HedgeyeRetail Visual: Valuation in a Different Light

Let’s throw traditional valuation metrics out the door for a minute and look at EV/Total Addressable Market Value. It suggests that some of the seemingly most expensive stocks are actually the cheapest – and vice/versa.


Tired of nit-picking over a point here or there in p/e, price/sales or EV/EBITDA?  Basing investment decisions on these metrics often obfuscate the real value proposition. We looked at EV/Total Addressable Market for a host of companies. It shows that some of the ‘most expensive’ stocks based on traditional metrics are actually among the cheapest on this methodology.


In our analysis, we not only look at the market size each company is targeting, but also apply two discount factors; 1) the extent to which the company has the operating infrastructure in place to garner increased share, and 2) whether management is capable of achieving this growth.


HedgeyeRetail Visual: Valuation in a Different Light - EV TAM

TGT: TRADE Idea Alert

Keith added TGT to the Hedgeye Virtual Portfolio today on the long side. To be clear, this is not a change in our fundamental view, and we don’t view TGT as one of those fat-TAIL 2-year doubles. But there are some near-term factors that should help TGT on the margin.


1) Oil down = TGT up. It’s interesting that since Crude Oil started to break down in the early part of April (Brent down by 22% in three months), TGT is down by 1%, and Wal-Mart is up 11% (and setting new highs). Yes, we understand that WMT serves a demographic with less disposable income, but there’s no fundamental reason why WMT would benefit from lower oil prices and TGT would not.

2) The JC Penney fiasco is resulting in a hemorrhage of market share in the mid-tier. The good news for TGT is that Kohl’s is not taking it. In fact, KSS is giving up additional share as well. We’re seeing the consumer shift to off-price channels as TJX and ROST pick up share. We’re even seeing the likes of Macy’s and Gap gain share. If those players benefit, TGT will too (and WMT will not).

3) Last quarter, TGT printed a blow-out number, which was at  the precise point where the organization should have otherwise shown weakness due to the management changes over the past nine months (Michael Francis likely kicking himself for going to JCP and subsequently getting fired last week).  BBBY is a good example of what happens when a company is ill prepared for changes in the competitive landscape, and logistics associated with big company events (HQ move). TGT is no BBBY.  In fact, BBBY is clearly losing share in the Home category. One of its top 5 competitors in that space is Target.

4) Lastly, with TRADE and TREND support of $57.30 and $56.22, respectively, it is sitting at a point where the fundamentals and price mesh well within Hedgeye’s Risk Management framework.


TGT vs. WMT. Vs. Brent Crude: Since Oil started breaking down, TGT is down 1% while WMT is up 11%. There’s no fundamental reason why TGT will not benefit as Oil drops.


TGT: TRADE Idea Alert - TGT


TGT: TRADE Idea Alert - TGT levels

UA: A Knight's Chase


Brian McGough, Managing Director of Retail (@HedgeyeRetail)



The case for Under Armour (UA) is an interesting one. After a meteoric rise in share price, the stock could be construed as a stock that’s “too expensive.” It’s up 100% since last August  after swooping in and taking market share from Nike. After today’s post-UBS downgrade pullback and the unveiling of a new line of footwear, we added UA to the virtual portfolio. The long-term outlook for the company is very solid despite the cautionary landscape in the near-term.



UA: A Knight's Chase - UA chart1



Using our TRADE, TREND and TAIL durations, here are three takeaways on why UA is a long:


TRADE (Duration = 3 weeks or less)

UA remains a bit expensive and footwear isn’t really going anywhere right now. Though business appears to be stable, there will be a capital-intensive marketing campaign surrounding UA’s new line of shoes. Our TRADE support line is at $98.78.


TREND (Duration = 3 months or more)

It appears that UA has finally got its inventory control levels sorted out and with a new management shake up that includes newly created positions, there’s a growth story here. UA is fixing problems that need to be addressed and by 2013, should be on its way to better margins and sales.


TAIL (Duration = 3 years or less)

We think that UA will put up $3 billion in revenue by 2014 after doing just $1.5 billion in 2011. Where does the growth come from? The 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).



UA: A Knight's Chase - UA chart2



Under Armour is not an immediate-term stock to chase around. There is serious growth potential here that companies like Lululemon Athletica (LULU) can only hope to achieve.

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The Consumer Financial Protection Bureau (CFPB) has released detailed customer complaint data from June 1, 2012 through June 12, 2012 since it began accepting complaints back in July of 2011. Interestingly enough, Capital One Financial (COF) has the most complaints with 22% of the total complaints filed with the CFPB. Regardless of COF’s business practices, this small amount of data makes it clear that consumers are butting heads with the company.


Discover Financial Services (DFS) reported Q2 earnings this week and as Hedgeye Financials Sector Head Josh Steiner pointed out, the company put aside a $90 million legal reserve. “It should make investors question whether large hits could be in store for more complaint-heavy companies, like Capital One,” Steiner has noted.


The regulatory landscape for credit card companies will become increasingly difficult over the next year or two. That’s food for thought. Like many provisions within the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB’s ultimate endgame and purpose is nebulous and vague. Time will tell the how the CFPB will exert power onto companies like COF and DFS.






  • Since Q1 2011, IHG and HOT have been leading the pack in North America REVPAR.  IHG may have benefited from a reverse FX impact.
  • Hyatt is looking like they are finally seeing the fruits of their renovation programs
  • Marriott is a laggard due to the higher concentration of group business which lags transient – they also have bigger boxes and an out-sized exposure to D.C. 
  • The standard deviation among the lodgers' performance in North America has narrowed considerably



Dollar weakness helped push the prices of many of the commodities we track higher over the past week.  Protein and dairy prices declined as gasoline and diesel fuel costs continue to fall amid economic weakness.  Overall, commodity costs are trending favorably for the restaurant industry.





Gasoline Prices


Gasoline prices declined -1.2% over the last week and we view this as a marginal positive for the restaurant industry.  Below are some quotes from management teams over the past six months on the topic of gasoline prices. 


Cracker Barrel Old Country Store (6/5/12):  And the impact of gasoline prices on the Cracker Barrel customer really shows itself in a couple of ways. One, as Sandy mentioned, 40% of the Cracker Barrel customers are non-local travelers. There's a fairly strong correlation in between miles driven, changes in miles driven and changes in our same-store traffic. There's a less strong correlation in between changes in gasoline prices and changes in miles.


Then, secondly, there's the availability of discretionary income. If the consumer is spending $50 more on gasoline in a month, that's $50 less that they may have available for restaurant purchases and for retail purchases.  One of the things that we and most restaurateurs have seen is, I refer to it as the parable of the boiling frog. If there is a spike in gasoline prices, it's the frog leaping into boiling water and being shocked. If they are rising at a fairly gradual rate, the consumer has time to make adjustments and they tend to stay in the water.


Cracker Barrel Old Country Store (2/21/12): 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.


HEDGEYE: Given the change in tone from Cracker Barrel’s management team between February and June, we expect the continuing decline in gas prices to prompt management to be more positive in its guidance for traffic trends over the next couple of quarters.


Darden Restaurants (3/23/12)And so we think because all of those things could change, the jobs picture could get worse, the spikes in food and gasoline could abate, that it's appropriate to have a broad range as we look out to the fourth quarter and think about what the comps ought to be.





Commodities News


Corn prices moved higher last week as reports of dry soil and stressed crops throughout the Cornbelt turned traders bullish as the realization hits that with weaker-than-expected yields, the 14.7 billion bushel projection corn crop may not be met, despite large acreage estimates.  This is a positive for beef prices going forward and a negative for Sanderson Farms.


Beef prices may find support this summer from the dry conditions on many pastures and ranches across the country.  Lower corn crop expectations and poor grazing prospects will likely dissuade farmers from attempting to rebuild cattle herds that were dramatically cut by the drought last summer.  The dry conditions are already forcing cattle producers as far north as Colorado to auction cattle earlier than planned.


Chicken supply is contracting by roughly 3% year-over-year, per USDA egg set data for the week ended June 16th.  It seems that the peak in wing price inflation may be in but, as positive as that sounds for BWLD, it may be a slow grind lower; wing prices are stubbornly hanging in north of $1.80 and management at food processing companies that we talk to are suggesting that rebalancing the relationship between chicken wing supply and demand may take some time. 


WEEKLY COMMODITY CHARTBOOK - chicken wings egg sets


Correlation Table














WEEKLY COMMODITY CHARTBOOK - chicken whole breast










Howard Penney

Managing Director


Rory Green


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