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KMB - Still a Short

We have been vocal in our dislike for KMB at these levels given what we see as a deterioration in earnings quality - valuation is getting stretched and Keith is getting the signal to short.


KMB - Still a Short - KMB PE


Have a great weekend,



Berlusconi Buys Votes

To take you into the weekend I’ve copied a very good note below from the Irish Times on Berlusconi’s recent acquisition of star soccer player Mario Balotelli from Manchester City to his club AC Milan. It’s a move Berlusconi hopes will fuel not only balls in the back of the net but importantly more votes to get him another term in office.  With much uncertainty remaining on the structure of a coalition government in the February 24-5 Italian general election, especially following the scandal surrounding the government’s bailout of one of Italy’s oldest banks, Monte dei Paschi di Siena, we thought Berlusconi’s potential back-pocket influence was worth a call-out.


Matthew Hedrick

Senior Analyst



As well as goals, it looks as if Berlusconi bought Balotelli for votes



For a majority of Italian observers this week, the big question surrounding the much reported €20 million transfer of Mario Balotelli from Manchester City to AC Milan concerned votes, not goals. Could the purchase of this obviously explosive (in every sense) talent really win over 400,000 votes for the centre-right coalition led by the irrepressible, 76-year-old former prime minister Silvio Berlusconi, who, of course, just happens to be the owner of AC Milan?


In the short term, there is no doubt whatsoever that the Balotelli transfer has been a brilliant publicity coup, making the prime-time news bulletins and the newspaper front pages for three days in a row, right in the middle of a red-hot general election campaign. In football terms, this is clearly a huge moment for the Italian game, with populist sentiment ready to perceive this transfer as the return of a talented prodigal son, following two years of cultural misunderstanding in the land of the Anglo-Saxon.


Football professionals know that this is not quite the case. Those who have worked with Balotelli know all too well that, on occasions, he can make the Mad Hatter seem like an understated chartered accountant.


However, everybody knows that the “boy” can play and it is in that context that he been greeted like a returning hero.


Riot gear 

On Wednesday, Milan fans followed his every move back on Italian soil, greeting him when he arrived at the airport, when he then went to a nearby health clinic for his medical check and, finally, when he went to the Giannino restaurant in downtown Milan for dinner with AC Milan managing director Adriano Galliani and team coach Massimiliano Allegri. So enthusiastic was the 400 strong gathering of fans outside the restaurant that police had to don riot gear and restore some peace after “Balo” had slipped in by a side entrance.


By yesterday, sports daily Gazzetta Dello Sport was selling T-shirts reproducing Wednesday’s front page of the paper, totally dominated by a picture of Balotelli and bearing the headline “Balo Is Back”. Gazzetta even carried a picture of the “good luck”, AC Milan biro pen which Balotelli used to formally sign his new contract yesterday.


All of this might sound like just another big football transfer story. Yet for those of us who have monitored Mr Berlusconi’s 20-year long, complex intertwining of football and politics, this is clearly about more than football. Remember, Berlusconi is the politician who in 1994 “took to the field” of politics with a brand new party called “Forza Italia” (literally Up Italy), an expression that until then had only been used when cheering on national teams.


Political appeal 

The original Forza Italia deputies were referred to as “Azzurri”, a term that had previously only referred to national team players. Perhaps the most emphatic example of Berlusconi’s understanding of the role of football success in his political appeal came during that 1994 election campaign. In those far-off days of single seat constituencies, he taunted his centre-left rival in the Roma I constituency, the late distinguished economist, Luigi Spaventa, with the words: “Before running against me, go and win yourself two Champions Cups.”


As for Mario Balotelli, the narrative is very clear. After years when he appeared to pay little or no attention to his club, rarely attending either training or games, Berlusconi late last autumn suddenly got active again on the AC Milan front. Not only did he resurface for Serie A or Champions League games at the San Siro but he also began to make regular Saturday morning visits to the club’s Milanello training ground.


For Berlusconi, Milanello is not just an alma mater but it also represents a very loyal and safe political constituency. Nowhere else does he so clearly portray himself as a “winner”. Remember at his first meeting with Milan players back in 1986, just after he had bought the club, he told then that he was “not accustomed to finishing second”.


Thus given Milan’s current league standing of fifth, it was time to put some money back on the table, hire a big name and get the “winning” show back on the road. If that helps win matches, good. If it helps win votes, even better. In a week, too, when he had been bitterly attacked for pro-Mussolini comments made on Holocaust Memorial day, what better stroke than to hire a brilliant, black Italian. Who says I’m racist now?

Ya EURO – Busta Move!

The EUR/USD has put on a nice move of +3.4% YTD and is up +10.3% since Draghi issued his all hands on deck to save the common currency (via the  introduction of the OMT bond purchasing program) in early August 2012. This conviction in the EURO is expressed well by looking at CFTC contracts of net positions in the EUR/USD (1st chart below). Coming off a net short bottom last summer, contracts are decidedly now net long in the new year -- seemingly there has been a lot of firepower behind the possibility that Draghi could use the OMT!


In the second chart below we update our quantitative risk levels for the EUR/USD, with topside immediate term TRADE resistance at $1.37 and intermediate term TREND support at $1.31. Our call remains to trade the range and it’s worth noting that there’s a pretty light formal calendar ahead.


What to watch for:

  • ECB Meets: Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. This position is grounded in recent data that is supportive of an “accommodative” hand’s off approach from Draghi – CPI came down 20bps to 2.0% Y/Y in JAN, exactly at the ECB’s targeted level; PMIs across the region looked broadly better, and importantly showed improvement in the Eurozone average and in Germany; and while the unemployment rate remains nominally high (10.7%), it saw no increase in the DEC reading. We think investors are beginning to price in much of the bad ‘crisis’ news, in that case what’s left in play is a long runway of slow, low growth, and unexpected sovereign/banking flair-ups across the periphery.
  • Italian Election February 24-25: we expect to see much political uncertainty heading into the general election which may influence the EUR/USD. The largest and most recent scandal to shake political posturing ahead of the vote involves a 3.9B EUR government bailout to one of Italy’s oldest banks, Monte dei Paschi di Siena, due to derivatives deals gone wrong. The scandal has been a polarizing force because the commoner still feels badly hit by austerity measures while banks are seen as getting free handouts. As it turns out the bank is closely aligned and supported by the Democratic Party, and now you have the leading center left candidate, Pier Luigi Bersani, insisting that his party bears no responsibility, and blaming Mario Monti, the head of a centrist coalition of small parties, for the bank largess. Yet it’s likely the support of Monti’s side that Bersani needs to establish a coalition as his faction can’t win an outright majority. The result is that the scandal has helped boost former PM Berlusconi’s right-of-center Freedom Party, and therein fueled more uncertainty on how a coalition government will be formed.


Ya EURO – Busta Move! - yy. cftc


Ya EURO – Busta Move! - yy. eur


Ya EURO – Busta Move! - yy. pmi manuf

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How We Are Thinking About Next Week's Earnings

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....

February 4th

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.

February 5th

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.

February 6th

SMG – No view into quarter as it is a seasonally unimportant quarter.  The fun starts when spring starts.

February 7th

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.

February 8th

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,



Hedgeye In The News

Hedgeye In The News for the week ending February 1, 2013:


The latest gaming revenue figures from Macau seem to indicate that the feared ban on smoking... (via Seeking Alpha)


First 3 tasks for Mary Jo White at the SEC (via Fortune)


Hedgeye report questions if Herbalife (HLF) is a pyramid scheme (via Ransquawk)


Beef price spike makes $1 McDouble harder to stomach (via Chicago Tribune)

ILMN: Time To Like This Stock?

Takeaway: Illumina (ILMN) stands to benefit as changes in funding and successful treatments revolutionize cancer research.

Illumina (ILMN) is a leading maker of sophisticated genetic screening equipment.  After reaching nearly $80 a share in 2011, the stock fell to a low of $37.77 this year.  We have been negative on the stock for some time, but a new environment may provide a lift as ILMN’s diagnostic systems emerge as possible leaders in key areas of cancer research.  


Today our Health Care sector head, Tom Tobin, hosted a conference call for our institutional clients with Dr. Gary Palmer of Foundation Medicine , a private company at the forefront of transforming cancer care using genomic screening to analyze how cancers develop.  Cancer specialists say the use of genomics screening is fast becoming the diagnostic approach of choice and Foundation Medicine is the go-to lab to perform the analysis.  This is important for doctors wishing to get their patients enrolled in clinical trials, and for practitioners testing off-label uses for approved treatments.  Of particular interest for our ILMN thesis, Foundation uses ILMN diagnostic equipment for its genomic screening.


Foundation Medicine and Cancer Treatment

Dr. Palmer walked us through Foundation’s genomic testing process.  Genomic testing is revolutionizing cancer treatment, because researchers have found that gene mutations correspond to broad varieties of cancers that were previously believed to be unrelated.  By approaching the disease from the genomics level, Foundation has helped doctors achieve startling results – Dr. Palmer cited breast cancer patients who were described as going from “hospice care to objective remission.”  While these treatments are still in early stages, it is clear that the genomic screening is a revolutionary diagnostic tool with the potential to dramatically advance cure rates.


The American Cancer Society reports over 12 million Americans have some history of cancer, and over 1.6 million new cases will be reported annually.  With over 1,500 Americans projected to die of cancer every day, the disease is the number 2 killer of Americans – but most Americans fear “the C-Word” more than any other health threat.


Foundation Medicine believes that genomics screening can dramatically accelerate the process of identifying effective treatments.  Dr. Palmer went so far as to say the targeted treatments arising from Foundation’s screening results are forcing a Paradigm Shift in the way cancer is treated.  Genomics screening has been able to identify up to 70% or more treatable cancers than are found with existing testing procedures.  Their ultimate goal, says Dr. Palmer, is to turn cancer from a life-threatening critical illness, into a chronic condition that can be managed using targeted therapies, similar to the model of long-term HIV treatment.  


Foundation is in conversation with a number of insurance providers and third-party payers.  Insurers have not yet embraced genomics testing as the diagnostic of choice, but Dr. Palmer says they are aware of the dramatically higher effectiveness and reduced cost of this approach.  It is not clear how many case studies will have to be presented before the insurers accept genomic screening as a diagnostic of choice, but Dr. Palmer believes this is inevitable.  


What does this mean for ILMN?

In our conversations with cancer researchers we have heard a distinct shift in tone.  Researchers used to speak of dramatic advances in cancer therapy that they could see “in the next five years.”  Now they are saying these advances are happening “now.”  This is critical to our thesis on the stock.  In 2010-2011, the academic community was in the grip of doom and gloom, as funding for genomic research from the National Institutes of Health, and demand for ILMN equipment, had gone into a steep decline but there was little offset from clinical applications such as Foundation’s.  Health Care sector head Tobin says his team’s analysis of current trends in NIH funding shows Illumina is getting a second wind as volume and dollars geared to ILMN’s products appears to be reaccelerating.  Foundation Medicine appears to indicate growth from clinical applications will be additive to ILMN’s growth among academics.


NIH awards appear not to be affected by the talk over sequestration and the Fiscal Cliff in recent months, although the risk of Sequestration remains.  Says Tobin, “This is in contrast to the 2011 debate that caused a substantial slowdown in awards.”  Sequestration may be a risk, but NIH appears to be largely ignoring the risk.


ILMN stock

ILMN is a mid-cap stock, with a market capitalization of over $ 6 billion, and average daily trading volume of about 1.6 million shares (source: Yahoo! Finance.)  Recently it has built up a short position of about 25% of the outstanding shares, creating the possibility of a Short Squeeze.  While the stock has a relatively low Beta of 0.77 (meaning that 77% of the action of the stock price is attributable to tracking the broad market averages – 23% of the price action is attributable to other factors, such as news coming out about grant funding, successful clinical trials emerging from diagnostics using ILMN equipment and the like) the high level of short interest means there could be a sharp upward reaction if a solid piece of good news comes out.  At the same time, we can not rule out continued volatility in the shares until meaningful news emerges.



Tobin considers ILMN an attractive stock with potential for a sound recovery over the intermediate to longer term.    

Dr. Palmer was very upbeat on the outlook for genomics testing as the new wave of cancer research.  The idea of moving from a long process of uncoordinated and expensive tests, to a single screen that identifies a broad range of threats and potential treatments, is a very exciting prospect.  The term “Paradigm Shift” is certainly appropriate.  We see the possibility of important news from a number of potential sources: greater adoption of ILMN equipment as new companies enter the genomics testing space; greater acceptance of genomics testing as the preferred diagnostic, leading to successful treatments; and acceptance by third-party payers, which would establish genomics testing as a preferred approach.  In all these scenarios ILMN has the potential to be a sought-after provider as the space grows.  Finally, the projected stability of government research funding brings all these outcomes closer to possible realization, as it provides ongoing resources carry through to the next breakthrough.

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