As you'll see in the chart below, the regional gaming stocks dominate the lower left quadrant, which shows where companies miss adjusted EBITDA and revenue.
Takeaway: We think that the quarter is in good shape, but if there are any fireworks we’re confident enough in our thesis to support the name.
This note was originally published March 18, 2013 at 23:35 in Retail
Conclusion: Our analysis suggests that Nike’s quarter is in good shape. But let’s face it, Nike always manages to light off a firework or two. If that happens to be case on Thursday, we’re confident enough in our underlying thesis that we’d support any weakness.
Nike remains one of our favorite names right now. We think its fiscal third quarter to be released on Thursday after the close will be another datapoint to support our view that it is gaining share and returns are rising – and there aren’t many other names that are doing both of those two things right now.
Will the quarter be a blowout? Not exactly. We’re modeling $0.72 vs the Street at $0.67. Nice upside -- but not huge. We’re about in line with the Street on the top line at about 11%, but we’re 50bp higher on the gross margin line. We think that’s fair given the easing product costs flowing through the P&L as well as 2Q ending with the most favorable inventory position in nine quarters.
Futures: As it relates to futures, bears are calling me with the expected ‘futures are decelerating’ concerns. The company is going against a 22% North American futures number in this quarter, and +18% globally. It doesn’t take a genius to figure out that this is a ridiculously tough quarter to comp. On a two-year run rate, a 7% North American or 5% global futures number suggests an even underlying trend.
We think Nike comes in two to three points above those levels. On a go-forward basis, keep in mind that after this quarter, we started to see China drop off precipitously. Beginning next quarter, we expect any slowdown in growth in North America to be offset by a rebound in China and an uptick in Western Europe (NKE is about to mark the anniversary of the latest downturn there, and Foot Locker recently noted a stabilization in Europe).
Sentiment is Flat-Out Bad: Lastly, we need to acknowledge sentiment and valuation. We agree that the stock isn’t cheap at 17x earnings. But let’s not forget that sentiment on Nike remains quite bad. Our sentiment monitor, which is based on both sell-side recommendations, short interest and insider trading activity, suggests that Nike is more hated today than almost any time over the past ten years.
While the fear mongering about the end of the world continues, we stay the course with our research process. They key element of our bull case is the strong dollar, which got stronger again Monday. The Dollar Index is up for the sixth week out of the last seven. Commodities have been down six of the last seven weeks. With commodities lower, it’s a de facto tax cut for the consumer who pays less.
It’s simple. The thing that are going right are the ones that could go wrong. That’s why we’re looking closely at US employment and housing. We’ll look closely at all the housing data this week, including today’s February housing starts that rose 0.8%, as well as the jobless claims numbers on Thursday. Oh, and we would be remiss if we didn’t mention Cyprus. As we have said, Cyprus doesn’t matter.
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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.
“The art of storytelling; make enough calls so that something is always working.” -- @KeithMcCullough
“After six years, I feel it is the right time to pass the baton.” – Electronic Arts CEO John Riccitello, who resigned Monday, sending the stock of the video game maker higher.
23, the consecutive-game winning streak of the Miami Heat, who beat Boston last night 105-103 to extend the second longest winning streak in the NBA
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.
TODAY’S S&P 500 SET-UP – March 19, 2013
As we look at today's setup for the S&P 500, the range is 27 points or 0.84% downside to 1539 and 0.90% upside to 1566.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on March 05, 2013 for Hedgeye subscribers.
“How do you tell a communist? Well, it’s someone who reads Marx and Lenin. And how do you tell an anti-Communist? It’s someone who understands Marx and Lenin.”
As Hedgeye has grown over the past five years, we’ve gone from a ramshackle group of less than ten to a team that is fifty or more with a view to a much higher employee count as our growth continues. For those of us that started here near day one, it has been an exciting and fulfilling experience.
Many of you that have started you own businesses know full well the management challenges associated with growth – compensation plans, career paths, titles, HR meetings, committees, and so on. I can’t speak for Keith, but there are certainly times where I wish I could channel my inner Karl Marx and completely control our day-to-day functions. That, of course, would be a disaster because our company, like most companies, benefits greatly from disparate opinions and personalities.
The caveat to that last point of course is China - a country that has seen fabulous growth and development with top down controlled management. In 1978, China was one of the poorest countries on the planet with a GDP of roughly one-fortieth of the United States. As Xiaodong Zhu, a Professor of Economics at the University of Toronto, writes:
“Since then, China’s real per capita GDP has grown at an average rate exceeding 8 percent per year. As a result, China’s per capita GDP is now almost one-fifth the U.S. level and at the same level as Brazil. This rapid and sustained improvement in average living standard has occurred in a country with more than 20 percent of the world’s population so that China is now the second-largest economy in the world.”
If President Ronald Reagan were alive today, it would be interesting to hear his assessment of the Chinese economic miracle. Despite his, and many a dour assessment of Communist economies, China has certainly proven the critics wrong.
In the short term, yesterday certainly provided some fuel to the proverbial fire for those negative on the Chinese economy this year. China’s CSI 300 index was down -4.6%, its biggest drop since November 10th, the Shanghai Composite was down -3.7% (the most since August 11th), and the Shanghai Property index was down -9.3%. The decline in the property index was hit on reports that Beijing has introduced new property curbs calling for higher down-payment requirements, higher interest rates on second home mortgages and a 20% tax on individual profits from property sales.
One of the top ideas in our recently launched Best Ideas product was China, via the closed end fund CAF. Given the performance of Chinese equities noted above, this position is now against us, but our Senior Analyst covering Asia, Darius Dale, addressed this directly yesterday in a note titled, “China Pukes”. As Darius wrote:
“In short, while we think this latest round of tightening measures is definitely impactful, they are not nearly as negative as we initially feared. The heightened concerns mostly stem from the new 20% capital gains tax on existing home sales; prior to Friday’s announcement, existing home transactions were taxed at a rate of 1-2% of the sale price.
To some extent, today’s “puke” instructs us that our initial interpretation of the tightening measures was not bearish enough. That said, however, rather than react to headline-grabbing 1D % change moves, we turn to our quantitative factoring for true guidance.
On this metric, the Shanghai Composite is still healthily bullish from an intermediate-term TREND perspective and continues to support our bullish intermediate-term fundamental bias on Chinese equities. If, however, the now-confirmed immediate-term TRADE breakdown is but a leading indicator for further breakdowns, then we’d happily abandon our bullish bias upon confirmation of that signal.”
In the Chart of the Day, we highlight our quantitative levels that still support being long of China. In fact, news this morning from China’s Premier Wen last “state of the country address” in which 2013 GDP growth was set at +7.5% and CPI at +3.5% bolsters our thesis. On the latter point, if CPI actually declines from 4.0%, which commodities support, this is positive for our thesis, especially if combined with what we believe will be a sandbagged GDP number.
The other interesting call-out from Wen’s speech is that China intends to raise its budget deficit by 50 percent to boost consumer spending. Longer term structural deficit spending is not something that we find overly appealing, but this is likely supportive for GDP targets in 2013.
Changing gears, from an asset allocation perspective, even as many are starting to call for a rotation into bonds, the U.S. 10-year Treasury is holding its 1.84% line. As a result, we continue to see a rotation out of the “end of the world” trade of long gold and treasuries and into U.S. equities in 2013. There are very large bond investors that disagree with our call, but as always – watch what they do and not what they say.
Since we are on the topic of China, I wanted to end with a quote from Thomas Friedman that on some level summarizes the future:
“When I was growing up, my parents told me, finish your dinner. People in China and India are starving. I tell my daughters, finish your homework. People in Indian and China are starving for your job.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1555-1589, $109.01-112.68, $3.48-3.55, $81.68-82.39, 91.89-94.79, 1.84-1.93%, 12.57-15.61, and 1509-1532, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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