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DECK: 2.5x EBIT?

I was never a massive fan of the DECK story, but it’s rare that I see any brand have this kind of momentum and get so beat up by the market. DECK printed a solid quarter, but inventories were up and sales guidance was light for 2009. That’s all this market needs to punish a stock that was already getting painted with the CROX brush – the ‘ol ‘earnings are not real because the fashion trend will not sustain itself’ call. While you call your 18-year old daughter/niece/neighbor/wife (hopefully not 18) to gauge the sustainability of the Ugg brand, consider this…
1. Let’s believe company guidance for a minute…
a. We’re looking at about $7 per share in earnings, but this includes $10.5mm in stock comp expense and $10mm of added marketing expenses for its Simple and TSUBO brands. We can’t ignore these P&L events, but they each account for $0.50 in EPS that management could have averted if it so chose. In my mind, $8 in EPS is closer to the core earnings number here.

b. The market cap is down to $620mm, but DECK has an astonishing $175mm in cash ($15/shr). Yes, $175mm in cash and $175mm in EBIT next year if you believe mgmt can actually forecast its business and hold core EBIT flat. Net it all out and this thing is at 2.5x EBIT. If you trust this management team, you can’t ignore this name here. I don’t think that management is anything to write home about in the grand scheme of retail, but I’d go as far as to say that it is a better team than a company the size of DECK probably deserves…

2. Let’s say that the US business rolls over, proves to have already hit its point of saturation, but remains a well-run, tightly distributed relevant brand in key consumer segments (a realistic bear case, I think). Then we’re likely looking at earnings closer to $6. No – not the direction of revisions I want to see. But that suggests that this name is trading at 8x earnings today.

I know you can’t make valuation calls in this market, but once real capitalists creep back onto the scene some of these small – but relevant – brands will be plucked away.

Eye on Leadership: Steve Wynn

In our morning research meeting yesterday, Todd Jordan, our Sector Head for Gaming and Lodging, highlighted comments from Steve Wynn, the CEO of WYNN Casinos, during his company’s conference call the other night. I thought his comments were worth noting from a broader perspective as it relates to how good managers should manage in a downturn and also an emerging TREND in defiant capitalists.

As it relates to his company’s hiring plans in the current environment versus the government’s plans, Wynn stated:

“I mean, everybody is letting everybody go. I created 4,000 or 5,000 new jobs here, does that make us a bad guy? How many new jobs did Uncle Sam create? Zero.”

This point is important because it is indicative of business leadership on the part of Wynn. Good companies will take share at the bottom and often this requires maintaining staff levels and capacity, or in the case of WYNN actually adding employees during the downturn. If a company is furiously reducing headcount, cutting costs, and selling assets at the bottom, they probably were not proactively prepared for the cycle. Nor will they be taking share in the downturn. I’m not expressing an opinion on Wynn’s stock (you can email Todd for that at ), but rather the strategy.

The other point I wanted to highlight from Wynn’s call, which we believe is an emerging TREND to watch, is the battle between capitalists and the government. As an aside, the point of this note is to not make a political statement against President Obama or President Bush, but rather to emphasize that successful capitalists like Steve Wynn are not going to stand on the sidelines, while the government makes repeated and costly mistakes. Specifically, his quote about the first TARP was:

“I don’t mean to go on, I will address your question technically but the political leadership from Washington was completely lacking in the first $350 or $400 billion they spent last year. So, that money went down the drain and didn’t produce the kind of result it was suppose to. Theoretically there was supposed to be some smart people on the job paying attention to this like the Secretary of Treasury and people like that, the former chairman of Goldman Sachs.”

This is a question all of America should be asking about this $350+ billion and hopefully will be asking with the stimulus and spending plans of the new administration. This isn’t a Republican or Democrat thing – this is an American Free Market Capitalist thing.

To the extent that the US government thinks capitalists will stand idly by while their hard earned money is misallocated, they are likely sadly mistaken. We see evidence in this anecdotally from Steve Wynn’s diatribe below, but also in the numbers of opinion polls, like the recent Rasmussen poll that showed only 34% of those polled believed the stimulus plan would help the economy.

Daryl G. Jones
Managing Director

Excerpted Comments from Steve Wynn on the WYNN Q4 2008 Conference Call:

“When I told you about the business we lost, it was a company that was one of the healthiest companies in the United States of America, much more healthy than the government of the United States of America. That is disturbing to me when a chairman of such a company feels intimidated. If that’s that class warfare or as I mentioned earlier that capitalism needs to be punished, if that is part of the mentality of this administration we’re in for a worse time than we expected.

President Obama got swept in to office on a wave of optimism about a better future. If we’re going to have increased welfare government we’re not going to create jobs and we’re not going to get out of this recession quickly. If we really have an intelligent, brilliant, sensitive government that understands how the country works and job creation is at the smaller business level. I mean, everybody is letting everybody go. I created 4,000 or 5,000 new jobs here, does that make us a bad guy? How many new jobs did Uncle Sam create? Zero.

So, I’m saying to myself, look there are certain times when the rhetoric from Washington is appropriate and if Northern Trust is taking money then they don’t need to go to a golf tournament, not at this point in their career. I would have to agree with those Congressmen. On the other hand, if this kind of rhetoric is not very enlightened and very sophisticated it can lead to an unintended consequence like the cancellation of a wonderful company’s educational forum where they teach salesmen the new programs. They need to go somewhere to do that. Las Vegas was the cheapest place for them to go. It’s the greatest value for conventions and meetings in the United States of America.

We consistently are the best value because we’ve got slot machines and crap tables we can afford to sell finer rooms for less money. We give better meeting facilities in terms of technology and in terms of the services available to the delegates. We serve the convention and meeting public the best of anyone in the United States of America. We’re more accessible in terms of our airport and for that to get torque or perverted because of political flap jaw or political speech would be unfortunate. So, let’s hope that the government grows up and does a good job and gets us out of trouble instead of putting us in a deeper hole than we’re in already.

On political leadership in Washington

I don’t mean to go on, I will address your question technically but the political leadership from Washington was completely lacking in the first $350 or $400 billion they spent last year. So, that money went down the drain and didn’t produce the kind of result it was suppose to. Theoretically there was suppose to be some smart people on the job paying attention to this like the Secretary of Treasury and people like that, the former chairman of Goldman Sachs.

You think well, they ought to know what to do. It got away from them a little bit and this last stimulus program that has come out of Washington is more of a welfare program than a real jobs creation program in spite of what the President says. Fixing bridges and roads are technically demanding jobs that require technical help, good drawings and substantial lead time. That may be a proper thing for us to do as Americans to fix the infrastructure but to think it’s a quick fix jobs program is a naïve and insincere and incorrect statement.”

Daryl G. Jones
Managing Director

Trading Gold? We Are...

While many market participants suggest that you can’t trade around positions like this, I refute that submission. Provided that you have a proactive risk management process, and you understand how to apply behavioral psychology to trading, you can trade around your exposure to an asset that remains in a bullish fundamental up Trend. We just did.

In the chart below I have outlined my playbook for trading gold. As prices change, I will… but right here and now I’m a seller at $1,008/oz (dotted red line), and a buyer in the range of $921-935/oz (shaded green). Massive support remains at the $840/oz line (thick green), and if gold bulls were to capitulate further from today’s lows, that’s where I suspect the real selling stops.

For now, given that I think global equity markets will come under further selling pressure from here (I am short Asia and the Dow), I am long gold again… at my price.

Keith R. McCullough
CEO / Chief Investment Officer

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Queen Mary Follow Up: South Korea Cutting Their Exposure to US Treasuries ...

Bloomberg just flashed this chart on Bloomberg TV – and I think very illustrative of a potentially much larger problem.

The problem, of course, being a big one if you can foresee a scenario whereby this Bloomberg headline reads “China” or “Japan” … “Cutting Exposure To US Treasuries”…

While we do not have that data point yet… we certainly should be managing risk around that potential scenario.

Unlike the US Government’s new idea of risk management “stress tests”, real risk managers manage the risk that lies out on the tails.
KM

Eye On Poland: Cutting, But Will It Help?

Poland’s central bank reduced its benchmark interest rate yesterday by 25bps to a two-year low of 4%.

The cut is less than most of us in global macro-land estimated, particularly given the recent tone of news flow coming out of Eastern Europe. However, the lower scale of the cut signals that the central bank is worried about further contractions to an already depreciated Zloty: the currency has lost 12.8% versus the Euro and 24.3% versus the dollar in this year alone. Bloomberg purported that the Zloty was the worst performer of the 25 emerging market currencies it follows.

Polish Central Bank Governor Skrzypek said the economy should grow 1.7% this year from 4.8% in 2008. Industrial output fell 14.9% in January (the biggest decline in 20 years) and unemployment stands at 10.5%, the highest in 9 months. So we’ll take the under on Skrzypek’s estimate.

The central bank is surely wrestling with the balance between cutting rates to stimulate the economy and raising rates which would dampen economic growth but protect the Zloty. The balance is one that much of Eastern Europe is presently struggling with. Already Eastern European central banks are signaling that they may raise interest rates when they next meet to defend their currencies in the face of mounting Euro and Swiss Franc denominated loans which they owe Western European banks and the IMF.

One way to play Eastern Europe on the short side is via the GUR etf.

Matthew Hedrick
Analyst

Andrew Barber
Director

Judd Gregg has the Republicans Doing The Math Now...

Judd Gregg (Obama turncoat), of all people, is now on the YouTube giving the Republican "response" to the Obama budget...

Now you know at least one of the reasons why Gregg gassed the idea of working for Obama as the Commerce Secretary. There are differences between Keynesians and Free Market Capitalists, indeed...

This is not good for the US stock market. Confusion on the budget will ultimately breed contempt.
KM

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