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Is Amex Charging Ahead This Quarter?

Takeaway: American Express growth is likely to be stronger sequentially in the first quarter based on January and February SpendTrend data.

This note was originally published March 12, 2013 at 09:55 in Financials

February SpendTrend Data Shows AXP Should be in Good Shape for 1Q

First Data released its February SpendTrend data this morning, which tracks aggregate same-store sales activity in the United States. February showed modest month-over-month deceleration in credit card volume growth to +7.9% YoY vs. +9.2% YoY growth in January and +4.3% YoY growth in December. 

 

This brings the 1Q13 QTD growth rate to 8.6%, up from 6.7% in 4Q12. The correlation between the YoY growth rate in SpendTrend credit volume and AXP global volume is 0.72. The current 8.6% QTD rate of growth implies AXP global billed business will grow at 14.0% in 1Q13, up from 7.5% in 4Q12. 

 

Interestingly, the relative strength in the credit line was a divergence relative to the overall spending trend, which was negative. On an overall basis, including credit, debit and check, consumer spending volume growth in February decelerated to 4.6% YoY, which was down from 6.2% in January and slightly ahead of the 4.0% YoY growth in December.

 

FirstData flagged the following factors as notable contributors to the relative weakness of February's print: 

 

Retail dollar volume growth fell significantly in February to 2.5% compared to January’s growth of 5.7% as consumers tightened their discretionary spending budgets. This marked the slowest growth in the past twelve months. 


The combination of elevated taxes, federal tax refund delays, adverse weather and higher gasoline prices clearly curbed shoppers’ ability and willingness to shop in February. The fact that the personal savings rate significantly declined in January and consumers shifted more spending onto credit cards could be a sign that consumers may be overstretched. 

 

We like to use SpendTrend data as a proxy for American Express' intra-quarter momentum. Amex didn't provide a January update, as they normally do, on either their 4Q12 earnings call or at their recent investor meeting. 

 

It's also interesting to consider that Amex' international volume growth accelerated meaningfully in 4Q12 to 8.8%, up from 2.7% in 3Q12. With both U.S. and International now accelerating, and the benefits of cost cutting materializing, the company is in position to generate upside surprise to estimates (if they choose to let it flow through).

 

Is Amex Charging Ahead This Quarter? - spendtrend 2

 

Is Amex Charging Ahead This Quarter? - spendtrend 1

 


Is McCormick Leaving a Bad Taste?

Takeaway: Here's why we're concerned about McCormick stock at the moment.

This note was originally published March 12, 2013 at 11:40 in Consumer Staples

Last night, YUM reported Q1 (February) China comps of down 20%, with improvement in February versus the overall quarter.  The stock is getting a well-deserved bounce today, and we mention it only because one of the names in our staples coverage has some leverage to restaurants in China - MKC.  The big difference between YUM and MKC is that MKC has been bouncing hard for about a month now, on no news and with utter disregard for the direction of earnings estimates or the company's multiple.

 

MKC’s commentary relative to continued Q1 weakness (1/24):

 

“While the Asia Pacific region had a strong sales result for the Consumer business, demand from industrial customers, primarily quick service restaurants, was weak. This was largely an outcome of less new product and promotional activity versus the year-ago period. We expect this decline to extend into the first quarter of 2013, which has a tough year-ago comparison. If you recall, we grew base business industrial sales in the Asia Pacific region 22% in local currency in the first quarter of 2012.”


We get it – shorting mid-cap staples names is tough – the companies tend to have sticky shareholder bases, multiples tend to be elevated versus the large cap peer group (and seem to matter less) and the opportunity exists for relatively small deals to move the needle on EPS pretty dramatically.  However, it isn't often that you see such a dramatic divergence between the direction of EPS estimates and the direction of the multiple in a non-cyclical name.  Full-year 2013 consensus estimates have gone from $3.36 to $3.22 since the company reported back in January, and the multiple has expanded from 18.9x (immediately post EPS) to 21.7x.

 

Is McCormick Leaving a Bad Taste? - MKC PE1

 

Perhaps you can make the case the company sandbagged 2013 EPS guidance, but even an earnings base closer to $3.50 puts this name at 20.0x '13, and we are having a difficult time coming to either that earnings base or that multiple.  It is our strong preference to deal in what is likely, and we think a more likely scenario is an EPS result for the full-year at or below current consensus.

 

Valuation is never a catalyst, but the combination of significant multiple expansion in the face of a declining EPS base confounds us, and we don't like being confounded.  MKC is fast moving up our list of names whose current price we can't justify or explain, but are inclined to short.

 


Herbalife: Math Trumps Fear

This note was originally published March 12, 2013 at 18:27 in Consumer Staples

Looking Back to Look Forward



We are taking a page from our prior experience as a dedicated tobacco analyst, recalling the days when litigation threatened the domestic tobacco business at then Altria (combined international and domestic tobacco as well as Kraft Foods).



The argument was that at some point the market was applying a negative value to the domestic business and that even in a worst case scenario (a bankrupting decision against the U.S. business), the value of the other entities would be preserved on the other side of the corporate veil.  Further, structural differences in the legal systems outside the United States made the export of any bankrupting litigation unlikely, preserving the multiple associated with the international assets.



We see the situation with Herbalife is broadly analogous, as the current share price reflects some material degradation of the earnings power of the business – with the US business being the most likely source of the decline.  We are somewhat less secure in our belief in the case of HLF that consumer protection litigation/regulation can’t be exported outside the U.S. (versus product liability litigation in the case of the tobacco industry), but we believe that the international assets are likely far more secure than the domestic assets in the case that Pershing Square’s allegations prove to have some merit (an open issue, to be sure).



Recall that it is our belief that the Herbalife debate has become too high profile to be ignored by the powers that be – the FTC, SEC any of the State Attorneys General.  We see some sort of investigation as highly likely, an event that the market will not likely treat kindly.

 

The Math

 

Consensus EBITDA estimates for 2013 EBITDA are $794 million (7.9% growth versus 2012) – of that number, we estimate that nearly $190 million in EBITDA will be generated in the United States (23.5%).  It’s a bit of a chore to get to EBITDA by region and the company’s disclosures could certainly use some improvement – we agree with Pershing Square in that regard.



The company’s average forward EV/EBITDA multiple since 2007 is 7.5x – applying that multiple to the EBITDA forecast for the company ex-U.S. ($604 million) gets us to a share price of $42.50 for HLF’s business outside of the US, implying a negative value of $1.70 per share for the US business currently imbedded in the share price.  At any multiple greater than 7.1x EV/EBITDA for the rest of the world, the U.S. business is “free” as currently reflected in the stock price.  We think a multiple closer to 8.5x EV/EBITDA is more appropriate given peers and the growth profile.

 

Herbalife: Math Trumps Fear - HLF EV.EBITDA

 

Herbalife: Math Trumps Fear - HLF Sum of the parts

 

We think replacing fear with math is always a useful exercise, and while emotions can drive stock prices beyond where the math would suggest, we think having some sort of analytical framework to look at what is currently being discounted is the best way to be right more often than not.

 

-Rob

 



 

Robert  Campagnino

 

Managing Director

 

HEDGEYE RISK MANAGEMENT, LLC

 

E: rcampo@hedgeye.com

 

P: 203.562.6500

 

 

 

Matt Hedrick

Senior Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

All That Giltters

Client Talking Points

China Belittles

For a while now, China has been one of Hedgeye’s top long ideas, but some of the recent data has sent some mixed signals. Specifically, industrial production, fixed asset investment and aggregate financing (a driver of money supply) were marginally below expectations and saw sequential declines. Now to be fair, many of these economic metrics are showing year-over-year growth rates, that relative to the rest of the world, are outstanding. We’ll continue to keep a close eye on China, particularly on new policy initiatives that come from the government there.

 

 

 

Gold Confirms

While China is belittling us a bit, our call on gold is playing out as we expected. The breakdown of gold has been a key asset call on the back of our view that global growth is stabilizing.  This hasn’t been a popular call as many institutional investors have been over allocated to  gold based on the idea that as growth decelerates, expectations for future QE rise, the dollar depreciates and investors flock to gold as protection against further dollar debauchery.

Asset Allocation

CASH 36% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
ASCA

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

FDX

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

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

TWEET OF THE DAY

“That smoke out of the Vatican chimney, that mean a Darrelle Revis trade is near?” -- @Adam Schefter, ESPN NFL Insider.

QUOTE OF THE DAY

“There’s a great consumer fan base that hasn’t declined.” – Metropoulos & Company on Twinkies. Metropoulos is one of the two investment firms that has agreed to buy Hostess Brands.

STAT OF THE DAY

1.1%, the amount US retail sales rose last month, the biggest jump in five months



Belittling Gold Markets

“Keep away from people who belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.”

-Mark Twain

 

The quote at the top of this note is certainly true for my experiences in life.  Every time I have met someone who has truly succeeded, whatever their domain, I’ve noticed they do their best to encourage others on the path to success. In the past week, I had a very good example of this when I met Senator John McCain.

 

Now setting aside your political affiliation, I think it is fair to say McCain has been one of the more successful politicians of this generation.  In this instance, I met him briefly in a small T.V. studio as he was going on to do a clip for CNN and I was waiting to go on for CNBC.  As we waited, he wolfed down a bag of chips, hopped on and off various calls, and planned out his town hall appearance in a small Arizona town for later in the day.

 

So, yes, at 76 years of age and after 26 years in the Senate, McCain is still grinding.  Therein lies the point of greatness and great people, they understand that the path to success is based on hard work and repetition. Investing in the public markets epitomizes this idea. 

 

The one market that has belittled us as of late is China.  Chinese equities remain one of our top long ideas, but as my colleague Darius Dale wrote in an update on the idea on Monday some of the recent economic data from China does give us pause. Specifically, industrial production, fixed asset investment and aggregate financing (a driver of money supply) were marginally below expectations and saw sequential declines.

 

Now to be fair, many of these economic metrics are showing year-over-year growth rates, that relative to the rest of the world, are outstanding.  In the Chart of the Day, we highlight this by showing Chinese Fixed Asset Investment for the last three years.  As the chart shows, in the most recent period fixed asset investment was up 21% year-over-year and remains well off its lows.

 

As it related to fixed asset investment in China, as the chatter out of China over night is that Shenzhen may implement a price cap at every housing project within 2013.  This pressure on Chinese property stocks was then compounded by the fact that Governor Zhou of the People’s Bank of China said he is on “high alert” in regards to inflation.  So the belittling point on China is that while growth remains relatively strong, the outlook for inflation and policy (the other two key factors in our country models) are more belittling to discern.

 

An investment asset class that has been less belittling for us to analyze recently is gold.  Yesterday, my colleague Christian Drake wrote a note titled, “Gold: Anatomy of a Breakdown”.  The breakdown of gold has been a key asset call on the back of our view that global growth is stabilizing.  This hasn’t been a popular call as many institutional investors have been over allocated to  gold based on the idea that as growth decelerates, expectations for future QE rise, the dollar depreciates and investors flock to gold as protection against further dollar debauchery.

 

The reality of the interplay above is that both the dollar and gold are large driven by economic data versus expectation and the view of future monetary policy.  As the note emphasized:

  • Gold versus Federal Reserve Balance Sheet:  The correlation between Gold and the Fed’s Balance Sheet is strong across durations with an R^2 = 0.92 over the last 14 years.  If you think this relationship makes common and economic sense (we do), a deceleration and unwind of policy (or the expectation for) on the back of an improving growth outlook is a decidedly bearish catalyst for gold; 
  • Gold vs. Dollar:  Gold’s Inverse correlation to the dollar has been moderate-to-strong across durations.  Gold is levered to the USD directly given that gold generally settles in dollars, and indirectly via expected inflation and policy impacts on fiat currency value.   Correlations aren’t perpetual – they build and decay - but when they start to tighten alongside other relevant/corroborating factors, it’s generally worth paying attention.  Gold’s 30D correlation to the dollar is currently -0.90;
  • Gold - CFTC Data:  Bullish Speculative positioning looks like its capitulating as net length in combined non-commercial futures & options contracts has collapsed since November.  It hasn’t paid to speculate on the end of the world (again) as extremes in bullish positioning (>1STDEV) have been followed by negative subsequent price performance in gold 100% of the time over the last year.  Net length is currently down ~62% from the late 2012 highs; and
  • Gold ETF Flows:  Gold flows to the GLD and ETFs in aggregate, have rolled over since the beginning of the year and have accelerated to the downside over the last month.  For example, total Gold Holdings in the SPDR Gold Trust (GLD) are down ~114 Tonnes (-8%) from peak 2012 levels according to Bloomberg data.

The summary of the points above are that gold will go down for exactly the same reasons it went up – slow growth and loose monetary policy.  So if the dollar continues to strengthen and growth continues to stabilizes, the record outflows from gold ETFs will only continue.  Thus as Mark Twain wrote:

 

“Moralizing, I observed, then, that "all that glitters is not gold."

 

Indeed.

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $109.02-110.78, $82.36-82.97, 93.76-96.82, 1.96-2.09%, 11.21-13.83, and 1, respectively.

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

 

 

Belittling Gold Markets - Chart of the Day

 

Belittling Gold Markets - Virtual Portfolio


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