The Economic Data calendar for the week of the 21st of January through the 25th 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.
ConAgra (CAG) is in the process of raising $3.975 billion in debt to complete its acquisition of Ralcorp (RAH). The weighted average interest rate of the debt issuance is 2.879% - well below the 4% number mentioned by CAG management on the conference call discussing the transaction.
However, recall that the total transaction size is $6.560 billion and that a portion of that (approximately $1.9 billion) represents the assumption of outstanding RAH debt. RAH debt isn’t cheap – 6.3% weighted average interest rate. CAG has already moved to “correct” that interest rate structure, commencing a tender for approximately $670 million of RAH debt, with a cost above 7.25%.
The net of this is blended interest rate right around 4% (newly issued debt plus assumed debt). We are therefore reluctant to increase our synergy estimate at this point as some analysts have done – we remain at $0.15 - $0.20. We recognize that there is upside to that number as CAG continues to correct the debt structure at RAH to more appropriately reflect current market rates.
Still, we remain very constructive on CAG shares as we see a favorable risk/reward with upside toward $37 - $38 a share. We see CAG as a relatively inexpensive name (13.8x calendar 2013 EPS versus the packaged food group trading at 17.6x) that has additional upside to earnings on a standalone basis as well as a transformative acquisition that is scheduled to close during calendar Q1 2013 that should provide investors a path to a higher EPS profile through accretion and synergies.
Enjoy the long weekend,
HEDGEYE RISK MANAGEMENT, LLC
Corn prices have continued to inch upward in the wake of the WASDE and Quarterly Stocks report.
Non-commercial positions turned bullish on a weekly basis for the first time since early December ‘12 as it appears that hedge funds moved to chase the price of corn. Slightly over 21K futures contracts were added on the long side offset by 13.4K contracts short (net positive 7.8K, 58% net bullish positioning).
Net positioning (net long positions/net short positions) remains bullish at 166%, well off the ’12 highs that we saw back in December (525%).
Our bias continues to be short corn, but we also recognize that there is a bit of a data vacuum over the next two months, and that we might see some upward pressure as hedge funds “correct” positioning into planting intentions.
Enjoy the long weekend.
HEDGEYE RISK MANAGEMENT, LLC
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Takeaway: The latest data is incrementally supportive of three of our best ideas on the long side in Asia (Chinese consumer, Hong Kong and Singapore).
Both the data and the tape(s) continue to support our 1Q Macro Theme of global #GrowthStabilizing. Moreover, the fundamental RESEARCH signals continue to affirm what our quantitative RISK MANAGEMENT signals have been suggesting since early-DEC.
ANALYSIS OF KEY DATA AND TRENDS
With regards to China specifically, we received a heaping helping of the country’s 4Q, DEC and JAN GROWTH data overnight; on balance, it was broadly positive – which was in-line with our expectations of continued directional improvement throughout the Chinese economy:
To put this generally positive into context, we parse out some of China’s previously reported DEC economic data below:
Again, when all of the numbers are appropriately crunched, it’s plain to see that the Chinese economy is an acceleration phase with respect to both its GROWTH and INFLATION figures – something we have been calling for as early as the first of NOV.
THE KEY TAKEAWAYS
It’s long been our view that Chinese GROWTH will not accelerate demonstrably to the upside over the intermediate-term TREND or long-term TAIL.
Moreover, our primary investment thesis regarding the Chinese economy centers precisely around taking advantage of the deliberate economic restructuring implied by our fundamental conclusion: LONG the Chinese consumer and SHORT the global mining CapEx bubble (not from every price, of course).
To the extent you’re not yet familiar with this thesis, please review the following two notes and/or send us an email to set up a call.
As a point of keeping score, Chinese consumer stocks (MSCI China Consumer Discretionary Index) is the second-best performing sector on the MSCI China index since 12/10 (#1 is Financials on cyclical NIM expansion) and is outperforming the MSCI China index by ~250bps.
With the Shanghai Composite Index continuing to track in a Bullish Formation on our quantitative factoring, our view continues to be insulated by market beta.
Also, our proprietary G/I/P outlook continues to auger well for continued strength in the CNY, which is just shy of 19YR highs. This is backed by continued pledges of “prudent” monetary POLICY out of the PBOC in the face of a subdued 2013 INFLATION target (+3.5%). Strong yuan = Strong Chinese consumer.
UPSIDE AND DOWNSIDE RISKS
From our purview, the next major catalyst to come down the pike on the POLICY front is the 12th National Party Congress, which convenes in MAR. There, members of the new seven-man Politburo will assume their formal roles as leaders of the Chinese state and formally outline their strategies to promote domestic demand.
We’re hoping for meaningful improvement on the social security front and perhaps some degree of early hukou reform(s) that may help advance China up the urbanization curve, but we’d settle for a continued focus on tax incentives and subsidies for now. Rome wasn’t built in a day.
Also, while perhaps not necessarily a catalyst, a rather important callout is the somewhat-shaky stabilization of China’s property market (~13% of GDP and ~25% of GFCF). Furthermore, to the extent recent price trends continue unabated throughout 1H, we could see the China’s Ministry of Housing and Urban-Rural Development (MOHURD) implement further tightening measures atop the existing ones they recently pledged to “unswervingly enforce” in order to “strictly curb speculation”.
Expanding the existing trial property taxes to a nationwide level would be one avenue they could pursue, but the latest official leanings on such a maneuver appear a bit on the dovish side. In fact, Premier Wen Jiabao recently signaled a delay in implementation amid further central government studies.
For now, China’s property market, and, by extension, it’s property developers have ample political headroom continue higher – at least over the next few months.
In conclusion, we continue to receive confirming evidence of a cyclical recovery in the Chinese economy. This directional strength out of the world’s second-largest economy and core contributor to global GROWTH should continue to underpin our 1Q Macro Theme of #GrowthStabilizing.
On the strength of this proactively predictable pickup in Chinese economic activity and the Chinese Communist Party’s purported POLICY agenda, we continue to hold a bullish bias on Chinese consumer stocks and select international consumer names with a strong Chinese footprint with respect to the intermediate-term TREND and long-term TAIL.
Additionally, both Hong Kong and Singapore (our other two long ideas in Asia on the equity front) should continue to benefit from a rebound in Chinese demand – albeit rather muted relative to China’s glory days – with respect to the intermediate-term TREND.
Takeaway: During our recent dinner with FNP, management noted that ‘not only will it not happen in 2013, but don’t hold your breath in 2014.'
One of the issues we had been watching in 2013 was the potential for the FASB to require retailers to capitalize operating leases. During our recent dinner with FNP, management noted that ‘not only will it not happen in 2013, but don’t hold your breath in 2014, and maybe not 2015 either’.
In the end, this issue really does not matter as it relates to cash flow as it is purely an accounting change. But the reality is that retailers have always given the false appearance of being high return businesses, as their largest asset (real estate) has been considered to be free from a balance sheet perspective.
But capitalizing leases would take up leverage ratios for retailers. Ratings agencies already look at EBITDAR, so it is unlikely that this would impact their ability to borrow. But traditional valuation characteristics would certainly change unfavorably for investors.
Unless FNP is wrong, it looks like we won’t have to worry about this for a while.
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