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Q4 Earnings in a Single Chart

“Of all of our inventions for mass communication, pictures still speak the most universally understood language.”

 - Walt Disney

 

Our average note is right around 940 words, so this picture isn't quite worth a thousand, but we still think it's useful.

 

Calendar Q4 Revenue and EPS versus consensus:

Q4 Earnings in a Single Chart - Q4 EPS

 

Kind regards,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst

 


House Calls

Takeaway: Here are two investing ideas that are likely to play well in a strong housing environment.

We hosted a deep-dive Flash Call Tuesday titled “Housing’s Sledgehammer,” led by Financials Sector Head Josh Steiner, whose work indicates the latest bullishness in the housing sector could be too cautious, as home prices could roar back and take everyone by surprise.  Josh was joined by three other sector heads.  Here we offer their individual ideas on companies that play well in a strong housing environment.

 

Restoration Hardware - RH

Retail Sector Head Brian McGough is bullish on RH, which he believes should stand out in the messy sector that is Home Remodeling.  Home remodeling generates over $140 billion in annual revenues but is highly fragmented, comprising everything from DIY house repair, to bathroom fittings, to bedroom suites, dining room sets and patio furniture.  With only about a 1% share of the total market, RH is one of largest retailers in “soft” side of home space and stands to reap large rewards in a housing upturn. 

The simple driver of McGough’s bull thesis is: in order to sell stuff, you have to show stuff.  Think of it: you might buy kitchen cabinet handles over the internet, but you want to actually lie down on that bedroom set, or sit in those patio chairs before you commit.  RH is one of the few home remodeling retailers that has made a push to aggressively expand the square footage in their stores – McGough cites their 8,000 square foot Boston location and compares it to the new 40,000 square foot Design Center.  This alone should drive more than 20% annualized sales growth over the next three years as both in-store and catalogue sales expand.  With over 70 locations nationwide, RH has enough individual locations to be a solid competitor.  But McGough says the average floor space is so small that only about a quarter of RH’s products actually make it into the showroom.  That’s changing.   

More space = more variety of new product categories on the floor = more attractions for more folks to buy = more revenues = higher stock prices.  McGough compares this to WalMart’s successful store expansion, where the company added new categories and drew a whole new group of customers.

The catch: our housing call may prove over-optimistic.  In which case McGough says the Design Center model is still superior to their existing locations – just not as superior in an inferior market.  And remember that, if people are not buying new homes, they will have to keep fixing the ones they’ve got.

 

NewellRubbermaid – NWL

Consumer Staples sector head Rob Campagnino calls NWL an inexpensive name in a sector where value is hard to find.  Rob says NWL showcases two of his favorite themes: free cash flow, and “bad company that is getting better.”

You will recognize NWL because of its Rubbermaid brand.  You may also recognize its Irwin, Lenox, or Hilmor brands.  Or its Levolor, Ace, Solano or Calphalon brands.  That, says Campagnino, is one of NWL’s problems: investors who run consumer staples portfolios don’t buy companies – they buy brands.  And just like a consumer, their brand loyalty can blind them to quality if it comes in a different package.  NWL has a perception problem.  From construction tools, to home solution, to writing implements and baby care, NWL actually represents a diversified portfolio that can benefit from an upturn in housing and in new family formation – both of which Hedgeye is calling for – but also in consumer sentiment and, as the unemployment figures tick lower, office employment.

NWL is also a turnaround story that, says Campagnino, has rounded the near turn and is coming into the home stretch.  NWL’s new CEO has been in the driver’s seat for two years, after successful turns at Kraft and Unilever.  Still, because of its brand perception issue, NWL actually trades at a lower multiple today than when it was a worse company.  With $1.85 a share in free cash flow – good for dividends or share buybacks – Campagnino believes the “bear case” – if we are wrong on housing, for example, is lots of cash lying around to return to shareholders.

 

Conclusion

Demographers have identified a simple basic trend in new household formation: get married, buy house, get dog, have baby.  Hedgeye has identified positive trends in new home purchases, pet buying, and new family unit formation.  Companies poised to benefit from any of these should come into their own as trends become clear.

 

 


CHINA’S IN NO MAN’S LAND

Takeaway: China’s fundamental outlook has become increasingly convoluted in recent weeks, posing material risk to its financial markets.

SUMMARY CONCLUSIONS:

 

  • The benchmark SHCOMP index is -2.6% below its immediate-term TRADE line of resistance and +2.7% above its intermediate-term TREND line of support – making it truly stuck in between the proverbial “rock and a hard place”. With such a now-convoluted fundamental outlook, we will stick to our tried and true risk management process by deferring to our quantitative signals on what to do with our Chinese equity exposure from here:
  • BUY [more] on a breakout above TRADE resistance (2,324): A probable sequential pickup in MAR growth data and a probable sequential slowing in MAR inflation data supports this action. Moreover, continued USD strength (and, by association, CNY strength) should weigh on int’l raw materials prices and allow the pace of economic activity to creep higher in China, as China’s heavy industry needs energy and raw material deflation to produce more with less credit expansion and the Chinese consumer needs food deflation to consume more discretionary goods and services.
  • SELL/SHORT on a breakdown through TREND support (2,205): As we’ve seen since 2009, the pace of activity in the Chinese property market has become the #1 factor in determining growth rate of Chinese economy – via credit expansion – and the returns of Chinese financial markets. That quantitative signal would be a clear-cut sign that there is likely more policy-perpetuated pain to come in the months ahead – especially to the extent those linkages have not broken down as much as the CCP would’ve liked.

 

Is the Chinese Communist Party and, by extension, the PBOC too concerned about inflation – both in housing and consumer prices? That’s fast become the most critical question as it relates to navigating fundamental risk in the Chinese economy.

 

Per PBOC Governor Zhou Xiaochuan’s latest testimony at the National People’s Congress:

 

“China should be on high alert over inflation… Monetary policy is no longer relaxed and is relatively neutral as demonstrated by a 13 percent target for money-supply growth that’s tighter than expansion in the last two years… Monetary policies to cool home prices will continue or even strengthen in the future.”

 

As an extension of the CCP, Zhou’s overt hawkishness underscores a broader political agenda to quash inflationary pressures on the mainland on all fronts.

 

Interestingly, the predominance of their prudence has been our base-case scenario for many months. As early as OCT ‘11 and all throughout 2012, we have been overtly flagging a sustainable lack of resolve to reflate the Chinese economy amongst Chinese officials.

 

Moreover, as most recently outlined on our 2/27 Best Ideas presentation, consensus finally coming to grips with a structurally subdued Chinese growth outlook was one of the key reasons we have liked Chinese equities on the long side since 12/10.

 

With the Shanghai Composite Index up +8.6% since then (besting the +7.9% advance for the MSCI All-Country Asia Pacific Index), that’s been a somewhat contrarian idea that has worked in our favor.

 

More recently, however, with the SHCOMP Index down -7% from its cycle-peak on 2/6 and the Shanghai Stock Exchange Property Index down nearly -15% from its cycle-peak on 2/5, it’s very clear to us that the latest round of property market tightening – which indeed caught us off guard from a magnitude perspective – is weighting on both price and sentiment in the Chinese equity market.

 

With a Global Macro Risk Manager’s process only as good as his/her last trades (hence our never-ending focus on evolution and embracing uncertainty), the most recent performance begs the question: where to from here?

 

The benchmark SHCOMP index is -2.6% below its immediate-term TRADE line of resistance and +2.7% above its intermediate-term TREND line of support – making it truly stuck in between the proverbial “rock and a hard place”.

 

CHINA’S IN NO MAN’S LAND - 1

 

With such a now-convoluted fundamental outlook, we will stick to our tried and true risk management process by deferring to our quantitative signals on what to do with our Chinese equity exposure from here:

 

  • BUY [more] on a breakout above TRADE resistance (2,324): A probable sequential pickup in MAR growth data and a probable sequential slowing in MAR inflation data supports this action. Moreover, continued USD strength (and, by association, CNY strength) should weigh on int’l raw materials prices and allow the pace of economic activity to creep higher in China, as China’s heavy industry needs energy and raw material deflation to produce more with less credit expansion and the Chinese consumer needs food deflation to consume more discretionary goods and services.
  • SELL/SHORT on a breakdown through TREND support (2,205): As we’ve seen since 2009, the pace of activity in the Chinese property market has become the #1 factor in determining growth rate of Chinese economy – via credit expansion – and the returns of Chinese financial markets. That quantitative signal would be a clear-cut sign that there is likely more policy-perpetuated pain to come in the months ahead – especially to the extent those linkages have not broken down as much as the CCP would’ve liked.

 

All told, we are watching China like hawks here and it should be noted that we are in the process of reconsidering our bullish bias on Chinese equities.

 

Needless to say, stay tuned.

 

Darius Dale

Senior Analyst

 

CHINA’S IN NO MAN’S LAND - 2

 

CHINA’S IN NO MAN’S LAND - 3

 

CHINA’S IN NO MAN’S LAND - 4


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Riding Bull: SP500 Levels, Refreshed

Takeaway: Higher-lows and higher-highs are bullish, because people have to chase them.

POSITIONS: 14 LONGS, 8 SHORTS @Hedgeye

 

After a controlled 1.5 day correction from our overbought signal, US stocks look great here. I am covering shorts and getting longer again this morning (from 20,000 feet on a GoGo connection, which is kind of cool).

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1567
  2. Immediate-term TRADE support = 1540
  3. Intermediate term TREND support = 1477

 

In other words, this is the first note you are receiving from me in 2013 where I have a higher-high than the SP500’s all-time closing high (1565) signaling as probable. Higher-lows and higher-highs are bullish, because people have to chase them.

 

#StrongDollar and the Transports (IYT) lead during the red open, and you know I like that.

 

KM

 

Keith McCullough

Chief Executive Officer

 

Riding Bull: SP500 Levels, Refreshed - SPX


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.

 


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