Tuesday, March 28, 2006

Hot in the OVEN

*Click on the picture for a wider view.

How does a stock that has fallen well over 20% within a week of not meeting earnings expectation, suddenly rises roughly 7% on a Friday on absolutely no material news, and falls 4.4% (intraday) the Monday after.

The move past the fall has been quite bullish, though more time is needed to establish the trend. Regardless, monday's fall over friday's rise a classic dark cloud cover, confimed by today's gravestone doji. Notice also that despite the bullish run the volume has been steadily falling, showing weak support for the move.

MACD is pretty useless here, since the extensive trading range of November upto early March has converged the MAs, so it's extra sensitive to a sharp move, same goes for the CMF, although it has an uptrend, much of it is due to the 1.6m gap-down on the bad news...

OVEN gets 2% of its float traded every day. Having 44% of that shorted, it's hard to see the stock moving significantly any further down, the seller pressure is pretty much exhasted and I can't help to think that maybe the boat has gotten too heavy.

The stock is likely to stagnante for a while, there's strong resistance near $13, and it's quite established that if the price is very unlikely to tap into that range anytime soon, however if it does, you can be sure that the short squeeze is not going to be anything other than spectacular.

posted by Kaveh at 3/28/2006 10:46:00 PM

1 Comments:

  • Betting on short squeezes is dangerous. Witness MOVI, in which the flost got 60% short when it was at about 8$, and kept getting shorter down to 2.5$. Those that bet on a squeeze when it based af 5 (after falling from 35) got smoked.

    Here is the short case for OVEN, written June 20, when the stock was at 18. Just so you know that money can be made shorting.

    I recommend shorting Turbochef (OVEN) $18.50 because it is a business that
    received a very large 1x in nature contract with Subway that the market has mistakenly
    perceived as the next hottest restaurant trend and has given OVEN an equally hot
    valuation. In reality, Subway is many multiples larger than any other restaurant chain
    Turbochef should reasonably expect to win business with and our conversations with
    restaurants decision makers and industry experts do not suggest widespread interest in
    their products. The market is mostly limited to c-stores, sandwich chains, coffees
    chains, and to a lesser degree, independent units without a major kitchen on premise.
    We think Turbochef is more realistically valued at $6 per share, including the $3
    cash per share.


    BUSINESS DESCRIPTION:
    Turbochef sells one product: Commercial use countertop ovens that combine
    microwaves, convection, and infrared ray to cook food 12x faster than normal ovens. The
    Turbochef technology has been in existence for over 5 years but has found new life in
    the menu expansion trend at various Quick Serve Restaurant (QSR) chains. Turbochef
    is also trying to adapt the oven for the residential market. It has high hopes for
    this segment but the technology is only 85% complete and is slated for a mid-2006
    release.

    SHORT THESIS:
    -Subway contract was a special situation and OVEN is unlikely to secure contracts
    of similar size in the future.
    -Oven only makes sense in Coffee/Sandwhich/C-stores and end market is much smaller
    than bulls expect in addition to a 6 year replacement lifecycle and exclusive
    contracts with major customers
    -Strong competitors and worthy product substitutes reduce the size of an already
    small market
    -Residential market unlikely to embrace OVEN & established players have similar
    products in the market selling poorly
    -Significantly overvalued given peak annual recurring unit demand of 15,000 units


    SUBWAY CONTRACT WAS A SPECIAL SITUATION IN TERMS OF DEAL SIZE AND NEED FOR THE
    TURBOCHEF OVEN. CONTRACTS OF SIMILAR SIZE ARE UNLIKELY IN THE
    FUTURE:
    The Subway contract was a unique situation because Subway had been looking for a
    way to compete with toasted subs from Quiznos. Turbochef was the perfect solution
    given Subway’s lack of other cooking equipment and the oven’s small footprint that is
    well suited for Subway’s limited space. A contact at the Subway told us they had
    tested a number of rapid cook oven brands a few years ago and went with the OVEN oven
    because it had the fastest cook time. Furthermore, Coca-Cola footed half the bill as
    part of a recent arrangement to switch from Pepsi to Coca-Cola, after 15 years of
    loyalty. At 22,000 locations, Subway is almost twice the size of the next
    potential customer; the market does not realize that the easy pickins’ have been picked. In
    their favor, recent follow-ups with Subway owners lead us to believe the campaign
    has been highly successful, driving more than 10% same store sale
    growth.


    SMALL END MARKET WITH 5-7 YEARS REPLACEMENT LIFE; RESEARCH SUGGESTS ~90% OF LARGE
    CHAINS NOT LIKELY CUSTOMERS:
    The oven really only makes sense in sandwich shops, c-stores, and coffee shops,
    where there is not a major kitchen on premise. Furthermore, Turbochef signed an
    exclusive agreement with Subway and cannot sell the same device into Subway’s major
    competitors. They will likely sign similar exclusives with all major customers. With a
    5-7 year replacement cycle and our research ~90% of large restaurant chains are
    unlikely customers the end market appears to be a fraction of expectations. According
    to industry stats, there were roughly 240,000 total franchised restaurant units under
    400 brands across the globe at the end of 2003. About 70% of the units are
    controlled by the top 40 franchises, which each have over 1000 locations. Our specific
    research suggests that less than 90% of these top 40 are highly unlikely to become
    Turbochef customers in the future. This leaves ~20,000 units, as potential rapid cook
    oven customers, including Starbucks, 7-Eleven, and other small convenience stores,
    but Turbochef will not be able to capture this entire market given the competition.

    Additional research assessed the amount of industry buzz around new food concepts
    and the likelihood of QSRs making rapid cook oven like equipment purchases. It does
    not seem like any major customers beyond Starbucks (~4500 US units, 9000 total) has
    plans to introduce a new food concept that would require a Turbochef oven in the
    near future. This only represents a 1x ~ .15-.20 EPS, or .03 EPS recurring since
    rollout will likely be limited to full size US stores (Not kiosks etc.)


    SPECIFIC CHAIN RESEARCH:

    03’ Units Restaurant Chain(s)

    32k Yum! Brands, KFC, Taco Bell, Pizza Hut
    30k McDonalds
    6k Dunkin Donuts
    6k 7-Eleven
    9.5k Wendy's
    7.5K Starbucks

    FINDINGS: 91k total units researched.
    Yum! Brands with KFC, Taco Bell, Pizza Hut unlikely according to contacts: no new
    menu shifts, equipment on hand adequate, pizza chains married to current cooking
    process and don’t want to alter taste.

    McDonalds has rolled out Enodis, Turbochef competitor in numerous countries
    (Canada, Australia, New Zealand) and is testing 400 Enodis conveyor style rapid cook ovens
    in US for a Hot deli sandwich concept. Likely to go with Enodis.

    Dunkin Donuts- doesn't fit into strategy and currently testing Blodgett convection
    ovens for two stage donut cooking only.

    7-Eleven- testing Turbochef right now but began recently. Testing usually takes
    12 months minimum. Contact claims it was a little big and not much cooking room, she
    prefers other brands currently.

    Wendy's (Baja Express, Tim Horton, Café-Express)- IR didn't think any menu changes
    were likely to come, new equipment is huge obstacle to them and they avoid it at
    all costs.

    Starbucks- testing Turbochef in DC in 100 locations currently. But also testing
    Turbochef + Maytag’s Amana in Seattle market, will have to see how this evolves but
    we think it is a likely OVEN customer.



    STRONG COMPETITORS AND WORTHY SUBSTITUTES REDUCE THE SIZE OF AN ALREADY SMALL
    MARKET:
    Turbochef directly competes with Amana, a commercial cooking equipment division of
    Maytag and Enodis, UK holding company with more than 300m in annual rapid cook
    technology sales. Both companies offer rapid cook ovens of similar quality & price, but
    Turbochef is the leader in cook time. To verify our research on the size of the
    market, contacts at Amana thought the market was more limited to C-stores. Management
    at Enodis admitted the particular market for Turbochef’s technology would start off
    slow but he could see it eventually growing into a larger size.

    There are also many substitutes to rapid cook ovens including advanced microwaves
    from Panasonic that use convection to help toast. Other substitutes include
    standard convection ovens, which use propelled hot air to cook 2-3x faster than normal
    ovens. An contact from Blodgett, a major manufacturer of convection ovens, confirmed
    the rapid cook oven market was of small size and limited to C-stores, which is why
    Blodgett did not pursue the market despite once having a relationship with Turbochef.
    Conversations with a high level sales manager at one of the largest distributors
    (three distributors make up 75% of commercial cooking equipment sales in the US), who
    carried Turbochef, Amana, and Enodis said that this market was “not even on his
    radar,” however, he said it took many years for conveyors ovens to find a following and
    everyone uses them now.


    RESIDENTIAL MARKET WILL NOT EMBRACE THE TURBOCHEF OVEN AND ESTABLISHED PLAYERS
    HAVE SIMILAR PRODUCTS IN THE MARKET THAT SELL
    POORLY:
    Established residential brands have experimented with rapid cook ovens for nearly
    20 years but the product has never been a hit seller with consumers. Today, lines
    from Thermador, Maytag, KitchenAid and others cook between 2-3x faster than
    traditional ovens and range from $1,100 to $6,000 dollars. Turbochef wants to introduce a
    residential oven in mid 2006 for $6,000 that is 8-10x as fast as traditional ovens.
    This will likely fail because major brands will block their entry, ovens that cook
    more than 3x faster require precise cook times and this margin of error does not work
    well in the home environment (if you’re 10 seconds off in your cook time you’ll burn
    the food), it will not be effectively priced, and the technology isn’t even
    completed. In addition, it will not serve as a substitute to the microwave oven because it
    will take time to pre-heat just like all ovens, and it will not be a substitute for
    the conventional oven because it cooks too fast to be readily useable.
    Conversations with professionals in Maytag’s residential cooking division confirmed that
    Turbochef’s dreams for this market were far
    fetched.

    VALUATION:
    Significantly overvalued given peak annual recurring unit demand of 15,000 units:
    We looked at valuation a number of different ways:

    First, we wanted to look at an expected peak recurring earnings stream. Using
    conservative estimates we discovered that a total of ~63,000 stores were potential
    installs. To get this figure we took the 240,000 (2003 figure) restaurants chains
    across the globe and divided it into categories ranging from burger joints, pizza shops,
    coffee/snack, chicken etc. and applied a reality metric to each category to see what
    made sense. Our values ranged from “doesn’t make sense for this market,” or 10% of
    all units across globe would become customers, to “makes total sense”, meaning 75%
    of those establishments would install the
    oven

    Category 03’ Units % Realistic Potential Installs

    Burger 60,000 10% 6,000
    Pizza 34,000 10% 3,400
    Coffee/Snack 40,000 50% 20,000
    C-Store 14,000 75% 10,500
    Chicken 19,000 25% 4,750
    Sandwich Bakery 35,000 50% 17,500
    Mexican 10,000 10% 1,000

    Total 212,000* 63,000

    *excludes customers we think have already gone with competitors

    We then adjusted for modest chain growth, potential customers with multi unit
    installs, non quick serve restaurant chains customers, and gave Turbochef a very
    generous 70% market share and applied a 6 year replacement life cycle to the peak install
    figure.

    Potential installs 63,000
    Franchise growth 30,000
    Multi-installs 25,000
    Non-QSR 10,000

    Total potential installs128,000
    Turbochef 70% share 90,000
    Replacement life 6 years
    Annual recurring units 15,000
    ASP @ $4,800 72,000,000
    EBIT @ 16% 11,500,000
    Taxes (w/o 45m NOL) 4,000,000
    NI 7,500,00

    EPS @ 31.59m diluted .23 cents
    @ 13x forward PE $3
    Cash per share $3

    Value per share $6

    A worse case scenario is 60k annual peak recurring units sold each year, which
    yields a $15 per share valuation. We think the probability for this is less than 5%.

    Another way to look at how absurdly valued we believe the company is…. The subway
    contract at ~85% fulfillment (international locations are still being rolled out)
    generated only .26 cents in free cash flow per share.



    RECENT DEVELOPMENTS:
    -Changed ticker from TCF to OVEN
    -Stock has recently rebounded from $11 to north of $18 based on:
    -mgmt. appearances on CNBC and Jim Cramer
    -expectations for a deal with Starbucks
    -numerous positive spins in the recent conference call on customers testing the
    oven
    -Possibility for Subway to rollout 2nd ovens at each location for another
    expansion of the menu

    -We believe the only real concern is a possible 2nd oven rollout by Subway. This
    2nd oven would be for their Pizza concept, which had been tested a number of years
    ago without much success as a standalone product because it did not impress the
    customer and the overhead of new equipment didn’t justify the concept. Based on our
    analysis we do not think an announcement is likely in the NEAR future for the following
    reasons:

    - Our conversations with multiple developing agents suggested very few were
    currently testing the concept and virtually no one was confident it was certainly being
    rolled out in the US
    - At the very least we are multiple months away from Subway having enough data to
    make a solid decision on rolling out this
    concept

    However, here are the facts to sort through about this possibility:
    - If Pizza is rolled out, capacity problems with current ovens would make it
    highly likely a second oven is needed to support new concept. During peak times a
    meaningful number of locations are experiencing wait time for their Turbochef ovens.
    - Each Turbochef oven cost $300+ a month in electricity to operate and owners do
    not want to front that additional bill
    - First Turbochef oven purchase was subsidized by Coca-Cola for roughly half the
    price. Store owners will likely have to pay for second oven themselves and many are
    opposed
    - Many subway locations are limited on countertop space and do not have any more
    room for a second oven.
    - Many of developing agents do not believe the concept is a smart move given
    contrast with the healthy subway image
    - Subway tests lots of products and any new food concept that comes to the table
    is thoroughly tried and tested. Pizza is one of many.


    -Turbochef claims 30 major chains are testing their ovens and could make a
    decision within the next year. Again, our industry research and conversations with test
    kitchens and various R&D departments make this seem unlikely.

    -In addition, Turbochef is 85% complete on a rapid cook oven for the residential
    market. A market it pegs at 16 million US households. We think the likelihood of
    this being a realistic market is very small. Although from a timing perspective, it
    does provide a fantasy for the market to trade on despite the outlook for poor
    earnings into the foreseeable future.


    RISKS:

    - A significant number of QSRs could easily adopt a menu change that requires the
    use of a rapid cook ovens
    - OVEN is able to leverage brand in Rapid Cook ovens and build into other lines.
    They’re already trying this with a normal convection oven. Sales will disappoint
    though.
    - Subway elects to install two ovens per location, management is hyping this
    possibility, it is clearly explained below
    - Headline risk from deals with large chain operators or even small chains that
    help fuel the Turbochef dream for another few
    quarters
    - At ~$4,800 ASP the Turbochef oven is not a major expenditure for most
    restaurants
    -Subway will probably grow 1000 units a year for the next few years and will
    provide some recurring stream




    Catalyst:


    CATALYSTS:

    - Significant expectations have recently been built into the stock, without any
    major delivers the market will quickly forget the Turbochef story. If major wins
    occur we’ll have to wait to get paid b/c this dream will remain alive.
    - Residential market opportunity proven unrealistic

    By Anonymous Anonymous, at 8:25 AM, March 29, 2006  

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