Stock Talk #15: $CHEF Issues Equity, Or, When Good Stocks Do Bad Things

Quick stock talk today – I wanted to offer some analysis on CHEF diluting shareholders, a move I’m not happy about but realize was probably necessary for the company.

First off, here on Stock Talk, I’m always willing to shift from a buyer to a seller when the facts change. Yesterday’s $CHEF news is not good for $CHEF equity. The company announced it’s issuing $75 million of shares with the option to issue $11.25 million more in the next 30 days. Why do they need it? Let’s go directly to the press release for more:

In addition to adding liquidity to the balance sheet, the Company currently intends to use the net proceeds from this offering for general corporate purposes, which may include, among other things, working capital, repayment of outstanding debt and opportunistic investment in sales and distribution infrastructure.

Before we analyze the planned use of cash, let’s look at how equity holders are getting diluted. CHEF’s market cap as of yesterday’s close was $454 million. If we assume the max equity they could issue of $86.25 million, this works out to 19% dilution at the current price:

If they sell the stock with the dilution factored in, I think a fair price given what the market currently values CHEF at is $11.84 (so, 19% off the current). As I write this, CHEF is down 9% pre-market.

While I hate to see my equity diluted, I’m not selling my shares. If you look at Stock Talking #6, I make a case for $CHEF being a billion dollar company that should get to $100 million plus in EBITDA. The use of proceeds to repay debt and invest in sales and distribution I don’t hate – this is good capital allocation. CHEF has some expensive debt with yields in the teens. This improves their credit profile if they repay debt and also is a chance to invest in Shop Like a Chef and other company initiatives if they re-invest in the company. Remember, the reason CHEF has sold off so much is concerns about whether it can make it through the crisis when its customers are restaurants. Improving its liquidity – which in my opinion was already better than most food distributors – should allay at least some of these concerns.

I can’t sugarcoat it though – I’m disappointed to be up to 19% diluted and there’s no way to spin this as more positive than negative for the company.

Before we wrap up, two podcasts I recorded over the weekend I think you’ll enjoy:

– Nick Widmer on the future of advertising, company culture and crypto – Nick has had ads appear in the Super Bowl and was just awesome to have a conversation with on the pod. SpotifyiTunes.
– Sean “The Impervious” Busch on options plays and $QQQ v. $BRK.B – Sean nailed it on Sunday with some of his picks – $DDOG, $SDC, $CSPR and more. SpotifyiTunes.

Happy trading,


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