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PG Crushes Modest EPS Growth Estimates

PG delivered F2Q13 results with EPS of $1.22 versus a guidance range of $1.07 - $1.13 and The Street at $1.11 with better than anticipated organic sales growth of 3% (2% volume, 2% price, -1% mix).  The company saw EPS tailwinds from continued cost savings initiatives, better commodity comparisons (gross margin improved +110bps y/y), and a more favorable tax rate ($0.04 benefit).


PG raised the full-year organic sales outlook to +3-4% from +2-4% and also raised the 2013 core EPS range to $3.97-$4.07 from $3.80-$4.00.


We think this is a big name stock that people missed and will want to own. As we said in our earnings preview note on 1/21, “our experience is that names that beat and raise go higher, particularly in the case of multi-year laggards such as PG.”


We can still see some upside to earnings as PG navigates fiscal 2013 and while valuation isn't particularly compelling, we think this is a name that investors can't afford to miss, and will chase.


Robert Campagnino

Managing Director


Matthew Hedrick
Senior Analyst


1565?: SP500 Levels, Refreshed

Takeaway: We expect the SPX to re-test its all-time closing price high of 1565 (OCT ’07) over the intermediate term.

Keith and I recently wrapped up a two-day road trip full of meetings with a multitude of sharp clients from all across the asset allocation spectrum. This is the first time in a very long time (roughly 12-13 months ago) where the Thunder Bay Bear and his blind-side protector universally left the room more bullish than the folks we had the pleasure of meeting with.


While an admittedly small sample size, we take solace in the fact that PMs, analysts and traders representing long-only equity funds, long/short funds, global asset allocators, bond funds and credit strategies all had a healthy degree of skepticism regarding how fast and how far the domestic equity market has climbed from the NOV cycle-trough – coincidentally when #GrowthStabilizing started to percolate though the global economic data.


While not a tangible bull thesis from these levels or any other prices, we do think the fact that money managers are A) not fully convinced this market is headed higher and B) not fully convinced that funds are poised to flow sustainably out of fixed income and gold/inflation-hedge strategies into equity funds is a sign that there are some out there who may be forced to chase this market higher in pursuit of relative performance.


The machines certainly will – especially given that the market remains in a Bullish Formation on our quantitative factoring: 

  • Overbought = 1506
  • TRADE Support = 1481
  • TREND Support = 1428 

Of course, that doesn’t mean the market will continue to make new highs a straight line. The call does remain, however, to trade this market with a bullish bias, booking gains on strength and buying the dip(s) on weakness. If the fundamental research signals (i.e. #GrowthStabilizing, #HousingsHammer and #BernankesExit) change, you’ll hear us get very loud about it.


For now, don’t be surprised if the flows, the machines and the institutional investment community all co-jam this thing higher. A re-test of the prior all-time closing highs is certainly not out of the question over the intermediate term.


Darius Dale

Senior Analyst


1565?: SP500 Levels, Refreshed - SPX

JCP: Increasingly Comfortable Renting the Stock in 2013

Takeaway: A name with well-publicized hair that deserves every strand. But retail failures are not linear. We're increasingly comfortable renting here

Ackman just noted on CNBC that “if Ron Johnson is still at JCP in 3-years, then he’s probably not the right guy.” This 3-year reference flies in the face of those who that think that Johnson is on a tight leash at JCP. He might be pressured to show improvement on the margin (signaling that the worst is behind us) but still has Board-level support to do the job he was brought on to accomplish.


Let's be clear, we're not fans of investing with Ackman. Going the other way has usually been a better bet.


But as noted recently, after 18 months of being bearish, we’re favorably predisposed on JCP. We still think that it is in the ‘Retail Hail Mary’ category, and its ultimate success 3-5 years down the road is suspect. But most failures are not linear. JCP’s stock performance on days where there are glimmers of hope are bigger than its corresponding losses on days where there are credible rumors of horrible fundamentals.


This is a year where JCP goes up against -25% comps, and will have nearly a third of its stores redesigned by the end of the year. That might not boost comps, but it helps sales per square foot -- which is what matters. Also, once the new format is complete for the redesigned stores, the content could be scaled into JCP's dot.com business, which has been down by over a third yy. Our strong view is that JCP will do what it can to close the comp gap this year – even if that means buying it. We think that the stock will trade with the top line – not with profitability. We’re not saying that’s right, but we think it’s reality.


Ultimately, is this one of those names where we fundamentally believe in the story and are comfortable putting our money alongside management and the largest activist shareholders. No way. It's got hair and it deserves it. But are we increasingly comfortable renting the stock in 2013? Yes.


See our 12/13/12 note – JCP: Reasons To Reconsider Your Short.   

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VIDEO: Attack Of The QuadrillYen


The third theme of our Q1 2013 Global Macro Themes call held last week was #QuadrillYen.

In our presentation, we discussed how Japan’s exports are slowing and their plan to devalue the Japanese Yen by following in the footsteps of the Federal Reserve. With the Bank of Japan targeting 2% inflation and entering an “open-ended asset purchase” program, Japanese stocks have been on the rise.

Unfortunately, policies to inflate stocks only work until they don’t and stagflation is more likely than economic growth in this case.

KMB: Bearish Bias Remains

After shorting Kimberly Clark (KMB) in our Real-Time Alerts yesterday, we covered our position this morning. Though the company was essentially in-line with expectations for its earnings, there’s a lot more pressure on KMB than investors think. Commodity prices like oil and raw pulp are moving against the company, which reinforces our bearish bias on the stock. We don’t think people should pay up for 3-4% top line growth and EBIT growth that’s largely derived from restructuring savings. 


We outlined earlier this week how the long PG/short KMB trade could be an idea worth considering...when the timing is right, of course.


KMB: Bearish Bias Remains - KMB EBIT


KMB: Bearish Bias Remains - pulp prices

KMB - What’s The Right Multiple for Cost Savings?

KMB reported Q4 EPS of $1.37 versus consensus of $1.36 and provided 2013 guidance - $5.50 to $5.65 versus consensus of $5.59.  Ho-hum, enough with the Old Wall earnings recap.

The good – constant currency organic sales growth was +5.0%, against a +3.0% in the lapping quarter.  The sales result was at the high end of the 3-6% range we saw in the prior three quarters.

The deterioration in earnings quality that we highlighted earlier in the week continues to manifest - $39 million of EBIT growth year over year, provided courtesy of $80 million of cost savings and a $15 million commodity tailwind  (this with the benefit of 5% top line growth).  The commodity benefit is a decline from Q3 ($55 million) and Q2 ($30 million) reflecting the fact that core commodities have begun to creep up again.


KMB - What’s The Right Multiple for Cost Savings? - KMB EBIT

What’s the Bull Case?


We get that sales were solid this quarter, and that the KCI International business continues to be an opportunity.  Also, Q4 was a robust FCF quarter ($2.01 per share in Q4, $5.54 per share for the full-year) and that the company continues to deploy its FCF to the benefit of shareholders via dividends and share repurchases.  That sort of profile certainly has an appeal to a certain group of investors.

To those investors, we ask a couple of questions:

  1. What’s the right multiple for cost savings, recognizing that all of KMB’s EBIT growth is from restructuring savings? (4-6x earnings is what we are thinking).  We recognize that there is a stability and consistency to that EBIT growth, but there is also a limited duration that should be reflected in a far lower multiple relative to EBIT growth derived from operations.
  2. What happens if sales weaken?  When things are going well at a consumer products company, sales growth should drop to the bottom line in substantial fashion.  That is clearly not the case with KMB.  If sales weaken, declining core EBIT should overwhelm the level of cost savings.
  3. Are the company’s increases in strategic marketing really strategic?  We have seen investments in strategic marketing decline sequentially throughout 2012 – is the company using that investment tactically to manage earnings, or is it truly viewed as long-term in nature? We consider the former to be a distinct possibility.

With commodities moving against the company and the multiple at 15.5x 2013, we continue to believe that people should not be paying up for 3-4% top line growth and EBIT growth that is largely derived from restructuring savings.  Our bias remains to be short.


KMB - What’s The Right Multiple for Cost Savings? - pulp prices

KMB - What’s The Right Multiple for Cost Savings? - crude oil


Call with questions.


 - Rob


Robert  Campagnino

Managing Director




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