Traeger: Another Pandemic IPO To Fall Down To Earth (NYSE:COOK)

Thesis

Traeger (NYSE:COOK) is a wood pellet barbecue grill maker and its IPO was a child of the pandemic. Although the business was founded way back in the 1980’s, pandemic forced people into their homes and got more people to explore cooking crafts among other things. Sales were roaring and the company took this opportunity to do its IPO. But like all the stars of the pandemic, the company had to face reality; That its business was targeting a niche segment and it would likely be nothing more than a niche segment. In this write-up, we will explore how the current market has treated Traeger, explore its outlook as a business, understand its financial health and see that this is likely to remain as a small cap company with no meaningful returns to shareholders.

Performance and Business cyclicality

The pain is real for investors as the stock is down more than 80% from its highs. Price performance has largely mirrored its earnings results which also has been bad news after bad news. Company’s IPO came on the back of a profitable 2020 but immediately saw increasing losses the following year. 2022 saw declining revenues as well and all of this have contributed to decimating the stock price. There are couple of takeaways here:

1. Traeger boasted of a first to market growing wood pellet grill business but at its heart it’s still a niche business and heavily influenced by short term trends. Pandemic gave a short term boost to multiple practices and not all of them continued to grow or have the same impact after the pandemic (In home exercise bikes, food delivery, hobby crafts are some examples)
2. Wood fired grills are a discretionary expense and during periods of high inflation and/or economic slowdown, this expense is non-essential and are typically the first to be cut down. In addition to paying a premium for the Traeger grill, there are other on-going costs to it and priorities change when faced with difficult times
3. Comparing S&M to revenues, it is an area of big concern as increasing spend on sales is not yielding much return suggesting to us that the product is no longer appealing to the market and people are “over” the trend of wood fired grills

Financial Health

Traeger came to public markets with debt that was manageable as a growing business but with declining sales and widening losses it will start to threaten the existence of the company.

1. Its current assets is greater when compared to its current liabilities but most of its current assets ($233M) is in the form of inventory($160M). This inventory has not decreased over the last year and at some point the company may have to decide to write this down.
2. Its quick ratio of less than 0.5 indicates poor liquidity
3. For the trailing twelve months its interest expense is $25M. It has less than $10M cash on hand and a negative cash flow. It has less than year of cash runway which means unless Traeger can raise funds, it could potentially run out of money to continue its operations

Valuation

At 1.47 times its book value the stock looks relatively cheap and much below sector medians but inventories contribute towards this book value and if this gets written off, it will show us a different picture. It trades at 0.75 times sales much below sector medians but this also needs to be considered under scenarios where the sales continue to decline.

When Price to Sales and Price to Book are modeled under different scenarios, a different picture starts to emerge. A picture where valuations start lining up with market medians

Concluding thoughts

I rate this stock as a Strong Sell both on a short- and long-term basis as it’s hard to see much upside based the company’s fundamentals and outlook. Given the health of its balance sheet, its more than likely that the company will have to raise money either through more debt or through stock issuance and investors are better off staying away from this company.