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WEEKLY COMMODITY CHARTBOOK

Despite dollar weakness over the past week, most agricultural commodities that we monitor declined week-over-week.  Chicken wing prices continue to gain as leading indications of chicken supply and increasing demand for chicken from food service.


WEEKLY COMMODITY CHARTBOOK - commod

 

 

CONSUMER CALLOUT

 

Gasoline prices continue to rise as Ben Bernanke’s recent commentary sent the dollar lower.  Average national prices are now above $3.90 and consumers’ displeasure is increasingly apparent.  Below, we present the most recent quotes from a select group of companies on the issue of gasoline prices.  We expect, if the current trend continues, for the tone of these statements to change when each management team discusses gas prices again. 

 

There have been two dueling schools of thought during the recent debate on gas prices that we feel are worth calling out.  First, there seems to be a camp that has a fixed price such as $3.75 or $4.00 that is seen as the “rubicon” beyond which consumer demand is greatly impaired.  Second, there is another group that proposed that it is the rate of change, rather than the dollar price, that impacts consumer spending.  While we have a view on that debate, the important takeaway from the chart below is that there is ample evidence to suggest that a consensus can be reached; not only are gas prices closing in on $4, they have gotten there in an expedited fashion (+20% YTD, roughly). 

 

WEEKLY COMMODITY CHARTBOOK - gasoline

 

 

WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.

 

BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.

 

CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.

 

DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.

 

 

SUPPLY & DEMAND

 

Coffee

 

SUPPLY

 

Goldman released a note yesterday saying that coffee may gain in Brazil if weather remains dry in the country’s crop growing regions.  German researcher, F.O. Licht GmBH, also said in a report that the main coffee growing areas in Brazil were “drier than usual” in February.

 

DEMAND

 

World coffee demand growth remains “resilient”, according to Roberio Silva, executive director of the London-based International Coffee Organization.  Silva attributes the resilience to emerging market demand, increased consumption in producing countries, and the expanding popularity of single-cup dispensers.

 

Chicken

 

SUPPLY

 

Egg sets placements continue to contract at around the same rate, -6%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.  As the chart below shows, supply is not showing any clear signs of picking up.

 

WEEKLY COMMODITY CHARTBOOK - egg sets wing prices

 

 

RECENT COMPANY COMMENTARY

 

Coffee: Prices are now down -24% versus last year

 

PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.

 

SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.

 

 

CORRELATION

 

WEEKLY COMMODITY CHARTBOOK - correll

 

 

CHARTS

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - milk

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


MIK/DG: STYROFOAM BALLS

After a period where private equity firms were buying retail and consumer brands as far as the eye can see, they are now clearly net sellers. You might come across an occasional KORS. But beware of the Michael’s of the world.

 

We’ve been waiting and waiting for Michael’s Stores to come back to market, and not only were we handed this little gift, but we got it in conjunction with a long-awaited Dollar General secondary! (there was severe sarcasm in that statement, fyi).

 

Seriously, let’s look at this from a thousand feet, which is where we get the best context. In doing so we see that companies taken private over the last 3-6 years need to ultimately come back out. After a period where LBOs ruled the roost, IPOs are back. So expect the calendar to be full. But not full of KORS, full of something else. 

 

We think it’s really important to dial back the mental clock for a minute to what was happening in 2006.

a) The market was on a complete tear, and the deal market followed.

b) From the time of the 2002 bottom to the 2007 peak, the S&P was up 95%, while retail (as measured by the MVRX) was up 165%.

c) During that same time period, we saw 34 retail/consumer discretionary IPOs. 20 of these were in 2005-06. In 2007, we only had 6, and then in 2008 there were none. Zero.

d) That ’06-’08 time period is most interesting. As our analysis shows, when we compare the purchase transactions for financial buyers vs. IPOs, there was a meaningful divergence in 2006. It was the start of a three year time period where the number of ‘going private’ deals outpaced IPOs for the first time since well into the 1990s.

e) This was the same period where everyone was afraid to short any junky stock, because all it took was a simple press release – or the rumor of one – that the company was being bought, and it sent the junk to new highs. Yes, many bad businesses were being bought at what seemed to be toppy prices.

 

In fairness, what seemed to be a toppy price back then ain’t looking so lofty anymore. Dollar General is up 164%, and we’re looking at an Enterprise Value of $18bn even. Over the 2+ years DG has been (re) public, it has nearly doubled its operating margin to 10%. For many reasons, we’d argue that the incremental boost in margin from here will carry with it an outsized capital cost. But nonetheless, EBITDA is up by 50% since the deal.

 

Michael’s is an interesting case because – unless bloomberg’s numbers are flat-out wrong -- it is already running back up around historical peak double digit margins. That’s not to say that Bain and Blackstone can’t profit nicely from the progress made since 2006, but we question what kind of growth anyone is buying into here. This story needs to have some serious teeth that we simply don’t see yet in order to be a winner.

 

As it relates to the concept, by no means is it bad. In fact, between Michael’s and Jo-Anne stores, they have a duopoly on stores completely dedicated to arts and crafts. But it falls into the category of ‘why does it need to grow’?

A colleague of mine asked me in our morning meeting yesterday: “Michaels Stores. Isn’t that where you go to get Styrofoam balls?” The answer is Yes, among many other things. It’s a great destination for teachers to get material for class, and for people that like ‘scrapbooking’ as a hobby. While the need for the venue will likely not go away, the reality is that ‘scrapbooking’ is not gaining in popularity anymore, and expenses related to education are not going up (as sad as it is to say).

 

Opinions aside, the product is largely a commodity, is increasingly available on Amazon, and is largely present in every Wal-Mart. We’re not suggesting that the Wal-Mart factor is anything new. Because it’s not. But it certainly has not gotten less intense over the past five years.  In fact, in the four years leading up to the deal, comps were +3-4% annually, and in the three years subsequent – comps average (-2%).

 

RETAIL/CONSUMER DISCRETIONARY DEALS: PRIVATE EQUITY BUYS VERSUS SELLS

MIK/DG: STYROFOAM BALLS - styrofoam balls


(CORRECTED) CZR: TRADE UPDATE

Keith shorted CZR in the Hedgeye Virtual Portfolio at $13.89.  According to his model, the TRADE range is between $11.89 and $13.97.

 

 

CZR shares have been extremely volatile as investors and analysts try to determine fair value.  In our view, outside of an option on internet gaming, CZR's core casino operations provide zero value given its huge debt burden of >$22 billion.

 

Better regional gaming performance and a recovery in Vegas still do not justify any equity value.  Investors may be playing roulette with the internet gaming option.  A federally legislated US online poker market is no sure thing and even if it does occur, investors may be too optimistic on expectations for timing.

 

(CORRECTED) CZR: TRADE UPDATE - CZR2


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CZR: TRADE UPDATE

Keith bought CZR in the Hedgeye Virtual Portfolio at $13.89.  According to his model, the TRADE range is between $11.89 and $13.97.

 

 

CZR shares have been extremely volatile as investors and analysts try to determine fair value.  In our view, outside of an option on internet gaming, CZR's core casino operations provide zero value given its huge debt burden of >$22 billion.

 

Better regional gaming performance and a recovery in Vegas still do not justify any equity value.  Investors may be playing roulette with the internet gaming option.  A federally legislated US online poker market is no sure thing and even if it does occur, investors may be too optimistic on expectations for timing.

 

CZR: TRADE UPDATE - CZR2 


LIZ: Buying on Sale

Keith added LIZ to the Virtual Portfolio into the close on today’s high Beta pullback just above his quantitative model’s TRADE line of support.  

 

No change to our thesis on the name here but today’s pull back is another opportunity to get involved with our favorite sm-mid cap growth story that we expect to double in 2012. Now that LIZ is a double-digit stock, has largely shed its debt burden, and is beginning to reveal its top-line growth potential, investors are starting to take notice. We think the Street’s numbers are still too low and the stock is trading at a significant discount to the value of Kate Spade alone. Investors will start looking at $1 in earnings power in three years.

 

Below are links to our 2/27/12 preview to the fourth quarter as well as our take headed out of the print. We also reflect on the 3/13/12 announcement of George Carrera to replace Andy Warren as CFO.

 

LIZ: Much Beneath the Surface (3.13.12)

 

LIZ: Noise = Buying Opportunity (3.01.12)

 

LIZ Q4 Preview (2.27.12)

 

LIZ: Buying on Sale - LIZ TTT

 


PVH: Levers & Drivers

 

There is nothing that materially changes our view on PVH post call – we still like it here and beyond 2012. The earnings beat was largely in-line with our view headed into the event. In addition, with persistent uncertainty in Europe we’re also not surprised in management taking a more conservative view of Q1; However, with sales trends at both CK and Tommy running well ahead of plan quarter-to-date, we think PVH is going to pull a RL and end up coming in above the Street’s original $1.32 despite guiding to $1.20-$1.25.

 

With Tommy and CK continuing to drive the company’s results as it works through a turnaround in its Heritage business, it is increasingly evident that PVH’s earnings growth is more stable than most other branded retailers given the number of drivers and levers at its disposal. This doesn’t suggest that there isn’t risk in the model, but simply that PVH has cushion if needed that many others don’t. We think the upside in 2012 numbers will come from stronger (than guided) sales rather than a reduction in spending and are shaking out at $1.36 for Q1 and $6.45 for 2012. With earnings power of $8 in 2013, we think the stock is headed higher.

 

Here are few callouts re 2012 from the call:

  • QTD CK comps up over 10% and Tommy in the teens vs. guidance of +4%-5% growth for each so revs continue to track above plan. Wholesale is also tracking ahead of plan suggesting upside to guidance.
  • Already seeing turn in Heritage margins here in Q1 (most effected by macro factors), which is notable given our view that Heritage is not a very defendable business.
  • The Spring/Summer order book is up 13% yy in Europe quarter-to-date (~70% of sales).
  • 2012 guidance was raised by $0.10-$0.30 to $6.10-$6.20 – mostly due to tax rate coming down from ~29% to ~24-25% as more profits realized overseas from Tommy as well as more aggressive debt reduction, $300mm in 2012.
    • This is not a 1x, but permanent shift. While we’d typically point to a lower quality earnings that is not the case here, but a new reality for the company given where profits are generated i.e. Tommy.
  • At CK, royalty revenues will decelerate to MSD growth this year driven by 1) take back of CK bridge line from WRC, 2) more conservative ordering by European retailers, and 3) a planned reduction in sales to the off-price channel.
  • SG&A spending growth will be up MSD driven by higher pension expense, multiple new launches (e.g. CK Bold underwear and new fragrances), as well as continued support for Tommy’s “Meet the Hilfigers” campaign.

All in, while it is not in our list of top three, we still like the stock here. We’re shaking out at $6.45 for 2012 on 5% total revenue growth driven by 9% growth at CK, 7% at Tommy and Heritage down slightly and 50bps in margin expansion.

 

While PVH works to stabilize its cash flow business (Heritage), it’s doing what the best brands do that license out their brands in order to grow into international markets – it’s starting to take back control of its own content. Driving brand sales directly at higher margin was key to RL’s success through much of the last decade as the company bought in its licenses. We don’t expect PVH to be any different. With earnings power of $8 in 2013, we think the stock is headed higher.

 

Casey Flavin

Director

PVH: Levers & Drivers - PVH S

 

 

 

 


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