PEYTO: Bullish On E&P

Peyto Exploration & Development (PEY.TO) remains one of our top North American E&P ideas. Hedgeye Energy Analyst Kevin Kaiser reiterated his bullish stance on the stock this morning, noting that the company has many positives going for it, including: 


-Growing NatGas production and reserves at the lows of the commodity price cycle


-The company has some of the most efficient capital spending among North American E&P and will employ its largest ever budgets for 2012 and 2013 to take advantage of this opportunity


-Deep inventory of drilling locations is underestimated/underappreciated


2013 looks to be a good year for Peyto with its large, capital efficient budget leading to explosive production and cash flow per share growth. We have been bullish since May 2012 and continue to remain bullish into the back half of 2012 and beyond.


PEYTO: Bullish On E&P  - p2 normal

VFC: Revisions Looking Exhausted

Takeaway: We’ve liked the name, but earnings revisions are starting to look tired. We’d start to lighten up here.

The negative reaction to an otherwise decent quarter for VFC shows how punitive the market is when quality of earnings is even mildly suspect in a group that is overextended like retail. Yes, VFC beat on the EPS line by $0.03, but it missed the top-line due largely to weakness in Europe a slowdown in The North Face, and continued weakness in US Jeanswear (due to JCP). The company’s SIGMA looks good, but notable is that EPS revisions are trending negatively for VFC.  

After a 5-year streak of upwards revisions of an average of 5-6% for FY2 on the print, VFC guided roughly in-line for the second quarter in a row. EPS have been the main factor where bears have gotten this stock wrong.  With increased spending to support growth, and continued challenges in key businesses, it’s tough to bank on real EPS upside aside from better FX rates. That’s not exactly a multiple enhancer.

The punchline is that we’re a little surprised to see this event take down the stock by 5%, but have a tough time justifying that a name like VFC – even with its track record – should trade at a 15x multiple when the earnings trajectory is getting increasingly cloudy. We’ve liked the name, but would start to lighten up here.


VFC: Revisions Looking Exhausted - VFC EPS revis





CAT: Back-end Loader Digs Through Backlog

Takeaway: New Order activity only ~2/3s of sales, suggesting $CAT does need a massive order recovery to hit 2013 sale guidance. Bear thesis intact.



CAT: Back-end Loader Digs Through Backlog



CAT provided back-end loaded 2013 sales guidance and reported a significant draw down in backlogs.  New orders in 3Q were very weak, running over 30% below sales.  CAT dealers are adjusting inventories down for a reason, and it is not a bullish end-market order rebound outlook.  We think that the bubble in resources investment will take a long time to be fully priced into CAT’s share price.  Importantly, CAT’s orders and backlogs have collapsed without an obvious global recession.

  • $5.1 billion Backlog Draw: If an investor’s long thesis is that CAT can ride its large backlog through a downturn, that thesis is now being tested.  Backlogs fell $5.1 billion in 3Q 2012, so CAT chewed through 18% of the backlog in just one quarter
  • Orders Far Below Sales: The new order rate was only about 2/3 of sales.  Without the draw on backlog, CAT was at an $11.3 billion order run rate vs. a reported $16.4 billion 3Q topline.   To us, that seems a very wide gap in a single quarter to blame on dealer inventory reductions.
  • CAT IS Expecting A Recovery, In Our ViewOrders must rebound for CAT to come anywhere near its 2013 sales guidance, in our view. The company noted that dealer orders are below deliveries, but deliveries are the product of end-market demand some time ago.  Deliveries lag, orders lead.  Dealer orders and inventories respond to end-market orders, not end-market deliveries.  Put another way, orders would need to rise nearly 50% for the company to hit its new sales guidance!
  • Capacity and Inventories High:  CAT’s own inventories continue to look bloated to us and the company will likely have to curtail production capacity, which it has started to discuss in this release, if orders do not rebound sharply.  That would likely lower margins from their current, multi-decade peak.
  • Long Cycle:  Trying to guess when to re-enter CAT is like trying to figure out when to buy CSCO in the early part of the last decade, in our view.  The mining and resources capital investment bubble appear quite large and may take years to run off.  We see CAT’s fair value in the $40-$70 range and we would wait until we were at the bottom of or below that range to enter the shares.  Cyclically adjusted valuation is key, in our view.
  • Bear Thesis Intact:  We continue to expect CAT to struggle with collapsing resource capital spending, excess inventories and excess capacity.  At the margin, we are a bit surprised at the weakness in CAT’s order activity.  We expect order deferrals to change to cancellations as contract delay options expire.  The company is letting us down easy, but it may feel like death by 1000 cuts.

Please see our September 14th CAT Black Book for additional details on our CAT thesis.


Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



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European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment

Takeaway: Nothing tangible came from last week’s EU Summit, however European bank swaps priced less risk on the week.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* European bank CDS tightened across the board last week with only 1 out of the 37 reference entities we track widening. This is a bit surprising considering that the EU Summit failed to produce any tangible solutions once again. But Sovereign swaps around the globe too moved sharply lower, mirroring the move in bank swaps. 


On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.



If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – Europe was not as good, only 36 of 37 reference entities improved. Spanish banks showed some of the sharpest improvement.


European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment - aa. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bp to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment - aa. euribor


ECB Liquidity Recourse to the Deposit Facility – The amounts drawn under this facility have been steadily declining since July 2012. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment - aa. facility

The Decline Line






A lot of people weren’t expecting the market to take a tumble like it did on Friday - it’s been awhile since something like that happened, right? June 25th was the last time the S&P 500 fell more than -1.5% in one day. Now with the VIX hovering around 15 and volumes remaining depressed, people are wondering how the market could decline like it did last week. The fact of the matter is that our #EarningsSlowing theme continues to strengthen. It’s going to get worse before it gets better. You’re seeing a lot of corporations with peak earnings offering lower guidance for 2013, including the big boys like Caterpillar (CAT) and FedEx (FDX).  


For the bulls out there: caveat emptor




We are in the midst of a commodity boom that’s been raging on for the past decade courtesy of Ben Bernanke’s policies to inflate at the Federal Reserve. You know how it works by now: print money, drive up commodity prices. But there’s a light at the end of the tunnel and Bernanke is running out of ammunition. Commodities will soon come down in price and 2013 is looking like a ripe time for this to happen. Companies who rely heavily on inflated commodity prices to drive revenue and earnings will suffer greatly, so keep that in mind when you see them reporting guidance going forward.






Cash:                DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


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







“ $CAT basically admitting that they are f'd in China w/o more stimulus..#nice” -@HedgeyeENERGY




“The nice part about being a pessimist is that you are constantly being either proven right or pleasantly surprised.” -George F. Will




The December to March "Risk On" base in Spanish bond yields was 5.15%; they’re now over 5.40%.


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