Heading into a busy EPS week (again) we offer the following quick views on how we would be positioned into and following next week’s EPS results. Most of these comments represent shorter duration ideas or simply an indication that we don’t see anything to do in the short-term. We know these comments aren’t for everyone, but in addition to shorter duration ideas we have taken the opportunity to discuss some long-term views that are (hopefully) of interest to shareholders with a longer duration.
Since nothing in staples (or the market) goes down for long (see our short CL call and today's "follow through"), we have looked hard for places where investors can generate some alpha on the short side - where we see risk to the multiple or EPS or both. The two next week that we have are admittedly lower conviction - LO and CHD, but if you have to be short something....
CLX – We would be short this name if we had a clear view on EPS weakness this quarter (we don’t). The multiple (18.4x ’13) doesn’t make sense to us when we look at it in terms of the company’s long-term top line and EPS growth profile. We have a $0.01 beat for the quarter.
HAIN – Business momentum remains intact but we would prefer to own BNNY at the right price rather than the aggregation of tail brands and subpar management that is HAIN.
EL – This one is a little tricky. We have a high multiple (24x ’13), a deceleration in constant currency organic growth in the last quarter and some conflicting laterals (RDEN/bad, Shiseido/bad, and LVMH/good). LVMH is the best lateral in our view, so we think the top line will be fine (+7%). We don’t have to do anything so we won’t do anything.
CHD – This is another name that we want to be short, except in this case we would take in a small short position. The multiple is aggressive (20.8x ’13) and we see some risk to 2013 numbers based on what PG is saying and doing, so our view is take a small short in and stick with it.
K – Valuation is as reasonable as you will find in staples, 15.8x, and we see upside to this quarter’s result. Guidance should encompass consensus, so we think you can be long for the print.
ADM – We like the name here, but no clear view on EPS. Modeling out the quarters is probably better done by rolling chicken bones that using Excel, but any weakness associated with the quarter is an opportunity. For the record, we do have a model, and we are $0.04 below consensus.
SMG – No view into quarter as it is a seasonally unimportant quarter. The fun starts when spring starts.
CCE – We just heard from the company back in December, so little risk to numbers. Fine to own, quarter won’t likely be a catalyst in either direction.
PM – This is another tough one as we remain below consensus for 2013. However, the multiple (15.2x) versus the top line growth rate is compelling versus other staples names. Recent move in the Euro helps, recent move in the Yen hurts. Until we can see a clearer path to EPS upside, we will trade from the short side.
IFF – Volume trends from PG and Unilever are constructive, multiple is not (17.7x). Do nothing.
KRFT – We like the management and margin opportunity story here, but we like it lower. Risk/reward range in the short term is $44 – $52; at $47 we do nothing.
RAI – Our view is to trade the domestic tobacco names from the short side, but since we are modeling a small $0.02 beat by RAI in Q4 and the growth rate in 2013 (6%) seems reasonable, we will watch the print.
LO – We see some risk to Q4 consensus EPS of $0.76, so we can abide by a small short position.
BG – This is the same theme as ADM (global agricultural play) but with a better view on EPS, fine to own into Q and fine to buy on weakness.
Have a good weekend and be careful out there.
Call with questions,