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URBN: Feel The Love

Takeaway: It's a sell-side love-fest as it relates to commenting on $URBN's comp trends, but in reality, it is still an under-loved stock.

Conclusion: It's a sell-side love-fest as it relates to commenting on URBN's comp trends, but in reality, it is still an under-loved stock. Despite the move, we're still there.

 

Several brokers were out this morning echoing URBN's positive comp trajectory commentary in its 10Q filed last night, and how it supports the turnaround story that is taking place. We usually step back and re-evaluate when we see so many uniformly similar comments about a name that we have been positive on – especially when the stock is up 50% since May when we added to the Hedgeye Virtual Portfolio. But the reality is that when looked at in context, the Street is still not too bullish on URBN at all. In fact, there are 32 firms that ‘cover’ URBN, and as the first chart below indicates, we’re currently looking at the lowest ratio of Buy ratings, and highest ratio of Sell ratings in the recent (5-year) cycle. While some will consider the 9% of the float being short as too low for URBN (ie suggesting that investors are a step ahead of analysts), we'd look at others like Macy's where short interest is sub 2% -- which is an absolutely unsustainable level. That's makes investors' bearish bets on URBN look more significant.

 

URBN: Feel The Love - 9 11 2012 12 33 34 PM

 Source: Factset

 

Aside from looking at sentiment we need to take this announcement for what it is – a sequential improvement in a high-return concept that has a lot of upside.

 

Here’s what we said back in May around the time we got more heavily involved…  

“Let’s not bend any facts here. The quarter stunk. URBN took 8.6% sales growth and morphed it into a 10.1% EBIT decline. But relative to expectations, it was slightly better. One comped a comp (Urban), while the other (Anthro) comped down on the easiest compare of the year. There were definitely puts and takes. But the big take-away came from simply listening to this management team.

 

They sounded so extraordinarily focused on the conference call – such a stark contrast to the URBN of six months ago. Seriously…go back and listen to the past two calls. Night and day. That’s what you get when you bring in the founders to save the day.

 

The message is simple.

  1. Hire all the right talent.
  2. Empower each of them to come up with a concise plan, to which they will be held accountable.
  3. Give them the financial and human resources to achieve the plan.

 

Along the way, they’ve got shared services initiatives (DC just going up for 3Q) that should allow URBN to leverage the back-end across concepts while investing in areas like mobile and digital to more efficiently flow product and reach new customers.

 

They don’t really give comp forecasts – which is great bc forecasting comps is ridiculous. They simply focus on the process to put up the numbers, and hold themselves accountable to execute. Anyone reading this knows that I (McGough) rarely throw out public kudos to management teams, but the bottom line is that listening to these guys is like listening to a company with $10bn in revenue, not $2.5bn.

 

There’s still wood to chop here, no doubt. But we’re coming up with estimates about 20% above consensus. If we’re right, then URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out.”

 

The stock is certainly much more expensive today, but we arguably underestimated the extent to which estimates needed to go up. When estimates are headed higher (as they still have to go) it’s a fool’s game to bet against a high-return growth retailer.

 

URBN: Feel The Love - 222


CHART DU JOUR: IS THE VEGAS RECOVERY OVER?

Takeaway: The all important slot volume metric has been consistently negative. RevPAR and visitation are now sloping lower as well.

  • July was a little misleading because it contained 2 fewer weekend days so this chart examines RevPAR and visitation on a 3 month moving average basis
  • RevPAR is trending dangerously low – probably needs to be at least +3% to offset inflation
  • Given the composition – fewer slot players – visitation growth needs to be higher over the long-term than 1-2%

 

CHART DU JOUR: IS THE VEGAS RECOVERY OVER? - FF


10 MIN CALL ON CAT, WHAT YOU NEED TO KNOW NOW

Takeaway: $CAT Flash Conference Call on Friday @11AM

CONFERENCE CALL DETAILS

Date: Friday, September 14th

Time: 11 a.m. EST

Toll Free Number:

Direct Dial Number:

Conference Code: 581552#

*Materials will be distributed prior to the call.

 

TOPICS

While a great company in many ways, we believe that CAT is exposed to declining investment in its core markets.  In particular, the potential decline in mining-related investment may be severe.  This does not appear to be priced into the market or reflected in profit estimates.

  • CAT: End Market Exposures
    • Coal
    • Mining
    • Construction
    • Oil & Gas
    • Part Sales At Risk
  • Backlogs & Orders
    • Potential order cancellations coming
    • Impact of slowing Chinese growth
    • Last Quarter’s Results
    • Impact of Tier IV
  • Management Strategy
    • Acquisitions
    • Capacity Addition
    • Inventory Trends
  • Disconfirming Evidence
    • Chinese Real Estate Price
    • July Order Trends
    • Manufacturing Flexibility
  • Valuation & Sentiment
    • Our Valuation
    • Market View of CAT
    • Centrality of Mining Underappreciated

 

If you have any questions regarding this call please contact us at .


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 80.30%
  • SHORT SIGNALS 78.51%

MCD SALES HUNKERING DOWN FOR WINTER

Takeaway: $MCD faces a difficult top-line outlook over the next 5-6 months

McDonald’s sales improved on a sequential basis, partly due to calendar shifts, in the month of August.  The US number was in line with our estimate while APMEA and Europe exceeded and missed our estimates, respectively.  We do not read much into this one-month sequential improvement in the headline numbers.  From here, compares ramp up dramatically through February.  The downside in this stock is limited, in our view, but patience will be required for meaningful upside to come about; we are staying on the sidelines until catalysts emerge.

 

“Every mile is two in winter.”

-George Herbert

 

 

Trend Still Corroborating Hedgeye Macro’s “Growth Slowing” Thesis

 

McDonald’s released August comparable restaurant sales growth numbers this morning.  Versus consensus, Global, US, and Europe narrowly missed while APMEA posted a beat.  We discuss these geographies in greater depth below.  Given the significant calendar shifts that seem to have resulted in some distortion of the July and August headline numbers, we believe that looking at the average of the numbers for those months is useful when thinking about the underlying trend of the business.  In all geographies, taking the average of July and August, and considering the resulting numbers versus prior trends, implies a continuation of slowing growth.  Looking at the headline numbers on a month-by-month basis suggests a sequential recovery which, we believe, will not show up in the numbers from here on.

 

August was a “last chance saloon”, of sorts, for McDonald’s to post a strong sales headline.  As we have written over the last few days, the coming dividend announcement offers management the opportunity to send a positive message regarding the state of the business but, looking at the compares MCD must lap from here suggests that it could be a long, harsh winter from a sales headline perspective.

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd global comps

 

 

United States

 

The US print came in at 3%, in line with our expectations and 10 bps below the Street, as breakfast contributed the results.  Any mention of beverages was conspicuous by its absence, despite the continuing advertising focus.  The outlook for MCD’s US business suggests that headline numbers may be depressed for the next six months as compares ramp up and traffic is flat (price running at roughly 3%).   McDonald’s will likely struggle to avoid posting some negative monthly comparable sales numbers for the US over the next six months.  As we wrote on 4/23/12, “The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team.  With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.”

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd us comps

 

 

Europe

 

Europe comparable restaurant sales grew 3.1% in August, missing Hedgeye and Consensus expectations by 50 and 20 bps, respectively, as positive results in the U.K., France, and Russia were offset by Germany and certain markets in Southern Europe.  The Olympics had, as we wrote in our preview, a positive impact on sales but, going forward, the macroeconomic environment remains a concern.

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd eu comps

 

 

APMEA

 

APMEA comparable restaurant sales grew 5.7% as strong results in Australia and China, along with the positive impact from the Ramadan shift, were offset by ongoing weakness in Japan.  That APMEA was such an outlier to the downside in July, and to the upside in August, is likely due in no small part to the impact of the Ramadan calendar shift.  The macroeconomic data in major APMEA markets continues to suggest difficult conditions for MCD and, taking the average of July and August comps, we believe that the Growth Slowing theme, articulate by the Hedgeye Macro team earlier this year, continues to manifest itself in McDonald’s sales trends in APMEA and elsewhere.  We are not believers in any recovery narrative in MCD’s APMEA business from here.   As the chart below indicates, compares step up meaningfully from here through January 2013.

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd apmea comps

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


FX Of The Dollar

FX OF THE DOLLAR

 

 

CLIENT TALKING POINTS

 

A GAME OF CHANCE

Some liken the stock market to a Vegas casino and while comparison can be debated and argued somewhat, we would call the market a particularly unique game of chance. Chinese stocks go up and then down after making YTD lows, US stocks have 2 up days then one down day and oil is up +31% since late June. If you’re looking for some magical pattern to follow, good luck finding it. The market is being whipsawed around these days by Federal Reserve whispers and rumors about market participation and bond buying programs over in Europe. One thing we can assure you is that this is NOT what growth looks like. Anyone telling you that inflation = growth needs to take a few more Flintstone’s vitamins and reconsider their career.

 

 

FX OF THE DOLLAR

Pardon the pun, but let’s examine the US dollar for a moment. The falling dollar, perpetuated by Bernanke & Co., inflates asset prices like stocks and commodities in the short-term. In turn growth slows and begging bailouts soon follow when the S&P 500 starts dropping a few handles each day. Meanwhile, you have speculators driving gold up higher and higher based on Fed action (or lack thereof) and next time you’re at the pump, you see $5 a gallon gas - we had the misfortune of paying $4.35 a gallon in New Jersey yesterday. Drive up food and fuel prices enough and you’ll have a lot of supporters of a stronger dollar soon enough.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                UP

 

U.S. Equities:   UP

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: UP  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Times like #CTUStrike showcase the problematic ambiguity of liberal wonk writers. Are they reporters? (insta-)experts? opinion columnists?” -@rortybomb

 

 

QUOTE OF THE DAY

“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions.” –Albert Einstein

                       

 

STAT OF THE DAY

US August Budget Deficit Soars To $192 Billion, $1.17 Trillion In Fiscal 2012

 

 

 


President Obama’s Reelection Chances

Perhaps the success of last week’s Democratic National Convention is rubbing off on the President. After a slight decline last week, President Obama’s odds of being reelected increased 80 basis points to 60.7%, levels we haven’t seen since early April. He is closing in on his all time high of 62.3% attained back in late March.

 

It appears President Obama is on the fast track to another four years in the White House according to the latest results from the Hedgeye Election Indicator (HEI). President Obama’s reelection chances jumped 80 basis points (0.8%) to 59.8% and is fast approaching his peak of 62.3% that occurred back in March. No one knows what the catalyst is, but several weeks of consecutive gains indicate Mitt Romney has his work cut out for him going into September.

 

Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.

 

Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.

 

President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.

 

 

President Obama’s Reelection Chances  - HEI


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