Acushnet Bids Due Today


Offers for Fortune Brand’s Acushnet golf business are due today. With Adidas still among the names mentioned on the list of final bidders we have a couple of things to consider to the extent it actually does emerge as the winner for Acushnet:

  1. First off, let’s look at the basic facts. Acuschnet owns some great assets. Titleist and FootJoy are two of the top brands in golf owning the #1 position in Balls and Footwear respectively. Market share numbers are dicey, but Acushnet has over 50%+ share of the golf ball market in the US.
  2. Nike dosen’t want this asset. Nike thinks it can beat Titleist and FootJoy organically in all categories. Whether you believe it or not is irrelevant. If Nike thinks it can, it won’t do the deal.
  3. That said, Nike will get involved in the bidding. They’d like nothing more than to drive the price higher to prevent Adidas from getting it on the cheap. Remember that one of the risks in this space had been that Adidas freed up close to $40mm per year with the NFL deal moving over to Nike in the 2012 season and could otherwise bid on athletes. If it wins Acuschnet, it’s going to be more focused on golf.
  4. What’s the one thing that will burn Nike up on this deal? This will be the one category where Adidas will arguably have a Footwear product that is more successful than Nike’s in FootJoy. (Adidas usually leads in apparel). The numbers speak for themselves. Even many Nike Golf die hards wear FootJoys.
  5. This is not a bank-breaker for Adidas. Regardless of the sale price – we could see anything between $800mm-$1.2Bn, its balance sheet can handle it without a hitch. Current net debt/total capital is 12%, and adding a billion in debt would get us to 25%.
  6. Not a good read-through for the toning market. When Hainer steps up acquisition activity, it usually means that a recent sales driver is waning. This was going to be the year of the International Toner.

Acushnet Bids Due Today - Acushnet Financials 5 11


Acushnet Bids Due Today - Adidas Acushnet ProForma 5 11



JNY: Winning Is Losing

JNY's chances for landing Jimmy Choo just went up. The market might like this, but we can't get the numbers to work. Leverage chasing growth is a bad idea.



The media continues to swarm around the Jimmy Choo sale. Investcorp has apparently pulled out of the bidding for Jimmy Choo ahead of the May 11 deadline for all bids. This would leave Jones duking it out with TPG for the ‘prize.’  But there’s a  big difference between these two – one can afford it, and the other cannot.


Numbers are spotty on Jimmy Choo. So let’s back into a value based on what current owner TowerBrook (and advisor HSBC) are suggesting. Specifically, on April 27th, in attempt to speed up the process, HSBC proposed an IPO at £650mm. Clearly, they’re going to throw out a lofty price to maximize valuation – so that’s probably well over what it will sell for. But let’s conservatively give it a 20%. Unfortunately, this is being priced in pounds. Kind of a tough time to buy an asset priced in pounds with a US $ right now. After netting out the haircut from the dollar translation, we’d still  be looking at a purchase price of just over $800mm in US$.


This would require JNY to borrow virtually all of the purchase price – which would take its net debt to total capital up over 50%. On that amount of leverage, we’ll assume a 7% borrowing cost.


If we assume a 12% operating margin on that business, it suggests that we’d need to have the brand come in at $500mm in sales in order to be net neutral to the P&L.  That sounds about fair.


But it’s the balance sheet component here that concerns us. We have yet to find a scenario for just about any company (or country, or individual) where levering up profitably solves a growth problem.


If JNY ends up ‘winning’ this deal without some kind of creative partnership to share in the financial burden but take away disproportionate economics, then we’ll be even more worried.


We remain very negative on this story. 

Retail: Big Price Divergence Week

Retail: Big Price Divergence Week     

Footwear (down), Discount stores (up) swapping places. Apparel still quietly ebbing and flowing. There’s your greatest near-term risk.


Some notable callouts from our Stock Divergence Monitor today…

  1. Footwear Retail is the clear loser – pretty much across the board – as we see companies coming in with weakness on the margin line of the P&L. Note that Timberland (TBL) is one of the big losers from a brand perspective, which definitely did not help the retail side.
  2. On the flip side, we’ve got the discount stores start to show signs of life. For the first  time in weeks, Target was not the Underperformer in that space – but rather Wal-Mart that graciously stepped in to fill the void. We still don’t like either.
  3. The key space that has yet to crack is Apparel Brands/Retail/Department stores. Simply put, people want to believe…and will not think otherwise until they see some ugly press releases that tell them to remove the blinders. That’s your greatest risk in both earnings and stock prices heading into May/June.

Retail: Big Price Divergence Week     - 212

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Is Obama’s Poll Bounce Sustainable? Does It Matter?

Conclusion:  President Obama’s approval bounce from killing Osama bin Laden will be short term in nature, but due to the incumbency advantage he continues to be well positioned to win a second term.


Despite the somewhat muddled public relations by the White House related to the killing of Osama bin Laden, President Obama has received a noteworthy bounce in his approval ratings.   In the most recent Real Clear Politics poll aggregate, President Obama’s approval rating is now +9.3.  The last time his approval rating was this high was late 2009, which was the beginning of Obama’s long decline in overall approval.


Although the killing of bin Laden is certainly a meaningful event and appears to show Obama’s decisiveness and willing to make a tough military decision, one off events are typically illusory in nature as it relates to shifting the perception of a President.  The best examples of this are political conventions, where a President or Presidential candidate sees a short term bounce in approval, which typically then reverts to the mean within a week or so.  The exception to this is, often, a negative performance, which can change the overall perception of the politician and reset approval ratings lower.


The best proxy for the sustainability of President Obama’s approval rating is probably the real time gauge on Intrade, which has a futures contract on whether President Obama is going to get re-elected.  Shortly after the announcement of the killing of bin Laden, the contract soared to 70.0.  The contract has since declined to the levels of before the event and is now trading at 59.9, which is consistent with the 58.0 to 60.0 range for the month of April.  We’ve attached a chart of this below.


Is Obama’s Poll Bounce Sustainable? Does It Matter? - 1


Despite the fact that it seems unlikely that the killing of Osama bin Laden leads to a new perception and a resetting of his approval rating, we still believe he is going to be difficult to beat in 2012.   We introduced this view on March 14th with a note titled, “2012 . . . Can Obama Be Beat?”  At the point, we raised the issue that there were not many Republican candidates officially in the race and certainly one clear front runner.  The implication of this is that the Republicans will severely lag President Obama in fundraising.


The race for the Republican nomination is poised to more fully get shaped on Thursday in Indiana as Governor Mitch Daniels is speaking at the Indiana Republican Party’s spring dinner.  He is expected to announce his Presidential intentions at this dinner. 


Currently, Governor Daniels’ poll numbers place him in the top ten of potential candidates, but very distant from the top 5 with only a 3.3% rating.  The top five, according to a Real Clear Politics aggregate are:  Romney with 16.3%, Huckabee with 16.0%, Trump 13.7%, Palin 10.3%, and Paul at 7.2%.  Interestingly, only two of the top five have declared their candidacy, which is indicative of how little shape the race has taken. 


President Obama’s advantage versus the Republican field is primarily based on incumbency.  Simply put, incumbents have a statistical advantage in elections. Professor Ray Fair, an economist from the Yale School of Management, has actually quantified the incumbency advantage in Presidential elections going back more than 100 years.   According to Fair’s work, there are three key factors in determining the outcome of a Presidential election: which party is in office, how long they have been office, and the state of the economy. 


According to Fair’s analysis, just the incumbency advantage alone should get President Obama 48.4% of the two-party vote.  After that, it is all about the economy (stupid).  The two components of the economic portion of the prediction relate to growth in the three quarters just prior to the election and whether any of the prior 15 quarters before the election have had growth rates of 3.2% or more.  Currently, Obama has had two quarters of 3.2% growth or more.  These were Q4 of 2009 and Q1 of 2010.


Interestingly, based on Fair’s formula, if President Obama had no more good news quarters of 3.2%+ growth and even if real GDP growth was flat lined at zero through the 2012 election, he would still have a legitimate shot at the Presidency.  In fact, according to the Fair Model, in that scenario, President Obama would win 50.4% of the two party vote. (The Fair formula is here:


So, even if the approval bump that President Obama has received from killing bin Laden is as illusory as we believe it is, the Republicans still have a serious uphill battle to win back the Presidency based on the incumbency advantage.


Daryl G. Jones

Managing Director


WEN is set to report EPS before the market opens tomorrow.  I expect management to strike a careful but confident tone on the earnings call when discussing its outlook for 2011.  2011 is still a “transitional year” for Wendy’s and the entire enterprise.  We don’t expect much news on the previously announced sale of Arby’s but ultimately expect the sale to be a positive catalyst for the stock. 


I continue to think WEN is solid long-term play in the QSR space.  The company’s renewed focus on revitalizing, not complicating, the menu in 2011 will benefit the company for years.  The company’s focus on selling burgers and cokes will, in my view, yield significant results in terms of sales, labor efficiency, and – ultimately – earnings. 


As with every company that has reported so far, food inflation is center-stage.  For WEN, beef costs inflation (in a sluggish sales environment) is one thing that could hinder the turnaround in the short term. 


Here is what the company had to say on the topic during the most recent earnings call on March 3rd.


WEN has all of its ingredients with the exception of fresh beef, which cannot be hedged.  As a result, it is likely that WEN will raise its FY11 inflation target, which is currently 2-3% at Wendy’s.  Since March 3rd, beef costs are actually down approximately 5%.  However, given the persistent inflation in grain prices it seems likely that beef costs may remain elevated – and perhaps even increase further – for the next couple of quarters at least.  Chicken is obviously one foodstuff that is trending down year-over-year, and therefore could provide some relief, but WEN is “pretty much locked in” on that item.


Below are some quotes from WEN management on beef prices and commodity inflation in general, provided during the March 3rd earnings call:


“For 2011, we expect Wendy's same-store sales to grow between 1% and 3%. We expect improvement of 30 to 60 basis points in Wendy's company-operated restaurant margin. This margin assumption factors in a 2% to 3% increase in total commodities for the year.”


“With beef costs going up significantly this year, you'll see Wendy's food costs, I think, reach a higher level in Q2 and Q3 because of the timing of when we'll recognize those market increases. Arby's will also be facing very high beef prices, we think, through this year, 15% or more increase year-over-year.”


“The offset that we have to it right now is favorable prices on chicken for the most part for the year that we're pretty much locked in on. So that will help mitigate, I think, some of the overall commodity costs. But I think we're like everyone else, I think we're nervous overall about the pressures we're seeing on commodity costs and we're working very hard from a menu and a pricing strategy to help offset that, so we can achieve the kinds of margin increases that we talked about.”





Howard Penney

Managing Director

European Risk Monitor: Greek Exit Scares Doused

Positions in Europe: Long British Pound (FXB); Germany (EWG)


As we discussed in a note on Friday titled “Greece Leaving the EURO, Not so Fast”, fears swirled on Friday afternoon that Greece had plans to leave the Eurozone based on unconfirmed sources reported by the German publication Spiegel Online.  As we expected, and as was confirmed over the weekend, this claim was a complete fabrication. However, the abruptly called meeting of finance minister on Friday in Luxembourg did focus on Greece’s persistent public debt imbalances. Of the few remarks we’ve received out of the meeting, it appears that a modification of Greek debt (either through lower interest rates on outstanding debt or more favorable maturities) could be in the cards in the near term. One issue outstanding, and oft pressed by fiscally stronger peers, is increased collateral on Greece's existing debt and future issuance.


Is all the Greek news baked into the cake? The short answer is no, however Greek equities and bonds have seen a significant plunge after an eerie rise in the beginning of the year. The Greek Athex (equity) is down -21.3% since a high on February 18th (and hitting ytd lows today, trading down -1.5%) and the yield on the Greek 10YR bond has gained steadily ytd, trading at 15.6% today!   


While the EUR-USD corrected -3.4% last week, the common currency has remained resilient in the face of glaring risks over the last weeks. We attribute a fair amount of this strength to the weakness in the USD, which we expect to persist as the US government wrestles with the debt ceiling debate (decision scheduled for August 2nd).  We still expect to see volatility in the EUR-USD over the coming weeks, but within a tight trading range. 


As Keith signaled to clients this morning, “the Euro has a ton of support at our immediate-term TRADE line of $1.43 and immediate-term upside to $1.47. Commodity markets (oil in particular is holding our TREND line of $98.63 like a champ) are betting USD down and EUR up from here in the very immediate term.”  As the EU continues to throw its weight (both in terms of capital and in principle) behind maintaining the Eurozone, we expect the EUR to continue to largely shake off sovereign debt contagion fears across the region.


Catalysts to keep in minds are Eurozone Q1 GDP reports this week and next week’s meeting of Finance Ministers on May 16th.


As is typical for Mondays, below we show our European Risk Monitor charts. The first chart of sovereign cds shows that risk premiums continue to heighten in the periphery, especially from Greece, Ireland, and Portugal. With Portugal receiving a €78 billion bailout early last week, Ireland is taking the opportunity to once again plea for more favorable terms on its bailout funds, a development we don’t think the European community will acquiesce to, but is worth monitoring.  


European Risk Monitor: Greek Exit Scares Doused - ch1


Our European Financials CDS Monitor shows that bank swaps in Europe were mostly wider week-over-week, widening for 31 of the 39 reference entities and tightening for 8. This shows a reversion from last week’s tightening, and is a reflection of the ever-present (but fluctuating) risk trade as debt contagion looms.


European Risk Monitor: Greek Exit Scares Doused - ch2

European Risk Monitor: Greek Exit Scares Doused - ch3


Today we bought back our position in Germany via the eft EWG in the Hedgeye Virtual Portfolio. We continue to see confirmation of Germany’s fundamental strength, including impressive export numbers of 7.3% in March month-over-month (vs 2.8% in February) reported today. Germany’s GDP is expect to grow around 2.6% this year, a healthy premium over many of its peers, while the country’s fiscal conservatism leaves it in a strong defensive position as sovereign debt contagion within the region persists.


Our levels on the DAX are immediate term TRADE support at 7,297 and intermediate term TREND support at 7,138 (see chart below).


European Risk Monitor: Greek Exit Scares Doused - ch4


Matthew Hedrick


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