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UAL & Airlines: Out of Catalysts

  • Big Catalyst Gone:  With the merger news now out, airline investors may need to wait some time for the merger to close and route integration to start.  Courts and regulators will no doubt make the wait abnormally long and we suspect many investors will lack the patience.  Further consolidation may face increased antitrust scrutiny, so this is likely the last consolidation catalyst.  


  • We Expect Consolidation to Fail:  We do not expect consolidation at post-AMR/LCC levels to support industry pricing.  There are many more consolidated industries that struggle. We have previously noted Accuride, which went bankrupt with >50% market share in truck wheels and Canadian airlines, but there are many others.  General Motors had a ~40% market share in the 1980s, but was eventually done in by significant legacy liabilities, low cost competition, expensive/inflexible unionized labor and product quality issues, among other factors.  Sound like anyone we know?  Consolidation is neither necessary nor sufficient for a healthy industry structure.


  • Low Barriers to Entry:  Even if consolidation does support pricing, those high prices may attract new low cost carriers to the market.  Low barriers to entry and high prices do not mix in the long run.  The current airline valuations are only attractive if the group were to remain profitable in the long-term, as equity valuations are heavily determined by post 2015 results/terminal values.  Betting on a temporary pop in airline profitability from consolidation is more speculation than investment, in our view, and we note that the last six months have shown the opposite - weak pricing and margin declines.

HNZ: Berkshire Buys a Little ADM

This note was originally published February 14, 2013 at 23:57 in Consumer Staples

On a day where we saw Berkshire Hathaway’s appetite for global consumer brands manifest itself as a $72.50 per share bid for Heinz (HNZ), a much smaller investment, but an investment that is no less consistent with Berkshire’s investment philosophy, may have escaped investor notice.  In a 13-F filing, Berkshire Hathaway reported a 6 million share position in Archer-Daniels Midland (ADM).

With the overarching investment principle a focus on long-term value, Berkshire has also displayed an interest in infrastructure when it ventures out beyond insurance.  We believe that part of the long-term investment thesis surrounding ADM (and Bunge, BG, as well) is the capital investment that both companies have made in global, agricultural infrastructure and the likely potential future returns associated with those investments.

The assets at ADM and BG are unique and leveraged to what we view as a powerful, long-term investment thesis – feeding an expanding global population and the associated need to get the crops from where grown to where consumed.

We expect that ADM shares will get a boost from this news and continue to see upside to the mid-$30’s in the name as we move through the start of the crop year in the U.S.  Similarly, we see upside to shares of BG, despite a recent quarterly result marred by the performance of the company’s risk management operations.



Panera’s ability to drive same-restaurant sales via mix has ebbed and flowed over the past few years.


We are going to be posting on PNRA more regularly going forward.  The company has no real competition but we believe that 2013 same-restaurant sales targets could be difficult to achieve in light of a challenging operating environment in which to maintain sufficient average check growth.


Panera’s company same-restaurant sales growth has become increasingly dependent on price and mix over the past few quarters.  Our fear for shareholders, at this point, is that management’s ability to sustain mix is waning and that meeting FY13 comparable sales growth guidance may prove difficult. 


During the 4Q11 earnings call, management broke out components of FY12 SSS guidance; during the 4Q12 earnings call, the same detail was not provided for FY13.  That management provided less detail is not a good sign, in our view.  We think that the outlook for mix growth is negative for Panera:

  • The company is lapping the positive mix impact of higher sales of salads in 1Q12, which were boosted by warm weather.  Guidance for 1Q12 mix growth was expected to be primarily catering-driven.
  • Management is planning on raising prices 2-3% in 2013 with a total comparable sales growth target of 4.5-5.5%.   We believe that there is high risk of mix growth turning negative in the first couple of quarters of 2013.  With traffic growth decelerating as average check growth has accelerated, we believe 1H13 could be difficult for PNRA.
  • Catering sales growth, while still impressive, has been decelerating and we expect that deceleration to continue as the initiative becomes a larger portion of PNRA’s total sales.  

PNRA MIX TAPPED OUT? - pnra sss components




Howard Penney

Managing Director


Rory Green

Senior Analyst

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Client Talking Points

Fix the VIX

The CBOE Volatility Index, better known as the VIX, is currently at the 12.66 mark. Back in the fall of 2009, the VIX at one point was flirting with 80. These days, the VIX going above 15 is a big enough deal. The point is that our bullish thesis for US equities is solidified by the VIX remaining at these ultra-low levels. Should it break through our YTD low, you can rest assured that the market would shift gears into “risk on” mode. In turn, gold and Treasuries would get hammered even more than they have been as of late. 

Growth Spurt

Oil is down this morning, which is a positive catalyst for the global growth game. High oil prices are one of the few things out there that can derail economic growth and recover; consumers do not like high gas prices. Our #GrowthStabilizing theme continues to march on along with the stock market, which has the S&P 500 dancing with 5-year highs. Another factor in the US growth game is that inflation is decelerating and the housing market is recovering. Even the labor market is improving as we saw with yesterday’s jobless claims numbers. America is on the right track and as long as we stay the course, the outlook is good.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Moscow is not New York. Moscow G20 is no Plaza Accord G7. Let's move on #forex” -@alaidi


“Fools rush in where fools have been before.” -Unknown


Canadian Manufacturing Sales (Dec) M/M -3.1% vs. Exp. -0.8% (Prev. 1.7%, Rev. to 1.9%)

Expert Call with Steve Keen (Contrarian Economic View)

Expert Call with Steve Keen (Contrarian Economic View) - Macro SteveKeenDial


"Economics is too important to leave to the economists."

-Steve Keen



The Hedgeye Macro Team will host an Expert Call with Steve Keen entitled "A Contrarian View On Monetary Policy, Debt & Growth" on Thursday, February 21, 2013 at 2:00pm EST.  Key topics will include:

  • Fallacies of conventional (neoclassical) economics, including why banks and money are crucial to economic analysis
  • The relationships between private sector debt, public sector debt and economic growth
  • Credit bubbles, financial crises and debt-deflation
  • Leverage and asset prices
  • The current crisis, monetary policy actions and a solution that could save the U.S. from a Japanese-style "lost decade"



Please dial in 5-10 minutes prior to the 2:00pm EST start time using the number provided below, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 419534#




Steve Keen is Professor of Economics & Finance at the University of Western Sydney, and author of the popular book Debunking Economics.


Steve predicted the financial crisis as long ago as December 2005, and warned that back in 1995 that a period of apparent stability could merely be "the calm before the storm."  His leading role as one of the tiny minority of economists to both foresee the crisis and warn of it was recognized by his peers when he received the Revere Award from the Real World Economics Review for being the economist who most cogently warned of the crisis, and whose work is most likely to prevent future crises.


He has over 60 academic publications on topics as diverse as financial instability, the money creation process, mathematical flaws in the conventional model of supply and demand, flaws in Marxian economics, the application of physics to economics, Islamic finance, and the role of chaos and complexity theory in economics.


Since 1995, Steve's main research focus has been the development of an alternative, empirically grounded theory, known as the "Financial Instability Hypothesis," which argues that finance markets are inherently unstable. Steve has a forthcoming book on this topic, Finance and Economic Breakdown.


Learn More About Steve Keen (from his website www.debtdeflation.com).


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