Takeaway: We remain bearish on GMCR for FY13

The market move in GMCR on its most recent earnings print was emphatic but there was nothing in the 4Q12 results that led us to believe that our bearish stance on the stock should change.  We have been bearish on the stock since early 2011.




Brian Kelley, formerly of KO, is a respected executive and showed wise judgment, in our view, to get himself paid up front.   The company’s cash flow situation is yet to be resolved and there are several potentially serious issues ahead in the form of SEC investigations and class action law suits.  Green Mountain has been in a downward spiral and investors will be watching closely over the coming quarters to see if Kelly can formulate a plan to solidify the company’s role in the coffee market.  As things stand, there is a large number of questions related to competitive pressures in the brewer segment, margin pressure in the K-Cup business, and the potential for the aforementioned investigations and law suits to yield negative outcomes for the company. 



4Q12 Numbers Flattered to Deceive


GMCR reporting 4Q12 EPS of $0.64 versus consensus of $0.48, along with the FY13 guidance raise, pushed the stock higher on Tuesday after the market close.   We believe that much more clarity is required before we get comfortable with an expected earnings number for FY13. 



Pulling the Goalie?

  • SG&A saved the day in 4Q12.  A 220bps decline in SG&A expenses was instrumental in GMCR offsetting the negative margin impact of increased promotional activity
  • Promotional activity is not a sustainable driver of sales for a business that is already seeing its margins decline


Positives in 4Q12

  • Inventory was brought under control for the first time in 9 quarters
  • FCF was positive as capex came in $100m lighter than expected


Issues Facing GMCR in FY13

  • Competitive pressures due to patent expiration:  The company reiterated several times that this is not a significant issue for the company but the data tells a different story. 
  • Negative K-Cup mix (-2% in 4Q):  Lower ASPs and mix with partner brands  should bring further mix declines going forward as we are only in early stages of transition from wholly-owned brands to private label brands.
  • Promotional Activity:  Gross margins declined 230 bps helped by 100 bps of coffee cost benefit.  Starbucks is taking advantage of favorable input costs to make strategic acquisitions while Green Mountain is using the COGs environment to discount product.
  • Starbucks’ Commitment Issues: We doubt that SBUX has committed itself to a long-term contract with GMCR. Even if that is the case, we know SBUX is not shy when it comes to extricating itself from relationships it does not see as being to its advantage.  The Starbucks Investor meeting on December 5th could shed light on this relationship.


Other Red Flags


Accounting Signals? The surge in deprecation in as a percentage of sales is a potential red flag.  Is the company changing its accounting practices with respect to depreciation?


Vue Appeal?  The company reported $10mm in Keurig Vue sales, down from $20mm in F3Q.  While the company insists the brand will be a slow build, brewer sales declining by 50% sequentially indicates that the rollout has been underwhelming.


Margins Rolling Over?  Neither lower coffee costs nor managing SG&A constitutes a sustainable strategy for expanding margins.


Cash Flow Slow Drip?  CFFO/Net Income is a key metric for Green Mountain as it indicates the proportion of earnings that are yielding cash.  A higher ratio relative to the industry can indicate more conservative accounting, signaling a sustainable level of income.  Any ratio that is nearly flat or negative is generally a concern for us.  The company has moved out of the “danger zone” over the past few quarters but we will continue to monitor this metric.


GMCR VOLATILITY CONTINUES - gmcr cffo net income




GMCR VOLATILITY CONTINUES - gmcr inv growth sales growth


Howard Penney

Managing Director


Rory Green




Takeaway: Another negative datapoint for MGM

  • Assuming normal slot and table hold, we believe October Strip gaming revenue should fall between -5% to -9% YoY. An unfavorable calendar—one less Saturday and Sunday—likely contributed to the decline.  Baccarat, as usual, will be the wild card.
  • McCarran airport passengers fell 1.5% while NV taxi trips fell 3.6% in August— the 4th consecutive month of declines.
  • After a respite in September, we believe, slot volume, the most important Strip metric in our opinion, will resume its downward trend in October.  



FedEx Idea Alert: Degrees of Freedom Skewed To Upside

Takeaway: $FDX is a top long idea. Inventories are flashing a buy signal and cost opportunities could drive significant upside, among other positives.

FedEx Idea Alert: Degrees of Freedom Skewed To Upside



TREND = 88.52

TAIL = 86.23



FDX A Top Long Idea:  FedEx is our top transport idea and we believe it is one of the best investment opportunities in the Industrials sector.  We have put together a Black Book on the Express & Courier Services industry here and written a note detailing how FDX fits into our investment process here.   FDX has many more positive degrees of freedom than negative ones, in our view, and we review the key aspects of our thesis below.


Inventories:  Inventory levels in the broader economy are a key driver of express volumes.  Businesses generally do not pay to express an item that they already have on hand.  Relative to trend, inventories have risen to a level that has historically signaled a good entry point for the Airfreight & Logistics sub-industry.  If you buy cyclicals when times are bad and sell them when times are great, the chart below indicates that it is currently lean times for express carriers like FedEx.  Note that this inventory signal is rare, breaching this level only half a dozen times in the past 30 years and remaining below it for about 86% of observations.


FedEx Idea Alert: Degrees of Freedom Skewed To Upside - 6



FedEx Ground Set to Dominate Industry:  UPS is not the first company to stand at a competitive disadvantage because of uncompetitive union labor costs.  FedEx Ground appears destined to dominate the US ground parcel industry as UPS’s iconic franchise loses share to a more nimble competitor, in our view.  Similar dynamics have occurred in many other unionized industries in recent decades.  FedEx Ground has ~18% operating margins and a clear revenue growth trajectory, positioning the unit to be a significant value driver for shareholders.


FedEx Idea Alert: Degrees of Freedom Skewed To Upside - 7



Express Cost Cuts:  FedEx Express has ~$26 billion in revenue at a rough 4% operating margin run-rate in fiscal 1Q 2013.  UPS and DHL have much higher margins (about 5 points) and there is no reason we see why FedEx cannot match or exceed competitors’ profitability.  Management is targeting ~$1.6 billion in P&L improvement at FedEx Express.  If management hits that target, which looks achievable to us in a normalized operating environment, the value of just the Express division could exceed the firm’s current market value, by our estimates.  We would happily take FedEx Ground for free.


TNT Deal Divestitures:  Since UPS’s future appears to be in express services, we expect the firm to pursue the TNT merger aggressively.  Divestitures of European operations are almost certainly needed to obtain EU antitrust approval for the deal.  FedEx would benefit from a stronger presence in Europe and is the only real buyer for the assets, in our view. 


FedEx Idea Alert: Degrees of Freedom Skewed To Upside - 8



Other Factors:  We also explore the impact of containerized freight rates vs. airfreight rates, airfreight capacity and global trade in our Express & Courier Services Black Book.


Valuation Scenarios Suggest Positive Risk/Reward:  We may be a little early in terms of the inventory cycle, but the cost reductions, FedEx Ground growth and TNT divestitures more than assuage our anxieties.  Our bear case FDX valuation is ~$85, suggesting limited downside from current levels if our thesis fails to play out.  Our base case valuation range of $120-$150 suggests healthy reward potential and upside to ~$180 if our thesis really comes together.   







Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012





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Weekly European Monitor: Padding Greece’s Pocket

Takeaway: There’s no prospect of this being the last bailout or concession thrown Greece’s way.

-- For specific questions on anything Europe, please contact me at to set up a call.


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +0.9% week-over-week vs +4.0% last week. Top performers:  Austria +2.7%; Hungary +2.2%; Czech Republic +2.1%; Switzerland +1.6%; Netherlands +1.5%; Germany +1.3%; Sweden +1.3%; Poland +1.3%; Italy +1.1%.  Bottom performers:  Cyprus -12.2%; Greece -4.2%; Portugal -1.3%. [Other: UK +0.8%].
  • FX:  The EUR/USD is up +0.22% week-over-week vs +1.84% last week.  W/W Divergences:  HUF/EUR +0.45%; CZK/EUR +0.40%; RUB/EUR +0.38%; PLN/EUR +0.30%; TRY/EUR +0.18%; DKK/EUR -0.03%; CHF/EUR -0.09%; GBP/EUR -0.28%; NOK/EUR -0.39%; SEK/EUR -0.66%.
  • Fixed Income:  The 10YR yield for sovereigns were down across the region week-on-week. Spain declined the most at -30bps to 5.38%, followed by Portugal -29bps to 7.62%, Italy -25bps to 4.53%, Greece -23bps to 16.21%, and Belgium -22bps to 2.07%. France fell -11bps to 2.05% and Germany declined -5bps to 1.37%.   

Weekly European Monitor: Padding Greece’s Pocket - cc. yields



EUR/USD: Our TRADE range is $1.29 – 1.31 with a TREND resistance of $1.31.


  • Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.
  • We believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012, which could support the band the cross has been trading in over the last weeks.

Weekly European Monitor: Padding Greece’s Pocket - cc. eur usd


Weekly European Monitor: Padding Greece’s Pocket - cc  cftc



Padding Greece’s Pocket:


For updated thoughts on Europe, and in particular Greece’s most recent hand-out, see Thursday’s Early Look Titled Europe’s Shell Game.



The European Week Ahead:

Saturday - Beginning of the Russian Presidency of G20


Sunday - Nov. UK Lloyds Business Barometer and Hometrack Housing Survey


Monday - ECB Governing Council Meeting; Eurogroup Meeting in Brussels; Nov. Eurozone PMI Manufacturing – Final; Nov. Germany PMI Manufacturing – Final; Nov. UK PMI Manufacturing, BRC Sales Like-For-Like; Nov. France PMI Manufacturing – Final; Spain Manufacturing PMI; Nov. Italy PMI Manufacturing, Budget Balance, New Car Registration; Greece Manufacturing PMI


Tuesday - Oct. Eurozone PPI; Nov. UK PMI Construction, BRC Shop Price Index; Nov. Spain Unemployment


Wednesday - Nov. Eurozone PMI Composite and Services Final; Oct. Eurozone Retail Sales; Nov. Germany PMI Services – Final; UK Chancellor Osborne Makes Autumn Statement in Commons; Nov. UK Official Reserves, PMI Services; Nov. France PMI Services – Final; Spain Services PMI; Oct. Spain Industrial Output; Nov. Italy PMI Services


Thursday - ECB Announces Interest Rates, ECB Deposit Facility Rate; 3Q Eurozone Household Cons, Gross Fix Cap, Government Expend and GDP – Preliminary; Oct. Germany Factory Orders; UK BoE Announces Interest Rates, BoE Asset Purchase Target; Nov. UK New Car Registration; Oct. UK Visible Trade Balance, Total Trade – Preliminary; 3Q France ILO Unemployment Rate; Sep. Greece Unemployment Rate


Friday - Oct. Germany Industrial Production; Nov. Germany Wholesale Price Index (Dec. 7-12); 3Q Germany Labor Costs Workday Adj, Labor Costs Seas. Adj; Dec. UK CBI Trends Total Orders, Trends Selling Prices and Reported Sales (Dec. 7-15); Nov. UK BoE/GfK Inflation Next 12 Mths, NIESR GDP Estimate; Oct. UK Industrial Production, Manufacturing Production; Oct. France Central Govt. Balance, Trade Balance; 3Q Greece GDP - Final



Extended Calendar:

DEC 12-13 –          First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)

DEC 20 –               ECB Governing and General Council Meeting

APR 2013 –           Parliamentary elections in Italy

MAY 2013 –           Presidential elections in Italy



Call Outs:

Spanish Banks - The European Commission approved the restructuring plans for four Spanish banks - Bankia, NCG Banco, Catalunya Banc and Banco de Valencia (which will be sold to CaixaBank). The approval will allow the banks to receive aid from the ESM.


Spanish banks - Cut their government bond holdings by €5.2B in October after an €8.8B increase in September. Total sovereign holdings, adjusted by market value, fell to €253.7B last month.


Spain - Bankia said that holders of preferred shares will have to take a write-down of 39%, while holders of perpetual subordinated debt will face a write-down of 46% and holders of subordinated debt with a maturity date will have to take a loss of 14%. According to estimates by Barclays, ~€30B of these products were sold to individual savers/retail investors before the crisis by small Spanish banks, including Bankia.


Spain - Bank of Spain noted that Spain experienced a capital inflow of €31B in September (August saw an outflow of €11.8B).


OECD  - Slashes 2013 growth forecast for advanced economies (1.4% versus 2.2% forecast in May).


ECB and OMT - Vice President Constancio said that the central bank expects Madrid to apply for support, triggering the OMT. While he noted that this is the ECB's base scenario for Spain, he reiterated that it is up to the Rajoy government to make a request.


UK - Bank of Canada Governor Mark Carney was named head of the Bank of England.



Data Dump:


Eurozone Services Confidence -11.9 NOV (exp. -12.5) vs -12.1 OCT

Eurozone Business Climate -1.19 NOV (exp. -1.60) vs -1.61 OCT

Eurozone Industrial Confidence -15.1 NOV (exp. -17.1) vs -18.3 OCT

Eurozone Economic Confidence 85.7 NOV (exp. 84.5) vs 84.3 OCT

Eurozone Consumer Confidence -26.9 NOV Final (inline)


Weekly European Monitor: Padding Greece’s Pocket - cc. manu and serv conf


Weekly European Monitor: Padding Greece’s Pocket - cc. business conf


Weekly European Monitor: Padding Greece’s Pocket - cc. consumer conf



Eurozone CPI 2.2% NOV Y/Y vs 2.5% OCT

Eurozone M3 3.9% OCT Y/Y vs 2.6% September

Eurozone Unemployment Rate 11.7% OCT vs 11.6% SEPT


Weekly European Monitor: Padding Greece’s Pocket - cc. unemploy eur and italia


Germany Unemployment Rate 6.9% NOV vs 6.9% OCT

Germany Unemployment Change 5K NOV vs 19K OCT

Germany Retail Sales -0.8% OCT Y/Y (exp. -0.3%) vs -3.4% SEPT   [-2.8% OCT M/M (= most in ~4yrs)  (exp. -0.4%) vs 0.5% September]

Germany GfK Consumer Confidence 5.9 DEC (exp. 6.2) vs 6.1 NOV

Germany CPI 2.0% NOV Prelim Y/Y (inline) vs 2.1% OCT

Germany Import Price Index 1.5% OCT Y/Y vs 1.8% September


France Consumer Confidence 84 NOV vs 84 OCT

France Producer Prices 2.9% OCT Y/Y vs 2.9% SEPT

France Consumer Spending -0.5% OCT Y/Y vs -0.3% September


UK Q3 GDP Preliminary -0.1% Y/Y vs -0.5% in Q2   [1.0% Q/Q vs -0.4% in Q2]

UK Nationwide House Prices -1.2% NOV Y/Y vs -0.9% OCT

UK M4 Money Supply -3.2% OCT Y/Y vs -3.7% September

UK GfK Consumer Confidence -22 NOV (exp. -30) vs -30 OCT


Italy Consumer Confidence 84.8 NOV (exp. 86.3) vs 86.2 OCT [new record low]

Italy Unemployment Rate 11.1% OCT vs 10.8 SEPT

Italy CPI 2.6% NOV Y/Y vs 2.8% OCT

Italy PPI 2.6% OCT Y/Y vs 2.8% SEPT

Italy Hourly Wages 1.5% OCT Y/Y vs 1.4% SEPT

Italy Business Confidence 88.5 NOV vs 87.8 OCT

Italy Economic Sentiment 76.4 NOV vs 77.1 OCT


Spain Retail Sales -8.4% OCT Y/Y (exp. -10.0%) vs -12.7% September

Spain Total Housing Permits -51.3% SEPT Y/Y vs -31.7% AUG

Spain CPI 3.0% NOV Prelim. Y/Y vs 3.5% OCT

Spain Mortgages on Houses -32.2% SEPT Y/Y vs -28.5% AUG


Switzerland Q3 GDP 1.4% Y/Y vs 0.3% in Q2   [0.6% Q/Q vs -0.1% in Q2]

Switzerland KOF Swiss Leading Indicator 1.50 NOV (exp. 1.60) vs 1.64 OCT

Switzerland UBS Consumption Indicator 1.31 OCT vs 1.04 SEPT


Austria Producer Prices 0.7% OCT Y/Y vs 0.7% SEPT

Belgium CPI 2.26% NOV Y/Y vs 2.79%

Ireland Property Prices -8.1% OCT Y/Y vs -9.6% SEPT


Portugal Consumer Confidence -59 NOV vs -55.3 OCT

Portugal Economic Climate -5 NOV vs -4.6 OCT

Portugal Industrial Production -4.3% OCT Y/Y vs -9.5% September

Portugal Retail Sales -6.9% OCT Y/Y vs -5.9% September


Sweden Manufacturing Confidence -18 NOV vs -16 OCT

Sweden Economic Tendency Survey 86 NOV vs 92.7 OCT

Sweden PPI -2.3% OCT vs -1.9% September

Sweden Household Lending 4.5% OCT Y/Y vs 4.5% SEPT

Sweden Q3 GDP 0.7% Y/Y vs 1.3% in Q2   [0.5% Q/Q vs 0.7% in Q2]

Sweden Retail Sales 1.2% OCT Y/Y vs 4.5% September

Sweden Consumer Confidence -7.4 NOV vs -2.9 OCT


Finland Business Confidence -14 NOV vs -12 OCT

Finland Consumer Confidence 1.0 NOV vs -1.6 OCT

Denmark Q3 GDP Prelim -0.5% Y/Y vs -0.6% in Q2   [0.1% Q/Q vs -0.7% in Q2]

Norway Consumer Confidence 25.4 in Q4 vs 23.4 in Q3

Netherlands Producer Confidence -7.0 NOV vs -7.7 OCT


Greece Retail Sales -10.7% SEPT Y/Y vs -7.2% AUG


Hungary Unemployment Rate 10.5% OCT vs 10.4% SEPT

Slovakia Consumer Confidence -33.1 NOV vs -38.0 OCT

Slovakia PPI 4.2% OCT Y/Y vs 4.4% SEPT

Czech Republic Business Confidence 0.3 NOV vs 2.6 OCT

Czech Republic Consumer and Business Confidence -5 NOV vs -3.3 OCT

Czech Republic Consumer Confidence -26.3 NOV vs -27 OCT


Poland Retail Sales 3.3% OCT Y/Y vs 3.1% SEPT

Poland Unemployment Rate 12.5% OCT vs 12.4% SEPT



Interest Rate Decisions:


(11/27) Hungary Base Rate Announcement CUT 25bps to 6.00%



Matthew Hedrick

Senior Analyst


The Economic Data calendar for the week of the 3rd of December through the 7th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



MD: A "Short" Thing?

In recent weeks, we’ve noticed an increase of short interest in Mednax (MD). Short interest currently sits at 6.3 million compared to the prior two peaks of 3.5 million. Short sellers have had considerable luck with Mednax in the past and it appears they're of the belief that their winning streak will continue. Hedgeye Healthcare Sector Head Tom Tobin suggests Mednax is nearing a point where you could go long. Says Tobin:


“The best time to be long MD has been when the growth in short interest peaks and begins to decelerate and when the 3M change begins to decline.  So far the first condition has been met, but on a 3M sequential basis, short interest continues to climb higher.” 



MD: A "Short" Thing? - mednax



Another reason to consider going long is the recent re-acceleration in births. As it relates to our positive outlook for a birth recovery, we’ve notice a few positive datapoints in recent days that coincide with the same population that drives birth trends, the 20-35 year old age group:


1. Pier 1 Imports (PIR) posted better than expected same store sales (#1 purchaser of furniture)

2. Household formation accelerated to 1.8% in October (#1 source of new households)

3. MBA Mortgage Purchase Applications Accelerating (#1 source of first time home buyers)



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