prev

HCA: Heartwarming Gain

While the rest of the world zigged on HCA stock, Hedgeye zagged, and it paid off  as a winning trade. Here’s what happened.

 

HCA Holdings (HCA) took a hit on Monday, closing down -6.5% after a soon-to-be-released New York Times investigative article was announced by management. In a nutshell, the article highlighted concern over cardiovascular surgical procedures at HCA affiliate hospitals. Despite the hype, we bought the stock for the Hedgeye Virtual Portfolio on the red per  Hedgeye Health Care Sector Head Tom Tobin’s guidance.

 

That paid off for us today as we sold HCA into the +5% rally as the rest of the world wised up and realized Monday’s news was overblown. Below are Tom Tobin’s notes on HCA and why we are reiterating our long bias:

 

•        The New York Times published its article on HCA which was previewed on yesterday’s earnings release and conference call.

•         It reads reasonably well for HCA relative to the stock price which fell -9.1% intraday and closed down -6.5%.

•         Staying long represents thesis drift for us on HCA, as we had seen their lack of legal issues as a positive relative to our Physician Utilization Uptick theme.

•         The quarter saw continued fundamental outperformance relative to the Hospital Subgroup and continues to support the long case

 

 

HCA: Heartwarming Gain - HCA Levels 080612 large


Examining The Global Shipping Bubble

Global shipping may not be the first industry to come to mind, particularly in the United States. But it could soon grab worldwide attention as the global shipping bubble bursts and takes down a cavalcade of companies with it.

 

 

Examining The Global Shipping Bubble - shippingcollapse

 

 

Hedgeye Managing Director of Industrials Jay Van Sciver created the above chart, which essentially says it all. We’re almost at peak global shipping tonnage and it’s about to fall very hard and fast. He’s outlined his case below, noting that a severe downturn is likely to occur within the next year:

 

Severe: The shipbuilding downturn will be disruptive, making it important to avoid suppliers, creditors and customers, in our view.  Freight capacity should be well supplied for years, leaving indicators like Baltic Dry less useful for macro analysis.

• Just Past Peak:  Since ships last for about 30 years, capacity added after WWII was replaced in the 1970s and that capacity was just replaced, with peak deliveries in 2011-2012.

• Next Two Years Painful: The drop-off will be unusually sharp this cycle because the financial crisis clipped off orders in 2008.  2014 capacity utilization at ship yards will be a fraction of current levels (something like 20% of current utilization).  Many shipyards will not survive.

• Avoid/Short: We suggest staying away from or shorting Samsung Heavy, Hyundai Heavy, and other shipbuilding exposed names, and even avoiding high quality suppliers like Wartsila.


SLOW START TO AUGUST IN MACAU

Low hold likely held back the first week’s GGR in Macau. 

 

 

Average daily table revenues per day (ADTR) increased 2.7% YoY in the first week of August.  ADTR of $664 million was in-line with the prior week but below July’s $735 million.  The last two days of July had a huge ADTR of $932 so that likely kept volumes down to some extent in the early days of August.  Also impacting the first week was the big police raid to crack down gang-related crime.

 

Our August forecast is for GGR of HK$24.5-26.0 billion which would represent YoY growth of 2-8%, better than July’s 1.5% growth.  MPEL was the big winner in the first week in terms of market share while LVS managed to maintain a strong 20%+ share.  The data is below.

 

SLOW START TO AUGUST IN MACAU - MACAU2

 

SLOW START TO AUGUST IN MACAU - MACAU1


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

CBOU: THE CURSE OF GMCR

That title may seem slightly hyperbolic, but Caribou makes money from selling green coffee to Green Mountain; they will feel the impact of any further issues that arise for GMCR.  The recent short squeeze, taken out of context, could be taken as a vote of confidence in Green Mountain; rather, we feel that the squeeze represents another compelling opportunity to short a stock that has some way to go before being fairly valued.

 

We will be writing up a comprehensive note on GMCR in the coming days but thought that some comments from the CBOU earnings call last night were worth highlighting.  “Significantly reduced shipments of green coffee to Green Mountain Coffee Roasters”, as Caribou management discussed, was a drag on revenue growth in 2Q12.  Green Mountain seems to be reducing its inventory levels of Caribou coffee.  We see this as the beginning of a larger inventory correction phase for Green Mountain, and the drawdown will be a drag on earnings going forward. 

 

CBOU: THE CURSE OF GMCR - GMCR sales inv

 

 

As for other players in the single-serve category, it is difficult to draw direct conclusions from the Caribou commentary, but it seems likely that Starbucks gaining market share could have exacerbated the decline in sales volume that CBOU is experiencing.  Despite this, our view is that the numerous landmines buried in Green Mountain’s outlook could also have a negative impact on Starbucks’ earnings. 

 

Below are a selection of quotes from the Caribou earnings call that highlight some issues for CBOU and GMCR.  For Caribou, the positioning of its brand within the Green Mountain portfolio can have a significant impact on its volumes; we believe this is a dynamic to watch closely going forward, particularly as Green Mountain’s K-Cup patent expires.

 

[INVENTORY] “I would say that as we talked on Q3, it will be the greater impact because that's where we're feeling the biggest shift in lower green coffee sales as Green Mountain is managing down their weeks of supply. So it's clearly more heavily weighted in Q3 than in Q4 and I would put the range or the delta on a quarter-over-quarter basis in that 40% recognizing that a big part of that is the green coffee that normally would have shipped that won't be going through in Q3.”

 

HEDGEYE:  That Green Mountain has an inventory problem should not be a revelation to anyone; the severity of the problem is the most important point.   We would take this quote as indicating that Green Mountain is likely managing its inventory levels due to lower sales volumes.  This has significant implications for Green Mountain’s business in 4Q12 and FY13.  In 3Q12, Green Mountain’s inventory grew 60% while sales increased 21%.   We see a heightened risk of GMCR taking a charge over the next couple of quarters (likely in January) and missing EPS expectations.

 

 

[THE SBUX EFFECT] “We are now expecting a decrease of approximately 10% for the year in Caribou branded portion packs. This decrease is driven by a combination of single serve category dynamics, as well as some short-term factors driving Caribou performance specifically. At the category level, new brands have entered the single-serve space, particularly at the premium end of the spectrum and are taking share from all leading players, including Caribou.”

 

HEDGEYE:  Starbucks’ market share gains are contributing to the decline in Caribou’s performance.  This also raises the question of whether Starbucks is taking share from Green Mountain in the single-serve category.  We would posit that the emergence of Starbucks into the category is leading to Green Mountain’s incremental sales growth to be less profitable (if we assume that Starbucks portion packs are less profitable for the company than Green Mountain’s).

 

 

[VOLUMES] “At the same time, Green Mountain has seen greater than expected channel shifting across their portfolio as volume has moved from the specialty retail channel into the more traditional grocery outlets. This shifting has affected all brands in the category and while we are seeing Caribou volume increases in the grocery and away-from-home channels, it's not been sufficient to offset declines in the specialty retail and club channels.”

 

HEDGEYE:  It’s difficult to tell if the shift described above is down to a change in consumer preference or a self-inflicted wound stemming from mismanagement.

 

 

[LICENSOR-LICENSEE] “Additionally, in the early part of this year, the Caribou brand was repositioned within the Green Mountain portfolio to more premium pricing group.  The Caribou brand can command a premium price from consumers, but the retail implementation of the Green Mountain pricing strategy is having a meaningful impact on our club volume, at least, in the near term. This channel represented a large portion of our total business and is the primary driver of our actual and forecasted volume declines.”

 

HEDGEYE: This is likely a point of contention between Caribou and Green Mountain: it appears that Caribou has little control of the retail pricing of its brand, at least in club channels, and suggests that Green Mountain may be taking measures to increase the rate of sales growth of its own brands.

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Industrial Indicator: The Worst Cycle We See

The Worst Cycle We See


While you may not usually look at shipbuilding, it is a very interesting and globally relevant industry – and it is poised for a severe downturn within the next year.

  • Severe: The shipbuilding downturn will be disruptive, making it important to avoid suppliers, creditors and customers, in our view.  Freight capacity should be well supplied for years, leaving indicators like Baltic Dry less useful for macro analysis.
  • Just Past Peak:  Since ships last for about 30 years, capacity added after WWII was replaced in the 1970s and that capacity was just replaced, with peak deliveries in 2011-2012.
  • Next Two Years Painful: The drop-off will be unusually sharp this cycle because the financial crisis clipped off orders in 2008.  2014 capacity utilization at ship yards will be a fraction of current levels (something like 20% of current utilization).  Many shipyards will not survive. 
  • Avoid/Short: We suggest staying away from or shorting Samsung Heavy, Hyundai Heavy, and other shipbuilding exposed names, and even avoiding high quality suppliers like Wartsila.

 

Industrial Indicator: The Worst Cycle We See - shipping cycle

 

 

  • Tough Industry: The shipbuilding industry has a difficult industry structure – fragmented competition, high barriers to capacity exit, consolidated suppliers, and consolidated customers by shipyards.  Except for cycle peaks, margins tend to be low.

 

Industrial Indicator: The Worst Cycle We See - shipping share

 

 

UPCOMING EVENT:  On August 16th at 11:00AM we will be hosting a call on the launch of our Trucking OEM Black Book that will discuss Navistar, PACCAR, Cummins and other key names in the space.

 

 

Industrial Indicator: The Worst Cycle We See - perf 8712


MPEL 2Q12 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL

  • WORSE:  While Mass was strong, VIP was worse than expectations after the Q1 conference call.  EBITDA missed our estimate by a little bit but the MSC commentary seemed positive on the margin.

 PERFORMANCE OF NEW JUNKET ROOMS AT COD

  • WORSE:  We did not see a sequential or YoY in RC volume despite the additions below.  RC volume increased 0.5% QoQ and was flat YoY despite opening of the new junket rooms at CoD. 
  • PREVIOUSLY: "We recently opened three new fixed junket rooms at City of Dreams, which we believe will start to contribute to our results [higher rolling chip volume] from the second quarter of 2012.  We add totally about 23 tables for these three new junket operator, which means about 10% more on the VIP tables allocated in VIP in COD compared to last quarter last year."

PERFORMANCE OF NEW PREMUIM MASS AREA AT COD

  • SAME:  Hold rate did improve but Mass drop fell 5% QoQ 
  • PREVIOUSLY: "Earlier this month [May], we opened our new Premium Mass gaming and entertainment area at City of Dreams. We aligned more Grand Hyatt rooms to our high end Premium Mass segment...we anticipate an improvement in hold percentage and also result from the length of stay for this segment customers."

MSC UPDATE

  • BETTER:  MPEL "received from the Macau Government the revised formal land grant approval and permit to restart construction" which we already knew.  However, management seemed very optimistic about gaining the necessary casino approvals
  • PREVIOUSLY: [Studio City] "We remain optimistic that we can restart construction towards the end of this quarter, subject, of course, to government approval. Our $1.9 billion budget for Studio City remains."

 

SCC IMPACT

  • WORSE: MPEL saw a temporary impact on their mid and lower end business, although they claim that since July that business has rebounded and come back to them
  • PREVIOUSLY: "And even with the limited offering, we have seen an uplift in terms of visitation into City of Dreams."

 

 

 MPEL 2Q12 REPORT CARD - MPEL


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 78.63%
next