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UA: IDEA ALERT


We added UA to the Hedgeye Virtual Portfolio late yesterday. Here’s how we’re thinking about it on different durations...


First off, this is a situation that was brought on by a recent call we made on Nike, whereby the near-term TRADE and sentiment factors are definitely not in its favor. But for a company that we expect to so grossly beat the consensus estimates over two years, we’re not going to get too cute on the short side of that. The better near-term call, however, is to buy UA, where the near-term factors are the inverse of NKE (i.e. very positive).  


Here Are Some Considerations on UA:

 

TAIL (3-years or Less): We think that UA will put up $3bn in revenue by 2014 – an impressive run given that it is coming off of a print of just under $1.5bn in 2011. That incremental top-line breaks out as follows. a) $500mm in core apparel growth, b) $300mm in incremental footwear, c) $300mm in international apparel, d) $250mm in women’s apparel, e) $125mm in accessories (having brought hats and bags licenses in house). Our confidence here is greater than it is with most other companies given that UA clearly has invested (and will continue to invest) the capital in the right places to get the job done. One of the key points we look at is that it’s sitting at an EBIT margin of only 11% -- when it could be printing a margin number with a 2 if it wanted (but would otherwise jeopardize forward growth potential).  It’s tough for us to find any name out there in retail -- -sans LULU – where we can build a consistent annual EBIT growth model in the 25-30% range.


TREND (3 Months or More): A key consideration is that we’re now anniversarying a period last year where inventories were up an average of 70% as UA battled through problems with it’s supply chain. Even with growth humming in the 30-40% range, 70% inventory growth was not exactly a confidence builder for anyone building a financial model. Since these problems, UA has made many changes in its management ranks, created new positions, and made key external hires to get its fulfillment to where it needs to be. The reality is that this happens to just about every company going through different stages of maturation. UA is no different. Where it is different is the speed at which it appears to be fixing the problems. The Punchline is that this is gross margin bullish for UA in the coming 3 quarters. Lastly, one interesting angle here is that UA has less than 5% of sales coming from outside the US. With a strengthening dollar, this creates a situation where its failure has actually turned into a near-term benefit relative to competitors that operate globally and need to translate profits to US$. That ‘benefit’ should wane in 2013 when we start to see the benefit of the new organization UA has put in place in Europe.


TRADE (3-Weeks or Less): There are some mixed message here.

  • On one hand, business appears stable, with the year/year change in apparel market share continuing on the uptrend. In addition, the Hedgeye Sentiment Monitor is sitting near the lowest levels in a year, and the company is about  to execute a stock split. While we all know that this should not matter, the reality is that there are some people that will always think that a $50 stock is half as expensive as a $100 stock.
  • On the flipside, footwear continues to do a whole lot of nothing. That supports the ‘where could we be wrong’ part of our longer-term call, is the potential for a capital infusion needed (hence lower margins) to amp up the footwear business to attain our revenue numbers.
  • The bottom line is that our TRADE factors lend clear support at $101, with near-term upside to $107.

Just a quick point on valuation – something we think needs a bit of context with UA. By most metrics – P/E, EBITDA, EV/Sales, UA is just flat out expensive. But if you went by those metrics over the past 3-years, you’d pretty much have been wrong on both the long and short side almost every time. We think the better metric is EV/Total Addressable Market. For UA, that equates to about 0.15x based on our math. That makes it the cheapest name around. LULU is 0.33x, RL 0.45x, NKE 0.60x.  Will that matter on a day where the consensus freaks out because apparel sales miss by 2%? No. But that’s when we think we’ll be able to step in and make the most money on one of the best names in the space.


UA’s Apparel Market Share Continues to Rebound…Footwear Not So Much

 

UA: IDEA ALERT - UA Mkt Sh

 

UA: IDEA ALERT - UA TTT




HOTELS: THE FRANCHISEE/OWNER PERSPECTIVE

Some brand commentary from our private company contacts

 

 

Incentive misalignment:

  • Given that most US incentive fees are so “out of the money”, brand management companies seem more interested in growing the top-line where they collect a percentage of revenues instead of focusing on the bottom line
  • Almost all of the programs offered by brands are focused on growing the top line vs. achieving cost savings

Marriott:

  • Still the premier brand company in North America
    • High brand integrity
    • Best reservation system
    • Strongest exposure to corporate travel
    • Marriott hasn’t been that aggressive in raising fees since they have a lot of large franchisees and operators that would give them strong pushback
  • Salesforce One hasn’t been viewed as particularly successful by owners who complain that it’s more expensive than doing the selling of meeting business themselves and that MAR doesn’t necessarily have maximizing their profits as a top priority
    • Program has not been popular with franchisees who have chosen to opt out for the most part as they see little upside in sharing their convention contacts with MAR
    • Property owners where MAR is the operator complain that they have yet to see results from the shared services model but are hopeful that things will improve as group business revs up in the coming years
    • We’ve heard that once MAR hits incentive targets, they shift business to other properties to maximize their fees

Starwood:

  • The best brand portfolio internationally but isn’t the top dog in North America
  • Perception that Aloft and Element are failed brands in North America. While Aloft does reasonably well in urban and high volume corporate travel markets, there are too many Alofts in suburban markets where the product doesn’t do well.
    • Complaints that the materials they use are very cheap and the walls are thin
    • Lenders refusing to lend on new Aloft developments
    • Many of the ADRs in suburban markets are $80 or less
    • HOT may come out with an Aloft refresh to salvage the brand in the next year or so
    • Little interest in Element:  no new openings in 2011, 1 in 2012 and 2 scheduled to open in 2013

Hilton:

  • Really jacked up royalty fees since the Blackstone deal
  • Increased fees from 4% in 2008 to 6% in 2012
  • Lots of onerous kickback deals in their contracts like forcing franchisees and owners to buy internet from them at 3x the price of getting it from a competitive source
  • Able to get away with the fee hikes given the strong performance and locations of their brands, high brand integrity, and a fragmented ownership base
  • Higher leisure exposure though so MAR is still preferred by many owners who believe that it will be a long time before leisure travel returns to 2008 peak levels

IHG:

  • Brands are on the decline
  • Little brand integrity.  One franchisee referred to IHG as a brand “prostitute” allowing applicants through the door and being indiscriminate about what gets a IHG flag
  • Older product base.  Aside from the Holiday Inn Express brand, they are viewed as having a weak brand portfolio and little group loyalty amongst their customers.

Hyatt:

  • Working very hard to compete head to head with HLT and MAR
  • Hyatt has good reputation amongst owners and is often a second or third choice for owners who can’t get a MAR or HLT flag

Wyndham:

  • Strategy is to be the conversion brand portfolio of choice
  • When HLT, MAR, HOT kicks hotels out of their portfolio after the initial license term expires or if they fail to meet brand standards, WYN is waiting in the wings to convert those hotels. 
  • There are many that think WYN will grow faster than HLT or MAR over the next few years with limited new construction in NA

Choice Hotels:

  • Quality Inn is their go to conversion brand. The majority of Hampton Inns that lose a flag become Quality Inns and a decent percentage become Best Westerns
  • The standard of renewing a license that expires from its initial term of 20 years is much higher than that of maintaining a flag during the license term.
    • Many owners try to sell their hotels a year or 2 before the license expires
    • A hotel with a good flag will usually sell for almost twice the price per key as an unbranded hotel in a suburban location.
    • It’s not easy to get approved for a high quality flag since there are a lot of conformity hurdles
    • Some investors look to buy the old full service Holiday Inns at $20k/key and turn them into Courtyards which sell close to $100k/key

THE M3: SANDS CHINA/WYNN MACAU STOCK SALE; WYNN/MPEL LOANS; OKADA; S'PORE HOME SALES & UNEMPLOYMENT

The Macau Metro Monitor, June 15, 2012

 

 

U.S. MUTUAL FUND SELLS SHARES IN SANDS AND WYNN Macau Business

Waddell & Reed Financial is offering 41MM shares in Sands China from HK$24.18 to $24.68 each, and 55.5MMshares in Wynn Macau.  The goal is to raise about US$250MM (MOP2 BN), according to terms obtained by Bloomberg News.

 

WYNN MACAU LOOKS TO RAISE CASINO LOAN Macau Business

Wynn Macau is considering raising its Wynn Cotai loan to US$2.5BN (MOP20 BN) from its initial goal of US$1.5BN. According to Bloomberg sources, Wynn Macau drew around US$2.7BN in commitments in the first stage of syndication.

 

MELCO CROWN SAID TO CONSIDER ADDING BONDS TO LOAN Macau Business

MPEL is looking to raise about US$2.2BN (MOP17.6 BN) in debt via a bond and a loan.  It had already been reported that the gaming operator was seeking about US$1.4BN in a syndicated loan.  Now the chatter is that Melco Crown is also considering a bond of about US$800MM.  The final size of the loan and bond hasn’t been decided, the sources said.

 

OKADA FILES NEW CLAIM IN BATTLE FOR WYNN RESORTS STAKE Reuters

Okada asked a federal judge in Nevada  to immediately restore the rights of his Universal Entertainment Corp. subsidiary, Aruze USA, as the largest shareholder of Wynn Resorts.  Okada also filed an amended counterclaim against Wynn, the company's general counsel and individual board members.


SINGAPORE HOME SALES IN MAY DECLINE TO LOWEST THIS YEAR Business Week

According to Urban Redevelopment Authority, Singapore’s May private home sales fell 32% from a month ago, posting the lowest sales this year as the Europe crisis damped demand.  Private home sales fell to 1,702 units last month from this year’s peak of 2,496 units in April.

 

SINGAPORE'S Q1 UNEMPLOYMENT UP SLIGHTLY, JOB VACANCIES FALL Channel News Asia

According to the latest labour market report released on Friday by the Ministry of Manpower, the unemployment rate edged up to 2.1% in March, from 2.0% in December 2011.  After adjusting for seasonality, job vacancies dropped 9.7% over the quarter to 50,000, though this was still higher than the recent low of 49,200 registered in September 2011.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 15, 2012


As we look at today’s set up for the S&P 500, the range is 34 points or -1.44% downside to 1310 and 1.12% upside to 1344. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/14 NYSE 1229
    • Up from the prior day’s trading of -1219
  • VOLUME: on 6/14 NYSE 779.39
    • Increase versus prior day’s trading of 10.22%
  • VIX:  as of 6/14 was at 21.68
    • Decrease versus most recent day’s trading of -10.67%
    • Year-to-date decrease of -7.35%
  • SPX PUT/CALL RATIO: as of 6/14 closed at 1.23
    • Down from the day prior at 2.08 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.61
    • Decrease from prior day’s trading at 1.64
  • YIELD CURVE: as of this morning 1.32
    • Down from prior day’s trading at 1.35 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, June, est. 13 (prior 17.09)
  • 9am: Total Net TIC flows, April, no est. (prior -$49.9b)
  • 9am: Net Long-Term TIC Flows, April, est. $45b (prior $36.2b)
  • 9:15am: Industrial Production, May, est. 0.1% (prior 1.1%)
  • 9:15am: Capacity Utilization, May, est. 79.2% (prior 79.2%)
  • 9:15am: Manufacturing Production, May, est. -0.1% (prior 0.6%)
  • 9:55am: University of Michigan Confidence, June, est. 77.5 (prior 79.3)
  • 1pm: Baker Hughes rig count 

GOVERNMENT:

    • President Obama travels to Chicago
    • Mitt Romney begins bus tour in New Hampshire
    • EPA, following court order, expected to announce proposal for new rule on soot pollution
    • House meets in pro forma session; Senate in session
    • Senate Finance meets on tax reform, energy policy, 10am
    • FERC, NRC meet on nuclear power, cybersecurity, station blackout rulemaking and power-grid reliability, 9:30am

WHAT TO WATCH:  

  • EU Leaders to call for “further urgent measures” to aid growth
  • Yammer agrees to be bought by Microsoft for >$1b: WSJ
  • Hong Kong Exchanges agrees to buy LME for $2.2b
  • Russell Indexes posts updates to list of additions/deletions for reconstitution
  • U.S. industrial production probably cooled in May
  • Safeway to hold call today on financial strategy
  • Greek Election, G-20 Summit, Fed Meeting: Week Ahead June 16-23  

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

COMMODITIES – thank God we covered all our shorts there ahead of proactively predictable central planning behavior; rallies in Oil, Gold, Copper look like those in European Equities, right to the walls of immediate-term TRADE resistance as the USD moves to immediate-term TRADE oversold at $81.83; very dangerous spot for Correlation Risk to come back on in a hurry. 

  • Gold Traders Bullish as Hedge Funds Increase Wagers: Commodities
  • HKEx to Buy LME for $2.15 Billion in First Commodity Venture
  • Copper Set for First Weekly Gain in Seven on Stimulus Outlook
  • Oil Gains a Second Day on Stimulus Speculation, OPEC Output Call
  • Gold Set for Best Run Since August on Stimulus Bet, Greece Vote
  • Soybeans Rise on Demand Gain From U.S. Processors and Importers
  • Cocoa at a Four-Month High as Ivory Coast Supply May Be Limited
  • Malaysia Rejects Bid to Cancel Lynas Rare-Earth Refining Permit
  • China Said to Buy 1 Million Tons of U.S. Cotton for Reserves
  • Bernanke’s Inflation Validated as Commodities Retreat With Hawks
  • Petrobras Worst Big Oil Bet on Deepwater Disappointments: Energy
  • Iron Ore to Slump as China Slows, Eurofer Says: Chart of the Day
  • Oil Rout Has China Hoarding Most Since Olympics: Energy Markets
  • Hedge Funds Increase Wagers on Gold Rally
  • OPEC Decision Puts Onus on Saudi Arabian Cuts If Prices Fall

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


EUROPE – now that the central planning “smoothing” mechanism has backstopped markets for another 12 hrs of trading, pretty much every single European squeeze index (Spain, Italy, Greece, etc.) has rallied right back to a wall of immediate-term TRADE resistance, and so has the Euro at 1.26; into the “event” we are at the end of the runway; not good.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


ASIA – interestingly, but maybe not surprisingly, Japan didn’t go up on that “news” – what will be left over for them after Geithner, the IMF, and Europe blows whatever bullets they have left on Greece/Spain/Italy? Rest of Asia was eerily mixed (China +0.5%, KOSPI -0.7%).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team



The Wall

“Would it be excessive of me to ask you to save my life twice in a week?”

-Tyrion, Game of Thrones

 

I was speaking at a Canadian Economic Development dinner last night. At the end of my presentation I opened it up for the customary Q&A. Most of the questions were concerned with where Oil and Metal prices could go when Bernanke and Geithner run out of US Dollar Debauchery bullets.

 

Whenever talking about mean reversion and/or tail risks, the most obvious two-word risk factor that I explain (that neither Berrnanke or Geithner ever mention) is CORRELATION RISK. After I walked through that, a nice Scottish-Canadian man stood up and said, “this is more of a statement than a question – you are scaring the hell out of us.”

 

I politely replied (he was Canadian remember), “after what happened again out there into the US market close today, you should be scared.”

 

Back to the Global Macro Grind

 

Yesterday’s stock and commodity markets were trading off into the close, and then completely reversed course to the upside after our overlords floated a headline to the market that central planners were “prepared to take coordinated action.”

 

Whew, thank God for that!

 

Fear is what central planners are feeding you. Without fear-mongering the citizenry, they can’t print, bail, and print. Without fear of being held accountable for their own policy moves (Growth Slowing, equity market outflows, crashing market prices, and no political re-election) they wouldn’t be making these ridiculous short-term decisions.

 

At this point, it’s clear that they have gone over The Wall. They cannot go back. And no, that doesn’t mean that it ends well when they realize what’s on the other side either.

 

In HBO’s latest mini-series hit, Game of Thrones, The Wall separates the known (centrally planned kingdom societies) from the unknown. It’s the perfect metaphor for how conflicted and compromised Keynesian politicians must feel right here and now in 2012. They fear what they cannot see. They fear letting free market prices clear.

 

We let losers win until The Wall no longer holds. In the meantime, Mr Market is already in motion in taking down the Old Wall.

 

If you are afraid of a small part of The Wall coming down this weekend, you should be – because now these market morons have ramped expectations (market prices) right back up to the walls of Hedgeye’s immediate-term TRADE lines of resistance.

 

What does that mean?

 

That means that if market prices fail, again, at this interconnected wall of resistance, there is very little left in terms of Big Government Intervention catalysts and/or downside market price supports.

 

Across countries, commodities, and currencies, here are your immediate-term TRADE walls of resistance:

  1. SP500 = 1344
  2. Russell2000 = 775
  3. Euro Stoxx50 = 2179
  4. CRB Commodities Index = 280
  5. Japan’s Nikkei225 = 8731
  6. Shanghai Composite = 2348
  7. South Korea’s KOSPI = 1897
  8. Germany’s DAX = 6281
  9. Spain’s IBEX = 6797
  10. Greece’s ATG Index = 664
  11. Oil (Brent) = $104.87
  12. Gold = $1645
  13. Copper = $3.44
  14. 10yr UST Yield = 1.73%
  15. EUR/USD = $1.27

If, by chance, The Wall of resistance to do more of what has not worked is overcome, beyond that is another wall – The Wall of intermediate-term TREND resistance. Economic gravity is thick.

 

It remains unclear if these people making these short-term political decisions to manipulate market expectations have any idea about what I am talking about. It remains unknown if they ever had a proactive process of preparation to meet the challenges that remain outside The Wall of their leadership’s groupthink. It is a problem – it is them.

 

Fortuitously, in anticipation of some version of this political gong show, I got longer earlier this week. Don’t expect me to keep a 67% Cash position into this weekend though. I only have 4 SHORT positions left in the Hedgeye Portfolio. Expect that number to go up, maybe a lot, too.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $95.90-98.71, $81.73-82.36, $1.24-1.27, and 1, respectively.

 

Happy Father’s Day Dad – best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Wall - Chart of the Day

 

The Wall - Virtual Portfolio


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