VFC: Let’s “YouTube” These Guys

Interesting to see the progression of management’s tone on key business drivers over the past 5 quarters. Here’s the progression…From their mouth to your eyes…

Be sure to click on pictures below to enlarge text.
Source: VFC Press Releases and Conference Calls

Oil : Holding the Maginot Line... Buying it for a "Trade"

We added a long position in Oil yesterday in the Hedgeye Portfolio. The commodity was providing us with a strong green buy signal and from a fundamental perspective the ~$70 price per barrel is also at, or near, an important level for some of the major producers around the world. Fortuitously, the initiation of our long Oil position was met with comments from the Qatari Oil Minister overnight that OPEC needs to cut production by 1MM barrels of oil a day or more, so Oil is trading up close to 5% this morning.

According to PFC Energy, the breakeven point is for many members of OPEC is just below $70. The higher cost producers break even points are as follows: Saudi Arabia’s break-even point is $49, Venezuela’s is $58, Nigeria’s is $65. While the OPEC producers break-even at prices below $70, the price is obviously perilously close to levels where the higher cost producers do not break even, so it is a line that is need of protection.

More important than OPEC, as it relates to $70 oil, is Russia. According to the Russian Finance Ministry, the nation’s budget for 2009 breaks even at a price of $70 oil per barrel. Per the International Energy Agency, Russia was the world’s largest producer of crude oil in 2007 (at 12.4% of the world’s total) and the second largest exporter, just behind Saudi Arabia. As a result, this price of $70 becomes a very important number to watch.

The French constructed the “Maginot Line”, which was a long line of concrete fortifications, tank obstacles, and machine gun posts along its border, in the run up to World War II. The concept was based on the success of static trench like warfare during World War I, which enabled the French, generally, to impede German progress. Ultimately, the antiquated defense measures of the Maginot line were limited in their ability to hold back German troops and France, as we know, was conquered by the Germans.

One has to wonder how long the antiquated defense of production cuts will enable OPEC to hold the current attack on Oil’s Maginot Line.

The “Trend” in oil is negative. Buying oil is for a “Trade”. KM’s lines for oil prices are:

Buy “Trade” = $68.94/barrel
Sell “Trade” = $81.85/barrel

Daryl G. Jones
Managing Director
(chart courtesy of

Eye on Regionalism: Italy, "I've got your back"...

Another data point in the narrative of EU divisiveness…

Some key data points arrived this week in regards to Italian economic health. On Tuesday CPI numbers were released for September which came in slightly better than August on a year-over-year basis, though still up almost 4%. Today, industrial activity data for August was released showing an unsurprising drop in both sales and orders.

A more telling measure of Italian economic credibility came from three Libyan government entities: The Central Bank of Libya, Libyan Investment Authority and Libyan Foreign Bank. These three entities boosted their holding in floundering UniCredit to 4.2% and committed to participate to the tune of almost 10% in an upcoming 6 billion Euro secondary. UniCredit, Italy’s largest bank, has seen its balance sheet shredded by the credit markets and has been rushing to shore up capital.

Italy has always been one of the weaker hands at the EU table and their finance industry has a long history of unsavory practices and corruption. The fact that one of their preeminent financial institution is receiving a bailout from a country that has just reemerged from rogue status and remains controlled by an unbalanced megalomaniac dictator (recall our 9/5 post) says a lot. This isn’t Warren Buffet to the Rescue – this is Muammar Qaddafi.

As a point of fact, Libya has a long investment history in Italy. During the decades when the rest of the world shunned doing business with them because they sponsored terrorism. The Libyan government acquired stakes in Italian banks, utilities & sports teams, but the timing of this move coming so closely on the heels of Berlusconi’s pledge to compensate Libya monetarily for colonial period abuse suggests that Italy and Libya are becoming increasingly chummy.

This is unnerving.

Andrew Barber

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Europe's Trade Balance Continues to deteriorate...

This chart is not a predictive one; more of a reminder of a "Trend". The EU, in its current organizational form, has never had to deal with protracted economic adversity. The finger pointing has began, but it looks mild relative to what it could be.

DF – November Milk Prices Continue to Decline YOY

The USDA just released the advanced Class 1 milk price for November of $17.33 per hundredweight. This price reflects a 19.2% decline year-over-year, but an 11.6% sequential increase from October’s level. As I have pointed out once before, there is an inverse relationship between the change in milk prices and DF’s gross margins so the fact that the average milk price for the first two months of the company’s 4Q08 have declined nearly 24% should benefit DF’s quarterly gross margins.

VFC: Written in the Cosmos

VFC has been one of our top short ideas for the past several months. No matter how well-managed a company is, when 3-years of acquisition/FX-fueled growth ends in conjunction with a consumer downturn and lapping its best cash conversion cycle in history, then that spells trouble at a 20% valuation premium to the group.
Growth rolled over in every one of VFC’s businesses – which is a first. It also represents the biggest sequential slowdown we’ve seen in the outdoor division in years. With 12.5% growth in that division (which is responsible for almost all of VFC’s multiple premium), my sense is that after stripping out FX benefit, it was a mid-high single digit increase – with several points of that coming from company-owned retail stores (not what I want to see). As I noted in a note last month – this company needs a deal.

The biggest saving grace here is that the company upped its dividend by $0.04 annually, which will presumably push its yield from 3.9% to something north of 4% when the stock opens in negative territory. That’s fine. If it were any more I’d be even more concerned about this story. I don’t want to see a company with 28% debt to total cap and 20% of its debt due over the next 2.5 years up its dividend at the expense of the balance sheet.

I’m not interested in owning this stock until it has a 4-handle.

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