Why Greenhaven Road Capital is Bullish on PAR Technology and KKR & Co

Greenhaven Road Capital is the management company of the Greenhaven Road Capital Partners fund. Scott Miller is the fund’s founder and managing member. Recently, Greenhaven Road Capital released its Q1 2020 Investor Letter – a copy of which can be downloaded here. In its most recent Investor Letter, Greenhaven Road Capital announced that the Russell 2000 Index fell by 30.6% in the first quarter. However, the fund fell a couple of percentage points further over the same period.

In the said letter, Scott Miller highlighted a few stocks and Par Technology Corp (NYSE:PAR) is one of them. Par Technology is a provider of systems and service solutions for the hospitality industry. Year-to-date, PAR stock lost 43.8% and on April 27th it had a closing price of $17.27. Its market cap is of $315.1 million. Here is what Scott Miller said:

“As referenced on the first page, PAR declined almost 60% over the course of the quarter, ending below $13 per share with a 50% decline happening in a 10-day period. At $13 per share, PAR has a market capitalization of $230M. They own a defense contracting business, not impacted by Covid-19, which is worth approximately $100M and will likely be sold in the next year. The company also has a hardware business that sells $100M+ of equipment to large chains like McDonalds and Taco Bell, plus the Brink software business. Brink should end the year with 12,000 locations paying in excess of $2,000 per year. Coupled with the just-purchased Restaurant Magic software business (paid $42M), the Brink unit should have in excess of $35M in run rate recurring revenues with attractive growth and low churn. Because of a convertible debt offering completed in February, the company has $70M+ of cash on the balance sheet and can survive just about any Covid-19 scenario and continue to invest in software.

Mr. Market wants nothing to do with restaurants during a pandemic. While it is unfortunate that PAR has this bullseye on its back, they are actually quite fortunate within the restaurant ecosystem. Their core customers are large QSRs (quick-service restaurants) and not those with small table service – think Dairy Queen, not your friendly neighborhood eatery with waitstaff. On a recent investor call, PAR indicated that for restaurant customers remaining open, business is down 35%, which is substantially better than credit card data showing national restaurant spending down 70%. PAR’s customer base will also benefit from the stimulus plan, which should cover rent, wages, and utilities and may in fact increase profitability for some locations. More importantly, the stimulus will get the vast majority of PAR’s customers through the pandemic, and a POS system is so critical to a restaurant’s operations that if the doors are open, PAR will get paid.

In the longer term, there maybe two silver linings for PAR from the pandemic. The first is that the current environment highlights the benefits of a modern POS system including enabling mobile (smart phone) ordering and enabling integrations with delivery platforms such as DoorDash and Uber Eats. A modern POS leads to higher revenues. The current challenging environment may also help rationalize the competitive environment and improve pricing. PAR competitor Toast, which is more focused on small chains and relies mostly on payments revenue (credit card processing fees), just laid off/furloughed half of their workforce. Toast raised $400M before the pandemic so they are not going away, but they may scale back their desires to enter the enterprise market and relax their aggressive pricing.

In the short term, many QSR chains have banned non-employees from entering their stores. This includes Dairy Queen and Panda Express, where PAR is in the process of rolling out their software. In these instances, demand is delayed, not eliminated, as long as the locations stay in business.

If the shutdown’s duration is measured in weeks and not months, PAR’s customer base should remain largely intact, their value proposition should be stronger, and their competitive landscape may even be improved. The fruits of their investments in product and management talent will eventually show up in reported numbers. CEO Savneet Singh is not a miracle worker and cannot undo the interruptions caused by the pandemic, but at the same time, he has the product, team, and balance sheet to navigate this environment. In the short term, with the current volatility, PAR may well see a share price significantly below $13, but in the long term, people will return to fast food restaurants for eat in, take out, drive thru, and delivery, and a share of PAR will no longer be available for the price of a couple of happy meals.”

In Q3 2019, the number of bullish hedge fund positions on PAR stock increased by about 60% from the previous quarter (see the chart here).

Greenhaven Road Capital comments on KKR

In the said letter, Scott Miller also highlighted KKR & Co. Inc. (NYSE:KKR) stock. KKR operates as an investment firm. Here is what Scott Miller said:

“KKR is well positioned to benefit from the pandemic in the longer term. The firm has in excess of $160B of fee-paying capital that is “locked up” and will continue to pay fees through the slow down. KKR can also call an additional $60B of capital (dry powder) from LPs to further increase management fee income, and the pandemic will likely improve the returns for capital deployed during this period. KKR should also be a beneficiary on the fundraising side since private equity is the most credible path to 8% annual returns with interest rates hovering around 0% and the losses recently seen in the public equity markets.

Our returns from holding KKR will have four drivers: The balance sheet investments, management fees, incentive fees, and capital market fees. Given that the vast majority of KKR’s balance sheet is invested in KKR funds, there will certainly be a mark down for the most recent quarter. As a point of reference, KKR’s 2018 decline in investments was approximately half that of the Russell 2000. In the short-term, the firm’s balance sheet has likely taken a hit on the order of $3+ per share. The losses may be reversed if and when the world recovers. The second driver of returns, which will certainly take a short- or medium-term hit, are the incentive fees. In early March, KKR announced that their realized monetizations would total approximately $500M in Q1. Given the breadth and diversity of KKR funds across geographies and asset classes, while incentive fees will decline, it is unlikely that they will disappear entirely. Fortunately, employees own more than 40% of the equity and the compensation structure at KKR has a large variable component, such that as incentive fees ebb and flow, expenses do as well.

Private equity remains one of the best business models in the world and KKR remains one of the best positioned to take advantage of the growth. The strong balance sheet, high insider ownership, and 40-year track record all remain in place. They will be investing mountains of capital at distressed prices. KKR is built to withstand just about anything, including a pandemic.”

In Q4 2019, the number of bullish hedge fund positions on KKR stock increased by about 30% from the previous quarter (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.