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Looking for Value in Staples? Grab a BUD

Anheuser Busch InBev (BUD, ABI BB) reported Q4 earnings this morning and we won’t dwell on the results versus consensus - suffice it to say that European sell side analysts make their U.S. counterparts look like the NASA team that put Armstrong on the moon.  The results were consistent with our slightly below consensus estimates, but there are several things we want to highlight from the release, particularly for investors that are scratching their heads and looking for “value” in staples (we do the same on occasion as we observe some stocks continuing to make multi-year highs – KMB, CLX, we are looking at you.)


ABI posted 8.8% constant currency organic revenue growth (against a +5.7% comp) – volumes improved 0.6% reported and declined 0.1% on an organic basis so much of the growth came from price/mix.  This top line performance (+7.2% for the full year) shames most staples companies and is a result that 80% of the executives in our sector would forego important body parts to realize.  The company delivered some leverage on this excellent top line result, with currency neutral EBIT +10.7% in the quarter – very few staples companies (PM and HSY come to mind) were able to leverage top line growth in any meaningful fashion.


In 2012, ABI generated $6.36 per share in FCF – at $92 per BUD share, 14.5x FCF is actually below the staples range that we generally reference (15-20x FCF).  Global multinational companies such as KO and CL trade in excess of 20x FCF and ABI certainly qualifies to be in that company.  As we mentioned above, ABI surpasses both those names in terms of recent top line performance.  We think a valuation case can be made for standalone ABI right here, right now.


We have become less vocal on STZ (we still expect upside toward $50 per share and a high probability of the deal gaining regulatory approval), but see an asymmetric risk/reward profile and a DOJ that has been willing, at least based on the initial filing, to suspend logic.  Based on the valuation case we made above, we think it can be argued that shares of ABI currently reflect no benefit from the transaction being approved.

In prior reports, we have mentioned the reason why ABI was likely willing to forego so much in the U.S. in pursuit of Grupo Modelo – the simple answer is, the rest of the planet.  We don’t usually go in much for revenue synergies, but we do see an opportunity for ABI to drive Modelo’s brands globally.  Further, even with the synergy estimate for the transaction upped to $1 billion, we point investors back to the transaction between InBev and Anheuser-Busch, where the original synergy estimate was $1.5 billion annually by 2010 and the company delivered $2.25 billion by 2011 (deal was announced mid '08).  The same math would imply the potential for another $500 million in synergies at Modelo, and we think we can make the case that the old Anheuser-Busch was run more efficiently than is Grupo Modelo.  Finally, one thing we don’t doubt is the ability of ABI management to cut costs – it is a core competency.


Finally, and this is a “softer” statement – buying staples companies that are integrating deals generally works – investors get a period of outsized EPS growth from the combination of deleveraging (in many cases) and merger synergies.  The income statement flexibility resulting from the business combination provides some certainty with respect to earnings visibility.  Make no mistake, this isn’t TAP management integrating a deal, ABI management has a long and envious track record in terms of business integrations.

So, bottom line for us that we can make a valuation case, have long been supportive of the rationale and regulatory likelihood of the Modelo deal, and are willing to bet on what we see as a superior management team going forward.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Stock Report: Fedex (FDX)

Stock Report: Fedex (FDX) - HE II FDX 3 30 13


We believe FedEx has the ability to improve margins in its Express division.  With a large revenue base at a 30-year low in margins, the Express division could be a value driver over the next two years.  A tie-up with TNT could drive additional value for FDX shareholders, in our view.


Further, we see FedEx Ground as a winner in the US ground parcel market.  That division offers exposure to fast growing e-commerce package volumes.   Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.


INTERMEDIATE TERM (the next 3 months or more)

Shares of FDX sold off sharply following its fiscal third quarter earnings release.  Markets responded negatively to a sequential decline in Express margins, even though the restructuring does not start until this (fiscal fourth) quarter.  A rebound from what we see as over-sold levels could support the shares near-term.  


Management has commented that we should see Express margin improvement in the fiscal fourth quarter.  The macro environment appears likely to be more supportive of Express services demand.  Should the company deliver in fiscal 4Q, the shares may begin to price in improving margins ahead of their actual acheivement.


LONG-TERM (the next 3 years or less)

FedEx is a long-term position, in our view.  Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made.  Cost reductions build through FY2016 and the long-run result may surprise to the upside.  Margins at UPS and DHL are meaningfully higher, in our estimates, and we see no structural reasons why FedEx Express cannot match its peers.  A TNT tie-up could also facilitate restructuring, in our view.  FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.


Stock Report: Fedex (FDX) - HE II FDX chart 3 30 13

BEST IDEAS CALL TODAY: Materials & Dial-in Info


BEST IDEAS CALL TODAY:  Materials & Dial-in Info - Best Ideas 2


Hedgeye Risk Management invites you to join us today, February 27th at 1:00pm EST for our Best Ideas Launch Part 2.


This call will be a follow-up to the introductory call of our dynamic Best Ideas Product which was held on February 11th. The new dynamic Best Ideas Product will track, update and notify clients of important changes and additions to the Hedgeye Best Ideas list.


On the call we will highlight our highest conviction calls across Financials, Industrials, Energy and Macro offering at least two high conviction and differentiated investment ideas from each vertical over an intermediate term duration.     




  • Date: Today, February 27th at 1:00pm EST
  • Toll Free Number:  
  • Direct Dial Number:     
  • Conference Code: 865921#

CLICK HERE to access the slides associated with this call. For more details please email .  



  • Financials - Josh Steiner
    • Part of the #1 ranked Institutional Investor and Greenwich Survey team at Lehman Brothers. Buy-side analyst at Amaranth Group & Millennium Partners.
  • Industrials - Jay Van Sciver
    • Co-Founder/Partner at Bishop & Carroll Capital Partners. 12 years as a financial analyst with buy-side coverage of the Industrials Sector. 
  • Energy - Kevin Kaiser
    • Covers the oil & gas sector with a focus on fundamental research on E&Ps, oilfield services, MLPs and refiners.  Princeton hockey alumnus.
  • Macro - Darius Dale
    • Senior Analyst covering Asia and Latin America on the Macro Team. Yale BA.

Buy American

Client Talking Points

Disaster Averted

So much for the end of the world. After the Italian election fiasco which tanked the market, we saw it rally yesterday to close at levels that were nearly the same before Berlusconi and Co. took over. We're not fleeing to "risk off" assets because of a down day in the market and thus, we are not buying Treasuries. We are short the Japanese Yen and will continue to use our levels and tried and true methodology to pick stocks using signals to tell us when the time is right.

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


"The difference between the $EATFY10 turnaround and the $DRIFY13 - $EAT rethought the buz model while $DRI is defending what has not worked" -@HedgeyeHWP


"Who is rich? He that is content. Who is that? Nobody."  -Benjamin Franklin 


The Commerce Department reported that total orders for goods meant to last more than three years slid 5.2%

What Keith's Reading

Lousy taste 'Buds' lawsuit (via NY Post)


Currency Veteran Kuroda Offers BOJ Credibility on Reflation (via Bloomberg)


WTI Rebounds From 2013 Low; Iran Talks End Without Deal (via Bloomberg)


Mantega Says Currency War He Named Eases as Brazil Recovers (via Bloomberg)


Treasuries Extend Monthly Gain Before Durable Goods Data (via Bloomberg)

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.