COH: Opacity Beware

Takeaway: We’re surprised that the market is glossing over Coach’s 8k about how it will be changing its reporting structure. Opacity is bad. $COH

We’re surprised that the market is glossing over Coach’s 8k about how it will be changing its reporting structure from retail/wholesale to Geographic regions. Coach is at a crossroads, and with the top line relying on new product categories and consumers (ie men) it needs to show the investment community more disclosure (which it has traditionally been very good about) rather than less.


We’ve got a mixed read on this. On one hand, companies don’t change up their reporting structure because business is ‘just trending so darn well’ -- ever. Restructuring makes modeling over the next four quarters very difficult, and it gives a management team plenty of opacity to hide behind if results fall short. Wall street usually sees through this.


On the flip side, we’re not suggesting a conspiracy theory here. Most restructuring structure events a) come at the request of independent auditors, b) are required to ensure that external financial reporting matches perfectly with internal business operational reporting. Coach is going more global, so it makes sense to report as such.


But even if 100% legit, it  does not change the fact that it opens the door for the company to back off it’s prior disclosure – specifically between performance by wholesale vs. retail. That’s a critical component to analyzing any company in this space.


The precise changes are not 100% clear. If the company will give all previous data and simply add another dimension, then this is great. But anything else is bad news from our perspective.


The crux of our call on COH is in the summary of our 9-factor fundamental model listed below. Revenue growth is slowing, and SG&A growth is accelerating. A low teens multiple seems cheap, but margins are at 32%, and we think that there’s a better shot that they come down before new product launches succeed to the point where they could add enough scale to improve margin.


COH:  Opacity Beware - cohttt



Takeaway: $JPM 3Q12 results were solid. A few hiccups (nonaccruals, NIM and loan growth), won't derail growth in tangible and improved returns.

This note was originally published October 12, 2012 at 07:59 in Financials

JPM's 3Q12 Results - Moving in the Right Direction

Overall, we found the JPM 3Q numbers solid. The company earned $1.40 vs. expectations for $1.21. We estimate core earnings were closer to $1.25, which adjusts for all of JPM's itemized one-time items except for their suggested litigation reserve add-back of 11 cents, which we regard as a recurring item until it isn't. 


Importantly, this quarter's results weren't driven as significantly by reserve release as we had expected, making it tougher for critics (like ourselves) to decry them as low quality results. Reserve release came in at 17-18 cents vs consensus expectations for 14 cents. As such, the core $1.25 number looks like $1.21 on an apples to apples basis. Given the apprehension that investors had going into the quarter we think an in-line to slightly better than expected result will be enough to keep the stock going higher through the election.


The three negatives in the quarter were that non-accruals ticked up 18 bps QoQ, NIM fell 4 bps (vs 1 bp expectations), and loans declined sequentially by $5.5bn (77 bps) vs. expectations for 1.5% growth.


The bottom line is that tangible book value per share improved again this quarter, growing by 5% sequentially. Return on capital (tangible), meanwhile, ticked up to 15.7% from 13.9%. Growing tangible and improving returns should support further multiple expansion.


We highlight the key takeaways, as well as our macro team's levels on JPM, in the three charts below.


JPM: QUICK TAKE ON 3Q12 RESULTS - JPM tang vs stock px


JPM: QUICK TAKE ON 3Q12 RESULTS - jpm earnings template




Joshua Steiner, CFA



Robert Belsky


Last Night's Debate







Last night’s debate was a fierce battle between Joe Biden and Paul Ryan over myriad issues. We may not be ready to declare a “winner” just yet, but one thing is certain: Biden laughed. He laughed, laughed and laughed some more. Keith sums it up best: Ryan looks like a rookie and Biden looks like a snake. There has been no material change on InTrade with Obama vs Romney, so the kid held his own.




#EarningsSlowing continues as companies like Norfolk Southern (NSC) and FedEx (FDX) get rocked when they offer lower guidance. JP Morgan (JPM) and Wells Fargo (WFC) were able to beat this morning, but keep in mind that earnings are peakish for a lot of names out there. Not everyone can pull a JPM and beat the Street. 






Cash:                UP


U.S. Equities:   DOWN


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



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.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“If u just read the top/bottom line beats for these bailed out banks, you're being regressive - may as well use a walkman” -@KeithMcCullough




“A lot of fellows nowadays have a B.A., M.D., or Ph.D. Unfortunately, they don't have a J.O.B.” -Fats Domino




JPM Earnings: Top & Bottom line beats. $1.40 includes 18 cents reserve release vs. expectations for 14 cents




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Takeaway: Commodity price action over the last week has strengthened our conviction in remaining bearish on $TXRH.

Coffee prices continue to lead to the downside as the majority of the agricultural commodities – that we track as part of our process – declined as the dollar index strengthened.  Beef and dairy prices remain the ones to watch for the restaurant industry in 4Q.  The strength in beef prices is negative for TXRH, BLMN, WEN, JACK, CMG and others. 


Summary View


Beef prices gained 1.3% over the last week.  The USDA’s WASDE report, released yesterday, was bullish for beef prices as lower expected cattle placements in the third quarter is expected to translate into lower supplies of fed cattle next year.   Importantly for beef prices, and proteins more broadly, corn prices surged yesterday as the USDA reported that global inventories are expected to drop more than expected as the U.S. drought cuts output


Coffee prices continue to show weakness as coffee producers in Brazil are reportedly waiting for better prices.  According to Bloomberg, the Brazilian Coffee Council is also concerned with low government inventories of the product and is proposing an auction for as many as 6 million bags of Arabica coffee.  The continuing weakness in coffee prices is a positive for SBUX, PEET, DNKN, THI, CBOU, GMCR and other coffee retailers. 





Gasoline Prices


Gas prices are up 12% year-over-year and we believe that this will have an impact on spending growth.  On a regional basis, it is important to note that this impact is likely to be greater in some areas than others; in California gas prices are up 22% year-over-year and could have a significant impact on discretionary spending.   Following a peak last week of over $5 per gallon in Southern California, recent prices now seem to be subsiding.













COMMODITY CHARTBOOK - crb foodstuffs










COMMODITY CHARTBOOK - chicken whole breast


COMMODITY CHARTBOOK - chicken broilers












Howard Penney

Managing Director


Rory Green



“Against the assault of laughter, nothing can stand.”

-Mark Twain


If there was one key takeaway from the Vice Presidential debate last night it was simply this: Biden laughed.  I took an unscientific poll on Twitter and people seem to be split on the actual winner.  Republicans lean towards Ryan and Democrats lean towards Biden.  I think my colleague Keith McCullough probably summed it up best this morning when he wrote to me:


“USA lost credibility as Ryan didn’t deliver in taking Biden’s old politics to task.  Ryan looked like a rookie and Biden looked like a snake.”


But you know Keith, he’s not really known to have an opinion on things …


From a quantitative perspective, the Intrade Presidential contract is basically trading at the same level as it was going into the debate.  According to Intrade, Obama has a 63% chance of retaining the Presidency and Romney is at 37%.  So there you have it, despite Biden’s best attempt at a Mark Twain laughter assault, the Px90 juiced whippersnapper Ryan held his own.


The next two debates will be held between Romney and Obama.  The first one is a town hall format and will be on Tuesday, October 16th and the final debate will be held on October 22nd, with a focus on foreign policy.  Given Obama’s weak performance in the first debate, these will be more closely watched than historical debates. The likelihood is that Obama will perform much better and they too will become non-events.


Even if the debate fireworks are behind us, the election itself is only heating up.  According to the national polls, this race is basically tied.  Based on the average of the last four key national polls, Romney is ahead on average by +0.7 points.  Interestingly, Rasmussen, who has been the most accurate pollster in the last two election cycles, actually now has Obama back ahead.  Undoubtedly the tightness of this race is no laughing matter for those with a party affiliation.


We will be joined with Neil Barofsky on November 7th, the morning after the election, to discuss the potential policy impact.  Neil was the former Special United States Treasury Department Inspector General that was appointed to oversee the Troubled Asset Relief Program, or TARP.  From an investment perspective, the election is critical because it lays the foundation for future fiscal and monetary policy.  In this respect, we think Neil will be the ideal person to discuss post election policy as he knows many of the key players.  If you are not currently an institutional subscriber and would like to become one to get access to the call, email


In the chart of the day, we’ve highlighted U.S. Federal government spending as a percentage of GDP going back to 1947.  The takeaway, which many of you know, is that federal spending has been going up and to the right for almost seven decades.  As we’ve been told by some key Republican insiders, this will be Romney’s primary focus if he is elected. That is, he will look to dramatically shrink the size of the government.


From an economic and investment perspective this could, perversely, be a real negative for economic growth in the short run.  Ultimately though, putting capital back in the hands of capitalists and getting the U.S. fiscal house in order should be positive for the U.S. dollar and economic growth in the long run.  Canada in the mid-90s is a prime example of a modern economy that took its pain, but then rebounded in a meaningful way.


Another positive related to the election is that when it is over, at least it will relieve the uncertainty among decision makers.  This uncertainty is manifested in many ways with a key way being an unwillingness of executives to invest in their businesses. 


My colleague Hesham Shaaban forwarded me an article this morning that encapsulated this point well.  According to this article from Bloomberg, the number of companies saying “profits will trail estimates compares to those who are saying they will exceed them climbed to 4.3:1”.  In a nutshell, when 4 out of every 5 companies in America think the future will be worse than the past, you can not expect hiring to accelerate.


#Earningsslowing is one of our three themes this quarter and clearly is already starting to play out.  At a point, of course, this all gets priced in, but we would just recommend treading carefully in that regard until the end of earnings season as there is stock specific risk associated with the fact that earnings in corporate America are peak-ish.


Speaking of stock specific risk, our retail team will be hosting a conference call on Carter’s, Inc (CRI) this coming Monday.  This won’t be your typical old Wall Street initiation call.  In fact, this is going to be one of those new Wall Street 2.0 calls where we are actually going to tell you that Carter’s is a stock that you should short, or at the very least lighten up on.  Imagine that, a Wall Street research firm making a short call.  I mean, who does that?


Speaking of short ideas, a key one is the little retailer called J.C. Penney (JCP).  Needless to say, even though JCP seem to be getting back into the coupon business by sending $10 coupons to customers as gifts, we still think this is a name to avoid.  On the contrary, our financials team indicated yesterday they thought J.P. Morgan (JPM) would beat numbers this morning and, lo and behold, JPM beat by $0.18.  It seems the fat cat bankers on Wall Street are laughing, as well!


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.66-115.71, $79.26-80.07, $1.28-1.30, 1.64-1.71%, and 1, respectively.


Enjoy your weekend.


Keep your head up and stick on the ice,


Daryl G. Jones


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