[Note: Just a heads up that, because of Thanksgiving, there will be no Cabot Turnaround Letter update this Friday. The normal update schedule will resume next week.]
Toast Inc. (TOST): Making Strides in the Booming Restaurant Sector
With the approach of the Christmas shopping season, we’re heading into what’s regarded as prime “restaurant season,” as the holidays typically see more foot traffic than any other time of the year, and with December historically the highest-selling month for U.S. restaurants.
In recent issues of the Cabot Turnaround Letter weekly updates, we’ve taken a look at some of the more attractive restaurant stocks that have lately shown increased relative strength and turnaround potential, including Wendy’s (WEN), Dutch Bros (BROS) and Starbucks (SBUX). But in this issue, we’ll focus our attention on a software company that is making a name for itself by helping restaurants around the globe become more efficient and profitable, while improving the dining and takeout experience for its customers.
The restaurant industry is currently in what can only be described as a boom period. Following the setbacks (for traditional sit-down restaurants) of the Covid years, the overall food and beverage service sector has made significant strides in the last couple of years, with record sales and employment projected for 2024. That’s where this month’s featured company enters the picture.
Toast Inc. (TOST) offers a point of sale and management operation system that helps restaurants worldwide improve operations, increase sales and create a better guest experience. The Boston-based company’s products further help restaurants quickly access customers, make takeout and delivery more profitable and better retain employees.
Toast also helps its customers with payroll processing, email and text marketing and reservations, managing tips and invoices and many other aspects of the day-to-day operations of restaurant management. It’s essentially a cloud-based, software-as-a-service (SaaS), all-in-one management system for restaurants.
Beyond its subscription-based software services, Toast also provides consumer payment hardware applications for restaurants, including guest-facing display terminals and order-and-pay kiosks (which make it easier for customers to self-order, split payments or add tips). The company’s customer base includes fast-casual chains, full-service restaurants and multi-location brands.
Customer satisfaction for Toast’s hardware and software offerings has been exceptionally high, with clients reporting an average 90% reduction in hours to run payroll and a 15% increase in orders delivered within 10 minutes or less. But these results only partly account for the firm’s head-turning growth of late.
The restaurant industry ranks consistently as one of America’s largest industries by annual sales, with just under $1 trillion in sales as of 2023, according to the National Restaurant Association. The restaurant sector is also one of the nation’s biggest employers, accounting for around 10% of the total workforce, with millions of workers across various roles.
More specifically, U.S. restaurant sales are forecast to exceed $1 trillion for the first time in history this year, making it the nation’s second-largest private sector employer. It’s also on track to add 200,000 jobs, pushing total employment to nearly 16 million people.
Toast currently has around 14% of the industry’s total addressable market, which means its future opportunity is massive.
A substantial portion of what comprises Toast’s unaddressed market hasn’t yet migrated to the cloud and is still using legacy restaurant management systems. And while the company is primarily focused on traditional sit-down, takeout and delivery restaurants, its offerings are also being tailored for and sold to other operations like pizzerias and bakeries.
Additionally, Toast is actively pursuing a new—and potentially huge—avenue of sales in the form of grocery stores. Its new technology platform paves the way for new revenue opportunities in this category, as Toast has lately expanded its product functionality to now accept electronic benefit transfer (EBT) cards (basically food stamps) and federal Supplemental Nutrition Assistance Program (SNAP) benefits, which opens up more of the grocery and convenience store market for the company.
Toast’s footprint continues to grow by leaps and bounds: In Q3, it successfully added 7,000 new locations, which amounts to a 28% year-over-year increase, for a total of 127,000 customers. Meanwhile, the key metric of annualized recurring run-rate for Toast in the quarter was over $1.6 billion, a 28% improvement from the year-ago quarter. Commenting on these sanguine results, a confident CEO Aman Narang said, “We are just getting started.”
Further commenting on the momentum the firm is experiencing, Narang said, “Our customers continue to choose Toast as they expand locations, solidifying our position in the market as the choice for growing successful restaurants.”
To help its customers drive demand, Toast recently released two new products that allow restaurants to better reach their guests: branded app and short message service (SMS) marketing. The branded app allows clients to build a best-in-class native app experiences for iOS and Android, including integrated digital ordering, delivery, loyalty and more. This helps customers “level the playing field with much larger brands at a fraction of the cost,” in Toast’s words, and it has been particularly successful with its multi-unit small- and mid-sized customers.
Toast maintains that guests who order through the branded app are four times more likely to be repeat customers than those who order through a restaurant’s website. For example, Peetaway, a fast-casual Mediterranean restaurant with 37 locations across the Midwest, saw orders from its newly launched branded app comprise nearly 15% of its total digital sales since the launch, according to Toast.
As for the SMS marketing feature, the company said it was “highly requested” by its clientele. It allows restaurants to send marketing campaigns, promotional offers and messages directly to customers via text messages or other SMS, enabling real-time communication with guests through their mobile phones, often utilizing automated campaigns and AI-assisted message creation tools to enhance engagement and generate more revenue.
One recent success story is the California-based full-service Italian restaurant, Spaghettini, which boasted over 11,000 in sales owing to its Toast SMS marketing campaign in its first month alone. Toast’s top brass emphasized in a recent conference that the SMS offering “is a critical tool when business is slow.” (For instance, during a quiet period, Spaghettini sold out its surf-and-turf special after promoting it with a tax campaign.)
Indeed, new product and service offerings are an integral part of the growth strategy, with the company focusing on a wide range of unique restaurant-first capabilities (which Toast refers to as “1,000 little things”). This fall alone, it released over a dozen updates across products like Toast Now, benchmarking, kiosks, Toast Tables and payroll in response to direct customer feedback.
Another major part of the firm’s expansion plan is its ongoing attempt at growing its international reach. Earlier this month, Toast provided an updated on this front, noting that it’s seeing “continued momentum” in terms of month-over-month gains in its guest products for overseas customers that were rolled out earlier this year (and which management said is driving unit economics and sales productivity). Customers in the U.K., Ireland and Canada can now also access Toast Now, the firm’s mobile operator app, where they can view real time data about targeted restaurants.
Entering 2025, Toast says its pipeline is exceptionally strong and it continues to make progress across its rollouts with big names like Marriott, NTY Group, NBC and many others. And with its focus on delivering ongoing operating leverage as it continues to scale, Toast believes it will be able to expand its intermediate-term—and likely too conservative—adjusted EBITDA margin target range of 30% to 35%. (For 2024, the company’s adjusted EBITDA margin is projected to be approximately 26%, marking a significant improvement compared to prior years.)
All told, it’s a solid story with several growth catalysts—and one with the added benefits of both cyclical and secular momentum tailwinds.
Recommendations
Purchase Recommendation: Toast Inc. (TOST)
333 Summer Street
Boston, MA 02210
Web Site: https://pos.toasttab.com
Symbol: TOST
Market Cap: $24.4 Billion
Category: Large-Cap
Business: Software
Revenues (2024e): $4.9 Billion
Earnings (2024e): $335 Million
11/26/24 Price: $43.00
52-Week Range: $14.00-$43.62
Dividend Yield: N/A
Price target: $70
Background:
TOST’s debut as a publicly traded company was decidedly unpropitious. It came public in September 2021 and almost immediately experienced the typical post-IPO droop, dropping from a high of 70 a share in November 2021 all the way to 12 by May the next year.
The stock spent the next year-and-a-half etching out a bottom within a fairly tight, lateral trading range before showing signs of life last November. The stock broke out on earnings in May, then spent four more months consolidating before taking flight again in September.
Since then, TOST has captured attention on Wall Street with a stellar rally that was accentuated by the latest earnings-induced blast to its highest levels in nearly three years. It’s a mid-stage turnaround with the benefit of strong forward momentum (one of my personal favorite set-ups for initiating a new long position).
Analysis:
A brief overview of the positive fundamental factors in Toast’s favor include: a massive total addressable market (TAM) with the potential to be the restaurant industry’s software management platform of choice, a growing number of sub-categories within the broader food and beverage industry (including dine-in, takeout and delivery restaurants, plus grocery stores, beverage chains and even large corporate catering events) and the company’s initial contract terms, which necessitate customers signing one-to-three-year contracts (which locks them in long enough to justify the initial capital outlay and makes it difficult to switch providers without a real need).
On the performance front, the company posted a stellar third-quarter earnings report earlier this month that featured revenue of $1.3 billion that increased 27% from a year ago, plus earnings of seven cents that beat estimates by six cents.
Other key metrics were equally impressive, including gross payment volume (GPV) that rose 24% to $42 billion, annual recurring revenue (ARR) that increased 28% to $1.6 billion and GAAP subscription services and financial technology solutions gross profit that jumped 35% to $365 million.
Among its recent initiatives, Toast recently released the results of its third Voice of the Restaurant Industry Survey3, a poll of restaurant decision-makers which highlights the current state of the restaurant industry and how business owners are feeling about the future. Amongst the top findings, nearly one-third of restaurant owners surveyed hope to open a new location over the next 12 months, which paves the way for additional growth opportunities for Toast going forward.
Additionally, restaurant operators said they were “very likely” to implement artificial intelligence (AI) in several ways over the next year, with approximately 40% of respondents selecting options including optimizing menu performance, making recommendations for guests, benchmarking their business performance against their peers and optimizing pricing. This of course is another pathway for Toast to market its services to new customers.
For Q4, the top brass guided for its subscription services and financial technology solutions’ gross profit to be $375 million at the midpoint which, if realized, amounts to around a 34% growth compared to the year-ago number. The firm also expects adjusted EBITDA of around $100 million in Q4, a massive 233% year-on-year increase if realized.
For full-year 2024, subscription services and financial technology solutions gross profit of around $1.4 billion is expected, up 33% if realized (and an improvement from last year’s 28% growth), with adjusted EBITDA of around $360 million (up nearly 500%).
Looking ahead, Wall Street sees the top line increasing 24% in 2025, followed by several more years of 20%-ish growth. Earnings, meanwhile, are expected to jump 50% next year and continue rapidly expanding in each of the next few years.
For investors who don’t mind chasing what has already been a head-turning rally, I think the stock looks reasonable for nibbling around current levels or (preferably) on a pullback, with an eye toward an intermediate-term upside target of 70 (the 2021 peak price). In terms of a loss allowance, I’m giving this stock more downside leeway than I normally would on most of our other portfolio positions due to its higher relative volatility factor. Accordingly, I suggest using a stop-loss slightly under 35. BUY
Other Ratings Changes:
I’m changing the rating for our position in Pan American Silver (PAAS) from Buy to Sell.
The position was first initiated back in October, and while the stock hasn’t drastically underperformed (particularly in relation to the recent action of the silver price), I’m disappointed with its overall performance in the past month. As of Tuesday, the stock is down about 14% from our initially recommended buy price—and this is typically where I recommend exiting a failed turnaround position for the sake of capital preservation.
What’s more, PAAS has closed decisively under a widely-watched trend line—namely the 50-day moving average—and while this in itself doesn’t necessitate the stock will continue underperforming, it’s often a sign it has lost enough of its remaining forward momentum to invite additional selling pressure in the short term.
It’s also worth noting that the post-election selling pressure that has extended across the broader precious metal arena has the additional headwind of a strengthening U.S. dollar index, which suggests flight capital from overseas is pouring into financial markets, and particularly into riskier assets outside of the metals. It further goes without saying that a strong dollar doesn’t normally bode well for the near-term metals outlook. SELL
I’m also downgrading Super Hi International Holding (HDL) from Buy to Hold.
On November 25, Super Hi released its Q3 earnings report which featured revenue of nearly $200 million that increased 15% from a year ago, plus EPS of six cents that missed estimates by six cents. The latter metric was likely the reason for the stock’s negative reaction, as shares were down 1.5%.
In other key performance metrics, Super Hi’s total number of Haidilao restaurants as of Q3 was 121, reflecting a net increase of six since the end of 2023. It also had over 7.4 million total guest visits in the quarter, representing a 4% increase, while same-store sales growth was 6%.
Granted, the earnings reaction was hardly a disaster, and the overall position is down just 4% since it was first initiated in October. However, I’m not keen on the share price action in recent days. Consequently, I recommend that if HDL breaks below 14 on an intraday basis (a benchmark support level in the chart) we exit the position. For now, however, we’ll hold onto it. HOLD
[Note: Your complimentary copy of my latest E-book, Turnaround Trading & Investing: Tactics and Techniques for Spotting Winning Turnaround Stocks, is available by clicking HERE.]
Performance
The following tables show the performance of all our currently active recommendations, plus recently closed out recommendations. You can find more details by visiting our website at cabotwealth.com.
The chief analyst of the Cabot Turnaround Letter does not yet personally hold shares of every company on the Current Recommendations List, but that will change over time subject to the following guidelines. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may currently hold and may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.
Recommendation | Symbol | Rec. Issue | Buy Issue | Current Price | Total Return | Current Yield | Rating and Target |
General Electric | GE | Jul-07 | 195 | 180.2 | -8% | 0.60% | Hold (210) |
Berkshire Hathaway | BRK/B | Apr-20 | 183.2 | 477.5 | 160% | 0% | Hold |
Brookfield Reinsurance | BNT | Jan-22 | 61.3 | 59.75 | -2% | 0% | Hold |
Janus Henderson Group | JHG | Jun-22 | 27.2 | 45.25 | 66% | 3.50% | Hold (42) |
Agnico Eagle Mines Ltd | AEM | Nov-23 | 49.8 | 81.7 | 64% | 2.00% | Hold |
Fidelity National Info Svces | FIS | Dec-23 | 55.5 | 84.4 | 52% | 1.70% | Hold (85) |
Duluth Holdings | DLTH | Sep-24 | 3.9 | 3.9 | 0% | 0% | Buy (5.5) |
Intel | INTC | Oct-24 | 22.6 | 24.9 | 10% | 0% | Buy (37) |
Alcoa Corp. | AA | Oct-24 | 39.25 | 47.2 | 20% | 1% | Hold (50) |
Centuri Holdings | CTRI | Oct-24 | 18.7 | 20.95 | 12% | 0% | Buy (24) |
Atlassian Corp. | TEAM | Oct-24 | 188.5 | 261 | 38% | 0% | Hold |
Pan American Silver | PAAS | Oct-24 | 25.4 | 21.7 | -14% | 2% | Sell |
Super Hi International | HDL | Oct-24 | 16.7 | 16.05 | -4% | 0% | Hold (27) |
American Airlines | AAL | Oct-24 | 13.6 | 14.95 | 10% | 0% | Buy (20-21) |
SPDR S&P Retail ETF | XRT | Nov-24 | 79.6 | 84 | 6% | 1% | Buy (88) |
Starbucks | SBUX | Nov-24 | 99.25 | 101.85 | 3% | 2% | Buy (118) |
SLB Ltd. | SLB | Nov-24 | 44.05 | 44 | 0% | 3% | Buy (118) |
Most Recent Closed-Out Recommendations
Recommendation | Symbol | Category | Buy Issue | Price At Buy | Sell Issue | Price At Sell | Total Return(3) |
Viatris | VTRS | Large | Feb-24 | 17.4 | Oct-24 | 11.5 | -34% |
Barrick Gold | GOLD | Large | Sep-24 | 22.6 | Nov-24 | 17.5 | -22% |
Baxter International | BAX | Large | Feb-24 | 38.8 | Nov-24 | 35 | -10% |
B2Gold | BTG | Mid | Aug-24 | 2.9 | Nov-24 | 3 | 3% |
Solventum | SOLV | Large | Sep-24 | 65.5 | Nov-24 | 73 | 11% |
Notes to ratings:
1. Based on market capitalization on the Recommendation date.
2. Total return includes price changes and dividends, with adjustments as necessary for stock splits and mergers.
* Indicates mid-month change in Recommendation rating. For Sells, price and returns are as-of the Sell date.
** BNT return includes spin-off value in BAM shares.
*** GE total return includes spin-off value of GEHC shares at January 6, 2023 closing price to reflect our sale.
**** Indicates a partial sell.
The next Cabot Turnaround Letter will be published on December 13, 2024.
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