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Baby Bust

This note was originally published at 8am on July 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Every child begins the world again.

-Henry David Thoreau

 

Deciding to start a family is an incredibly hopeful act and one that reflects in part the national mood.  It should be no surprise then that birth trends in the United States peaked in 2007 and then began a long period of deceleration and decline over the subsequent 5 years.  Births were still declining in 2011 and look likely to continue to slow in 2012, reflecting the shifting landscape of global economic concerns.  There are glimmers of hope, however, and a recovery bodes well for many stocks in Healthcare, but in particular Hosptials.

 

There is a large body of academic work that describes how individuals and families consume, save, and plan over their lifetime.  The broad name of the field is Life-Cycle Hypothesis (http://en.wikipedia.org/wiki/Life-cycle_hypothesis).   In the simplest terms,  an individual  behaves in predictable ways over their lifetime.  They buy a home, invest in stocks, have children, reach their peak income, among many things,  in predictable ways over their lifetimes.  For Healthcare, they also age, which begins an accelerating cycle of doctor visits, medications, and hospital stays.  The key point though is that theses consumption patterns are distinct at discrete age groups.   Looking then at the historic pattern of peaks and troughs of births tells a story of predictable consumption in the future.

 

What makes understanding these consumption patterns worth thinking about is the wide variation in birth trends over the last 100 years, including the last five years of declines in the United States.  Birth trends fell in the 1920s and 1930s, which has been a present day problem for Nursing Homes and Senior Living in recent years as the growth in their key customer base has slowed.   The Baby Boom following WWII led to the great healthcare boom of the 1990s and early 2000s as Boomers aged through the period in their life when healthcare consumption begins to accelerate in earnest.  It helped too that they had reached peak earnings (late 40s) and peak disposable income (50s).

                                                                                                        

For Hosptial companies birth trends play a major role in admission trends, making up over 20% of the total hospital admissions.  While there have been many issues facing hospitals including reimbursement pressure from states cutting Medicaid, cuts to Medicare writen into the Affordable Care Act, and pressure from private insurers through rates and rising out of pocket expenses for their enrollees, the slowdown in births has been the least discussed. 

 

Our analysis shows that over the last 5 years, the differnece between the predicted number of births, based on per capita birth rates by age and the number of women entering child bearing years, and actual births has created a cummulative deficit of between 530,000 and 1,600,000 babies not being born.  Considering that there were 4.3M births in 2007, the magnitude is indeed relevent.  Further, uncovering where the inflection point of a recovery lay in the furture will be a meaningful catalyst for admission trends for Hosptials.  In addition to slowing birth related admissions, Hosptials have experienced pressure on admissions from everything from Knee Replacements to Cardiovascular surgeries.

 

Our best forecast about the timing of a recovery in births in the United States is that we will see them turn positive in Q412.  However, over the next two quarters, trends will remain soft and in fact appear to be weakening further sequentially.  This will have a negative impact on Hospital admission trends, revenues, and earnings.  Weighing the short term weakness against the longer term acceleration will be our key focus over the next few quarters. 

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1596-1624, $97.47-101.71, $81.59-82.39, $1.24-1.26, 6567-6679, and 1365-1380, respectively.

 

Tom Tobin

Managing Director Healthcare

 

Baby Bust  - EL 7 5

 

Baby Bust  - VP 7 5


THE M3: BEIJING TIGHTENS CONTROLS ON OFFICIALS' TRAINING TRIPS

The Macau Metro Monitor, July 19, 2012

 

 

BEIJING TIGHTENS CONTROL ON TRAINING TRIPS FOR OFFICIALS Xinhua

The Beijing municipal government will tighten controls on officials' going abroad for training, aiming to stop taxpayers money being wasted on overseas junkets.  The new rules came as the public demands more transparent disclosure of the use of public funds for receptions, vehicles and overseas trips.  The circular stipulates that officials will only get US$10 each for daily miscellaneous expenses.

 

Figures released by the Ministry of Finance showed that China's central government expenditure last year totaled $5.64 trillion yuan, up 16.8% YoY.

 


HedgeyeRetail Visual: Profitability Slowing Already?

The shift in the delta between costs and prices suggests that profitability is slowing sequentially.

 

A 120bps sequential slowdown in the Apparel import price index (+2.7% in June vs. +3.9% in May) seems bullish in the face of a 50bp slowdown in Apparel CPI (+3.9% yoy in June relative to +4.4% in May). But that's not so.

 

The average retail price of a unit of apparel is about $10 while the cost is only $3.50.  So a 50bp slowdown in price equates to ($0.50) per unit, while a 120bp slide in cost is +$0.42. That's a net negative $0.08 per unit. 

 

This is not a doomsday scenario, but it is an incrementally negative change that most CEOs could care less about -- until they have to. 

 

HedgeyeRetail Visual: Profitability Slowing Already? - profitability slowing already


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COH: Trade Idea Alert

 

Keith shorted COH in the Virtual Portfolio today on the short-side for a TRADE. While COH looks cheaper today 25% lower than when it reported 3-months ago, valuation is not a catalyst. We want to be clear that we hardly think this is a fat-tailed call after the precipitous drop. It is one of those names where the levels are sending a clear signal to sell at the same time fundamentals are more challenging on the margin. This might be a short-lived TRADE, but a good one nonetheless.


Here are a few things to keep in mind re the intermediate-term fundamentals:

  • The company is accelerating the rollout of men’s line to 100 stores in NA by the end of the F12 (this current quarter) from 42 at the end of FQ3 and will account for ~8% of total sales by year end ($400mm+).
  • At the same time, China is closing in on $300mm in sales and store growth continues at a heated pace on a relatively low base of 85. The focus here is increasingly on Tier 2 and Tier 3 cities to capitalize on the growing middle-class shopper that tend to shop at home versus overseas. Combined, these two initiatives will account for nearly half of COH’s top-line growth this year and then again roughly next year. As such, slowing demand in China increases the likelihood of more meaningful top-line deceleration. 

  • NA comps came in slightly better than expected in Q3 (6.7% vs. 6.2%E), but decelerated on both a 1yr and 2yr basis sequentially despite easier yy compares and strength in both e-commerce and men’s suggesting a more meaningful deceleration in the core women’s business.
  • Sales at U.S. department stores slowed and actually declined perhaps reflecting a heightened competitive environment. To keep this in perspective, COH’s exposure to the wholesale channel is well below its competitors at ~13%, but it suggests that perhaps department stores have more options (i.e. brands) available to choose from and so do consumers. We’re less concerned about the impact on Indirect sales than the pressure on COH’s retail store base from more aggressive brands like KORS, Kate Spade, and Tory Burch. This is will require COH to step up spending to defend its share in a way that it isn’t accustomed to marking an important shift in the domestic competitive landscape.
  • In addition, management dialed back its expectations for square footage growth in Japan (~18% of total sales) down 5% to +10% for F12 shaving roughly 1pt of top-line growth over the next 12-months. We think these factors combined will result in a deceleration in top-line growth over the next two years down from 15%+ last year and we expect again this year to 12.5% and 11% in F13 and F14 respectively.
  • The sales/inventory spread eroded 3pts sequentially to -5% with inventory growth up +21% in Q3. We’re willing to chalk some of this growth to new store inventory and buying in APac businesses and related inventories, but this is gross margin bearish if sales decelerate faster than expected.
  • This is particularly notable in light of gross margins rebounding up +100bps to 73.8% in Q3 after dipping below 72% in Q4/Q1. The elimination of in-store couponing as well as increasing international mix should be an intermediate-term tailwind though we expect the mix contribution to be more modest than originally expected with Asia slowing on the margin.

COH: Trade Idea Alert         - coh ttt

 

 


You Just Can’t WYNN

Wynn Resorts (WYNN) reported their second quarter earnings last night much to the chagrin of investors. It was a mess. Truly abysmal. Essentially, the company missed guidance and consensus estimates across the board. Things do not bode well for the company going forward. We would sit back on the sidelines and wait. Here’s why:

 

-Even taking into account Wynn’s poor luck at the tables, their results would have still missed consensus estimate. That said, investors were expecting a miss, so we’re not surprised that the stock is having a small relief rally. Also helps that the market is up today.

 

-Given the challenging fundamentals ahead in Macau for Wynn (ie more competition with Sands Cotai Central’s full opening,  anticipation for further slowdown in VIP, China Macro headwinds),  lackluster data coming out of Vegas, and the Okada overhang; we would take profits here.

 

You Just Can’t WYNN  - wynn compare


CHART DU JOUR: REGIONAL GAMERS RATIONALIZING

On the surface, it may seem like a negative but gaming operators can reduce supply

 

  • Given demand trends, it shouldn’t be surprising that operators are reducing the number of slots on their floors
  • Rationalizing the slot floor cuts costs and improves yields
  • We would expect this trend to continue with more competition from new gaming states

 

CHART DU JOUR:  REGIONAL GAMERS RATIONALIZING - NORMAL


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