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PG and KMB into Earnings

Kimberly-Clark (KMB) is set to report earnings on January 25th, and while it isn’t our thing to preview earnings, we think the timing of the KMB and PG earnings releases (also scheduled for the 25th) makes for an interesting short duration pair – long PG/short KMB.



KMB on the short side



KMB will report Q4 2012 EPS and provide an initial look at 2013 EPS – consensus for Q4 is $1.36 (we are modeling $1.34), bringing the full year 2012 EPS result to $5.23 versus company guidance of $5.15 to $5.25.  We see more risk to the $1.36 than upside.  The company will likely provide 2013 guidance consistent with its longer-term goal of EPS growth in the mid-to-high single digit range.  For reference, 2011 vs. 2010 was 6.3% EPS growth at the mid-point, while 2012 vs. 2011 was 5.7% growth.  Consensus for 2013 ($5.59) already contemplates 6.9% growth, so we don’t think a short position gets hurt with guidance.



Further, at 15.5x ’13 consensus, we don’t see much upside to the multiple, given our view of the company as a 3-4% top line grower.



We believe that the quality of KMB’s earnings have declined through 2012.  In Q1, $77 million of year over year EBIT gains were driven by cost saves ($60 million) and hurt by $10 million of input cost inflation, so operations accounted for $27 million of the year over year EBIT gains.  KMB reinvested $45 million in strategic marketing.  In Q2 and Q3, year over year EBIT gains slowed while cost savings increased and raw materials moved from a headwind to a tailwind and strategic marketing investments slowed.  As we move into 2013, raw materials appear to be set to move from a tailwind to a headwind once again.



PG and KMB into Earnings - KMB EBIT



Finally, the key commodities of crude and pulp have moved against the company over the last quarter of 2012.  Now, the company does have some flexibility year over year as we have seen increases in the strategic marketing spend through the first three quarters of 2012 (+$45 million in Q1, +$35 million in Q2 and +$25 million in Q3).  However, we are of the opinion that the company has seen its multiple expand precisely because it has increased investment and any reversal of that trend is unlikely to be greeted kindly by the market.



PG and KMB into Earnings - crude oil

PG and KMB into Earnings - pulp prices

 

PG on the long side

 

PG will report Q2 EPS on Friday, with consensus looking for $1.11 versus a guidance range of $1.07 to $1.13 - the growth versus 2012 is not heroic at all, with core EPS in the year ago quarter at $1.09.  Our estimate is $1.13 and we can model an increase to the full-year guide as well.  Our experience is that names that beat and raise go higher, particularly in the case of mult-year laggards such as PG.

 

While top-line trends at PG have been lackluster, the company has significant income statement flexibility from its restructuring program.  EPS stability sans top line momentum isn't likely to garner multiple expansion, but we at least have some comfort that the earnings base can be sustained while we wait to see what materializes on the top line for PG.  We may be waiting for Godot, but we don't think we are paying a substantial premium for the show.

 

PG's valuation isn't particularly compelling to us (16.9x calendar '13), but we think the name can be defended lower if our math happens to be wrong (just as we think investors can stick with the KMB short if Friday doesn't emerge as a catalyst).

 

Have a good week.

 

Rob

 


Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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MACAU: PRE-CNY SLOWDOWN

Average daily table revenues declined to HK$775 million last week from HK$899 million the prior week.  We expect the current week to be slow as well, ahead of the February Chinese New Year celebration.  Remember that CNY is on Sunday February 10th this year versus Monday January 23rd in 2012.  Our full month January forecast is down slightly from our previous projection.  We’re now expecting YoY growth of 7-11%.

 

MACAU: PRE-CNY SLOWDOWN - macau7

 

For market share, MPEL is having another very good month, well above trend, as is Galaxy.  LVS gained some share back but remains below trend for January.  Following a strong, hold-aided December, MGM has fallen well below trend.  Wynn remains at its 3 month average of 10.7%, but far below its 2012 share of 11.8%.  We expect Wynn and MGM to continue to be market share losers.

 

MACAU: PRE-CNY SLOWDOWN - MACAU3


Finish The Job

This note was originally published at 8am on January 07, 2013 for Hedgeye subscribers.

“Give us the news and we will finish the job.”

-Winston Churchill

 

That’s what Churchill said to President Roosevelt in the spring of 1941 as the British were still pleading for America’s hand in taking down one of Germany’s most important ships - The Bismarck (The Last Lion, page 359).

 

With the US Dollar on the cusp of another long-term breakout from its bombed out base, that’s what I am still begging for. President Obama, get the Fed and Congress out of our way and we will let free-market pricing Finish The Job.

 

Strong Dollar, Strong America.

 

Back to the Global Macro Grind

 

The US Dollar was up smartly last week. Closing +1.1% to $80.50, that was the 11th week out of the last 15 that the US Dollar Index closed flat to up. And the global economy liked it.

 

For the US stock market to have its best up week in a year on an up week for the US Dollar is not only progressive, but very new. If you want any chance at sustained US and Global Economic Growth, you need to see this Dollar strength confirmed.

 

For what feels like forever, we have warned of the Fed/Congress (monetarily and fiscally) perpetuating what we call The Correlation Risk (Debauched Dollar = Inflated Asset Prices, not real-inflation adjusted economic growth).

 

To be clear, this opportunity for the US Government to get out of the way is fleeting – but we just saw, on a very immediate-term basis, what that could look like if Obama gives us that news.

 

Look at these positive 15-day immediate-term TRADE correlations:

  1. US Dollar vs. SP500 = +0.48
  2. US Dollar vs. MSCI Emerging Markets Index = +0.79
  3. US Dollar vs. US Treasury 10yr Yield = +0.62

Again, these are very immediate-term changes in the Global Macro Risk Factoring of the market – but they are not new to US and Global Economic history. During both the Reagan (1983-1988) and Clinton (1993-1999) sustained US Economic Growth periods, we had A) Strong Dollar and B) Deflated Commodity prices.

 

*Class Warfare fans: that would be good for lower-income populations and bad for the only class I’ll call a “class” - the #PoliticalClass.

 

Importantly, if I push the duration of these US Dollar correlations out to 120-days (i.e. when we were of the view that Global Growth was still slowing), here’s what the negative Correlation Risk looks like:

  1. USD vs SP500 = -0.75
  2. USD vs MSCI EM = -0.73
  3. USD vs UST 10yr Yield = -0.57

In other words, the Weak Dollar, Slow Growth world can come back in a hurry if policy makers think more policy that hasn’t worked is the answer. That said, for now (as in what someone needs to forward to Axelrod to read right now), as global economic growth goes from SLOWING to STABILIZING:

 

A)     The US Dollar has stopped going down

B)      Commodities have stopped inflating

C)      Both Bonds and Gold have started to go down (relative to stocks), big time

 

That last point is driving Gold/Bond bulls nuts, because it too is very new. But it makes sense. That’s precisely the reason why most growth investors who own Gold now didn’t buy it in the 1990s. Absolute returns were a lot higher in productive assets (Tech).

 

Last week’s signals from the US Treasury market were both explicit and fundamentally driven:

  1. Global Growth Data (across Europe and Asia in particular) continued to stabilize/accelerate
  2. US Employment Data continued to stabilize
  3. Tim Geithner said he’s leaving

All of this was good news for both global growth and the US Dollar. They have both causal and correlated relationships. They are also reflexive. And they are screaming at us from a quantitative risk signaling perspective:

  1. US Treasury 10yr Yield long-term TAIL risk breakout line = 1.84% (TREND support under that at 1.70%)
  2. Yield Spread (10yr minus 2yr, a good proxy for marginal slope of growth) = +19 basis pts wider wk-over-wk
  3. US Dollar Index moved back into a Bullish Formation (bullish on all 3 of our core durations: TRADE/TREND/TAIL)

There’s a very unique opportunity for the President of the United States to provide both American savers and those starving from food/energy inflation globally to Finish The Job here. Yes We Can buy into him just getting US government out of the market’s way.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1636-1664, $110.01-113.06, $3.63-3.75, $80.24-80.58, $1.30-1.32, 1.84-1.96%, and 1434-1477, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Finish The Job - Chart of the Day

 

Finish The Job - Virtual Portfolio


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THE WEEK AHEAD

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.

 

THE WEEK AHEAD - week


Quick Thoughts on CAG Debt Issuance

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.

 

Quick Thoughts on CAG Debt Issuance - CAG Prospectus

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,

 

 - Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Hedge Funds Get Longer Corn

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.

 

Hedge Funds Get Longer Corn - CFTC Corn

 

Enjoy the long weekend.

 

 - Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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