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URBN: We Liked It Lower, And We Like It Higher

Takeaway: $URBN looks expensive, but we can’t point to a catalyst to get either the multiple to contract or for earnings to slow.

URBN’s positive release this morning did not come as a great surprise to us. The company has strong momentum in both its business and its turnaround, and we think that those both have legs. The timing – ie less than a week before ICR – is a no-brainer as well.

 

It’s impossible to argue that this stock is still cheap, but the reality is that we think it is a 20% EPS grower over the next 2-years, and consensus estimates are at least 5% too low (we think that’s probably conservative). Our model assumes a sales and margin recovery, but still not even within a stone’s throw of prior peaks.  

 

Bears have often told us that there’s no way that URBN will hit prior peaks. But we never thought we needed that to support a bull call. We are assuming mid-single digit comp rates, and have EBIT margins topping out shy of 16% -- well pelow 18%-19% peaks.

 

Is the stock expensive? Yes. But looking into next year, we consider it the first real year of the company’s recovery, as we have the benefit of the new human capital put in place in 2012 as well as the new fulfillment centers to facilitate better DTC growth. Our model has earnings growing 24% in the upcoming year, which is very difficult to find in retail/consumer. That plus upside from the consensus numbers still leaves us liking URBN here.

 

Do we like it more on a pullback? Yes.  But remember that the consensus is still rather bearish on it, as evidenced by our Hedgeye Sentiment Monitor (which triangulates Buy Side, Sell Side, and Inside sentiment).  It looked expensive at $26, then at $30, then at $35 and now at $42. We can’t point to a catalyst to get either the multiple to contract or for earnings to slow. 

 

URBN: We Liked It Lower, And We Like It Higher - 1 10 2013 11 21 14 AM


JOSHUA STEINER: JOBLESS CLAIMS: THE SIGNAL AND THE NOISE

Takeaway: Full steam ahead on the labor front.

This week's take on the labor market is shorter than usual owing to me being on the road.

 

The Signal

Labor conditions improved demonstrably this past week, in spite of what the printed number suggests. As the first chart shows, the rolling YoY NSA claims series improved to -9.8%, which is sharply better than the -6.0% and -5.9% readings over the prior two weeks. Remember that a smaller number (i.e. more negative) is better in this instance. This puts the rolling NSA series right back on track with it's longer-term average, meaning that labor conditions are continuing to improve, and at an accelerating rate versus what we saw in December.

 

The Noise

Seasonally-adjusted claims "rose" 4k to 371k after last week's print was revised from 372k to 367k. Overall, the seasonally-adjusted series continues to bounce along the 365-375k range it has occupied post Hurricane Sandy renormalization.

 

JOSHUA STEINER: JOBLESS CLAIMS: THE SIGNAL AND THE NOISE - 1

 

JOSHUA STEINER: JOBLESS CLAIMS: THE SIGNAL AND THE NOISE - 2

 

JOSHUA STEINER: JOBLESS CLAIMS: THE SIGNAL AND THE NOISE - 3

 

Joshua Steiner, CFA


January ECB Presser: Draghi’s Optimism in No Real Recovery

There wasn’t much “new” news revealed in today’s ECB press conference; however Draghi underlined the significant progress that the region has made over the last six months and even referred to a “positive contagion” that can take place.

 

In the Q&A session Draghi said that the council was unanimous in its interest rate decision (and only 5 of 55 surveyed economists expected a change):  the interest rate on the main refinancing operations was unchanged at 0.75% along with the interest rates on the marginal lending facility and the deposit facility at 1.50% and 0.00%, respectively.

 

January ECB Presser: Draghi’s Optimism in No Real Recovery - aaa. ecb rates

 

Of the economic indicators there was no great change over December’s statements. The Bank believes that CPI should moderate over the medium term and fall below 2% in 2013. GDP is expected to see a gradual recovery in late 2013, however risk remains to the downside mainly due to the slow implementation of structural reforms, geopolitical issues and imbalances in major industrialized countries. Further, GDP projections remain in line with December’s 2013 guidance of -0.9% and 0.3%.

 

You can find Draghi’s Introductory Statements here.

 

In a question related to signs of regional improvement Draghi very specifically stated the financial market improvements over the last six months:

  • Bond yields and country CDS much lower
  • Stock markets have increased
  • Volatility is at historical lows
  • Lower redemptions are now much lower
  • Strong capital inflow to the Eurozone
  • Deposits in peripheral banks are up
  • Target 2 balances are broadly down
  • The ECB balance sheet size (seen as a risk) continues to shrink

When returning to the broader economy, and not financial markets, Draghi was less positive, stating that there is really no end in sight and that the Bank had no plan to exit its non-standard measures and that regional economies still remain fragmented.

 

We too wrestle with the mismatch between the broader economy and market conditions. Below are a couple of signals we’re watching. Broader Eurozone confidence figures are flattening out to showing slight signs of improvement while ECB loans to households and non-financial corporations have yet to arrest their decline/show a meaningful inflection.

 

January ECB Presser: Draghi’s Optimism in No Real Recovery - aaa. confidence

 

January ECB Presser: Draghi’s Optimism in No Real Recovery - aaa. ecb loans

 

With respect to our view on the EUR/USD we continue to expect the cross to be range bound, especially given the OMT (bond purchasing program) that is in Draghi’s back pocket, the favorable financial market conditions exhibited since last summer, and commitment of Eurocrats to keep the union together at all costs.

 

Another bullish data point comes from the CFTC data we follow for net non-commercial positions in the EUR/USD. The latest data point (1/1/2013) turned positive for the first time since August 2011 and is confirming a strong trend-line breakout!

 

January ECB Presser: Draghi’s Optimism in No Real Recovery - aaa. cftc

 

We do not currently have a real-time position in the EUR/USD, however we’d trade the range of $1.29 to 1.31.

 

January ECB Presser: Draghi’s Optimism in No Real Recovery - aaa. eurusd

 

On balance we think that there is still much political risk in the Eurozone on the backdrop of a very slowly improving economy (#GrowthStabilizing). Fiscal consolidation is clearly a long road and we still expect the periphery to underperform as it mismanages its consolidation targets. The Italian election towards the end of February will be one key political test, as is the feedback loop between imbalances across sovereigns and banks, especially without a fiscal union in place. Stay tuned.

 

Matthew Hedrick

Senior Analyst


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JOBLESS CLAIMS: THE SIGNAL AND THE NOISE

Takeaway: Full steam ahead on the labor front.

This week's take on the labor market is shorter than usual owing to me being on the road.

 

The Signal

Labor conditions improved demonstrably this past week, in spite of what the printed number suggests. As the first chart shows, the rolling YoY NSA claims series improved to -9.8%, which is sharply better than the -6.0% and -5.9% readings over the prior two weeks. Remember that a smaller number (i.e. more negative) is better in this instance. This puts the rolling NSA series right back on track with it's longer-term average, meaning that labor conditions are continuing to improve, and at an accelerating rate versus what we saw in December.

 

The Noise

Seasonally-adjusted claims "rose" 4k to 371k after last week's print was revised from 372k to 367k. Overall, the seasonally-adjusted series continues to bounce along the 365-375k range it has occupied post Hurricane Sandy renormalization.

 

JOBLESS CLAIMS: THE SIGNAL AND THE NOISE - nsa rolling yoy

 

JOBLESS CLAIMS: THE SIGNAL AND THE NOISE - sa 4 wk

 

JOBLESS CLAIMS: THE SIGNAL AND THE NOISE - sep thru feb

 

Joshua Steiner, CFA

 

 


UNH: Trouble Over Time

UnitedHealth Group (UNH) is a name we’re looking to short when the timing is right and we’d rather short the name sooner than later rather than miss any opportunity. We are less concerned with a strong Q412 earnings release and more concerned with accelerating cost trends from an early/strong flu season, employment trends and a new modeling tool. 

 

UNH: Trouble Over Time  - Managed Care Implied Premium Growth normal

 

The most recent employment data continues to suggest both rising maternity (significant driver of inpatient utilization) and acceleration of physician office visits, over the next few quarters. Our expert call that we hosted with Ken Burdick last week added to our concerns surrounding the Affordable Care Act. There will likely be further market disruption that comes with the implementation of the Act than previously thought.

 

UNH: Trouble Over Time  - 1 9 2013 2 53 38 PM normal

 

All in all, the stock screens as a long right now but over time, we believe the opportunity to short UNH will present itself very soon as operating trends deteriorate. 

 

UNH: Trouble Over Time  - Google Trend Flu   4Q12 normal

 


Japaniflation

Client Talking Points

Pump It Up

The Japanese are being watched by the rest of the world’s central planners, politicians and investors right now. People are interested to see exactly how Japan plans on fixing its economy and whether it will follow in the path of the United States, footstep after footstep. Japan’s Finance Minister Taro Aso is saying he wants to buy not only domestic bonds but European bonds as well. They also want to print money and devalue the yen as much as possible. They claim it’s all in the name of keeping the yen at a “reasonable” level. We’ll see what the Japanese are capable of doing soon enough and the people of Japan probably won't be too happy about it.

Asset Allocation

CASH 43% US EQUITIES 21%
INTL EQUITIES 21% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“BATS says their customers lost around $420k due to a system bug that hit 430k trades since 08. Problem discovered Friday.” -@nathanielpopper

QUOTE OF THE DAY

“The thing I hate about an argument is that it always interrupts a discussion.” -G.K. Chesterton

STAT OF THE DAY

Jobless Claims 371,000; below our #GrowthStabilizing level of 385,000.


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