charge a premium price for its products over the competition and maintain profitability.

Luckin’s store concept is “coffee to go,” where people can pick up coffee. Unfortunately, this setting makes the demand for its products elastic, meaning that it cannot charge premium prices for its products and maintain profitability. That’s at the root of the company’s woes.

To turn things around, its leadership has been closing down its worst-performing stores, scaling back on promotions, and reducing operating expenses. While this is the right strategy, Zolidis thinks it won’t work. “Customer transactions fell at a double-digit rate every quarter in 2020,” he says. “Has this continued into 2021? Covid is probably not helping a business that chose to put most locations in office towers.“

While he thinks that Luckin’s strategy won’t work, he’s still concerned about the company’s valuation going forward. His model suggests that Luckin gets a positive EBITDA by 2023, but he thinks it doesn’t make sense for a business with this financial profile to trade at a higher multiple than Starbucks or Shake Shack (SHAK).

Bottom Line

In short, Luckin is a money-losing coffee chain with a high market valuation in search of a strategy for its survival. Investors chasing after its shares should be reminded that hype is never a good substitute for due diligence.

Disclosure: At the time of publication, Panos Mourdoukoutas had no position in Luckin Coffee.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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Weekly Market Review: Sharp Rebound as Rates Push Higher

It was a tale of two markets last week; as U.S. stocks were hit hard early, but mounted a sharp recovery beginning Wednesday, to ultimately finish higher. Cyclical groups, such Read More... The post Weekly Market Review: Sharp Rebound as Rates Push Higher appeared first on TipRanks Financial Blog.

Weekly Market Review: Sharp Rebound as Rates Push Higher

It was a tale of two markets last week; as U.S. stocks were hit hard early, but mounted a sharp recovery beginning Wednesday, to ultimately finish higher.

Cyclical groups, such as Energy and Financials led the way higher last week. On the other hand, rate-sensitive groups, like Real Estate and Utilities lagged.

All eyes were on the Federal Reserve last Wednesday, which signaled that it may soon taper its $120 billion of monthly bond buying. This news saw the yield on benchmark 10-year U.S. treasury notes move back up around 1.45%.

Elsewhere, the preliminary purchasing managers’ index readings were released by IHS Markit on Thursday and suggested a slowdown of both U.S. and European economic activity in September.

The Week Ahead

The third quarter comes to an end on Thursday and Bed Bath & Beyond (BBBY) and Micron (MU) highlight a relatively quiet earnings calendar.

On the economic front, we’ll get a look at September U.S. consumer confidence on Tuesday, followed by the ISM manufacturing index Friday. The PCE deflator will also be released on Friday, which is the Fed’s key inflation measure.

Following the snap-back recovery in stocks last year from Pandemic lows, we believe that investment gains will be harder to come by in 2021.

As a result, deciding what and when to buy can be challenging for any investor.

However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

One such Consumer name is worth a closer look and is our Stock of the Week.

Stock of the Week: Camping World ()

The company sells and services recreational vehicles (RVs) and related camping supplies.

The stock gained nearly 4% last week and we believe this outperformance can continue in the final months of 2021.

Here’s why:

With travel to most countries off-limits this past year, many Americans chose to hit the road and drive/camp for vacation.

This activity has translated to Camping World’s earnings, which exceeded expectations back in August. The company earned $2.51 a share in the second quarter, as revenue increased 28% from the previous year.

Management also bought back $45 million worth of stock in the period and added $125 million to its future buyback authorization.

In addition the retailer doubled its quarterly dividend in August, to $0.50 a share (5.1% yield). Investors at the close of trading on Sept. 10 qualified for the payment on Sept. 28.

We view a dividend increase as one of the most bullish signals that management can send investors, particularly one of this magnitude.

Despite the recent gains, the stock is currently trading at just 6.3x expected 2021 earnings of $6.25 a share. This is a steep discount to both the broader market and industry median valuation of 12.1x.

Wall Street agrees that Camping World has value. All four active analysts tracked by TipRanks have a Buy rating and the average price target of $54.50 represents 37.9% upside potential. 

In the meantime, the stock carries a Smart Score of 10/10 on TipRanks. This proprietary score utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.

On top of the positive aspects mentioned already, the Smart Score indicates that shares have seen improving sentiment from financial bloggers.

FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks.

The post Weekly Market Review: Sharp Rebound as Rates Push Higher appeared first on TipRanks Financial Blog.

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