NKE: 3 for 3 in 3Q

Takeaway: Nike delivered on everything we needed to see to keep pounding the table, and then some.

There are three things we were looking for in Nike’s quarter; proof that 1) Nike is gaining share/driving consumer demand across its portfolio, 2) Gross Margins are improving at a rate well ahead of consensus expectations, and 3) that it is achieving these things with disproportionately less capital invested in its business (ie driving returns higher).  


Well, Nike showed us every one of these, topped our EPS estimated by a penny, and blew out the Street by $0.06ps. No changes to our above-consensus EPS estimates our thesis. Nike remains a top pick.


Some important points:

North America En Fuego. As it relates to demand, we saw North America sales up 18%, which was on top of a 17% growth rate last year. Importantly, futures were up 11% despite being up at a colossal rate of 22% this quarter last year. Think about it like this -- try to find another company with 45% share in its category that is growing its top line at a mid-teens rate while improving margins and lessening capital intensity along the way. Let us know what you find, we think you’ll come up dry.


China has definitely bottomed. Don’t let management’s caution fool you. They specifically made it a point to keep estimates grounded and said that that they still have a lot of wood to chop. But futures going from -6% and -5% over the past two quarters to +4% in 3Q is proof positive that this business has at least found bottom, and is likely trending higher once again.


Inventories still improving – driving better margins. Though pricing and easing raw materials costs helped gross margins, the spread between inventory and sales growth is getting better and will continue to drive gross margins higher. This is probably best evidenced by our SIGMA chart, where it shows Nike making a big move into the upper right quadrant of this analysis. Over time, triangulating margins with capital efficiency explains away 92% of stock moves in retail. Translation – it matters.


NKE: 3 for 3 in 3Q - nkeSIGMA


We think that the spread between inventories and margins will continue to diverge well into FY14

NKE: 3 for 3 in 3Q - nkegm




Here’s our previously-published comments on our expectations for 3Q.


NKE: Ahead of the Print

We think that the Q is in good shape, but if there are any fireworks we’re confident enough in our thesis to support the name.


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.


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 2-year run rate, a 7% North American or 5% Global futures number suggests an even underlying trend. We think Nike comes in 2-3 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 anniversary the latest downturn there, and FL 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 10-years.


NKE: 3 for 3 in 3Q - NKE sentiment

ADM - Looks Like Ethanol Has Turned More Quickly Than Anticipated

ADM's bioproducts segment (ethanol) has been an albatross for the company in recent quarters - lack of corn and the price of corn have seen ethanol margins hover at or below breakeven.  Looking at consensus, it appears that there is no improvement expected until 2H calendar '13 for the company.  However, examining the trends in cash ethanol margins on Bloomberg as a proxy, it appears that the profit per gallon has moved up significantly in recent weeks and is now decidedly positive.  In the past, we have found the cash ethanol margins to be directionally useful in regard to determining segment profitability, and we are encouraged by recent trends.


At current levels and with weather semi-cooperative, we continue to see ADM as an inexpensive option on the corn crop in the U.S. in coming months.


ADM - Looks Like Ethanol Has Turned More Quickly Than Anticipated - Ethanol Profitability


ADM - Looks Like Ethanol Has Turned More Quickly Than Anticipated - ADM price to book


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst 

Mining & Construction Equipment Call Invitation

Takeaway: Please join us March 27th at 11AM for our Mining & Construction black book call.

Mining & Construction Equipment Call Invitation - Picture2



The Hedgeye Industrials Team, led by Jay Van Sciver, will be hosting a black book conference call on Wednesday, March 27th at 11:00am EST entitled "Mining & Construction: Running Just To Stand Still." Jay will be highlighting the emerging opportunities in the mining and construction space as well as detailing bearish aspects of commodity markets, including production and demand data.




  • Examine the causes and sustainability of the recent moves in mining product prices
  • Update CAT thesis and data from Conference Call held September 14, 2012  
  • Update data and provide outlook for mining capital spending
  • Characteristics of historical capital investment cycles
  • A look at Global Construction Equipment market
  • Construction equipment demand trends
  • Industry structure analysis for Construction Equipment & Mining Equipment
  • Competitive entry, technological developments and other changes to the industry structures
  • Valuation of key competitors under different scenarios



  • CAT
  • JOY
  • TEX
  • OSK
  • MTW
  • GE 
  • Sandvik (SAND SS) 
  • Komatsu (KMTUY)
  • Finning (FTT CN)
  • Toromont (TIH CN)
  • Hitachi Construction (6305 JP)
  • Atlas Copco (ATCOA SS)


Please email to obtain the dial-in information for this call and a copy of the presentation, or to learn more about our research.

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Mednax: Birth of a Nation?

Takeaway: Mednax stock could benefit from this significant demographic trend.

Our Healthcare sector’s recent survey of birth statistics in key US markets shows that births may resume growth in 2013 after persistent annual declines dating back to 2008.  We think the rest of the investment community has not yet caught up on this key metric.


Sector head Tom Tobin says this could be the leading edge of a surge in revenues and profits for companies like Mednax (MD). 


The increase in births will directly benefit MD, who provides neonatal intensive care treatment to premature babies.  That increase should be driven by families with private-payer insurance coverage.  This is significant for MD: private insurance reimburses MD at roughly three times the rate that Medicaid pays, and MD’s highly fixed-cost structure means increases in revenues will drive greater increases in profits.


Tobin calculates the outsized effect of shifting the payer mix away from Medicaid, and to private insurance.  For every 1% move from Medicaid to private insurance, MD stands to gain 1.2% in additional revenues, and 1.5% in profits.  Put differently, MD’s cost structure magnifies the profit impact by approximately 50%.  The emerging birth trend could turn into a big payday for MD.


MD stock has a pattern of performing well as short interest declines.  There was record shorting in the stock at the end of 2012, which has since backed off.  If buying volume comes in, MD looks well positioned for a rally on both emerging fundamentals, and on a trading set-up.


Mednax: Birth of a Nation? - Mednax


  • Over the past four years, Connecticut gross gaming revenues (Foxwoods and Mohegan Sun) have had only 3 growth months.  On an absolute level, CT GGR in February hit its lowest point since February 1998.
  • Since 2009, the northeast area has seen the expansion of the New York and Pennsylvania markets (Genting Resorts World New York, Sands Bethlehem, Rivers Casino, Sugarhouse, and Valley Forge), which certainly have hurt Connecticut’s gaming business.  But those new ‘growth’ markets have also slowed.  In February, NY gaming revenues posted its 1st YoY decline since September 2008, while PA gaming has only expanded by 2% in the last 12 months.
  • CT joins virtually all other mature, domestic casino markets in struggling to post growth
  • The macro, higher gas prices, and smaller paychecks aren’t the only explanation as the demographics look awful for domestic gaming.  The young generation is not gambling and the core gaming player base (+50 year old) is shrinking. 



Close to a 52 week high but here’s a compelling case for significant multiple expansion.



Why are we still positive on MPEL after the stock has reached an all-time high?  After all, we could cut bait after first recommending the stock at $4 per share back in the summer of 2010, clap ourselves on the back, and take a victory lap.  We understand that with the volatility in this group and especially MPEL, a couple of weeks of “sluggish” GGR growth could haircut the stock considerably.  But we’ll take the lumps over the near-term because we firmly believe that this stock is ripe for some serious multiple expansion and on potentially higher numbers.


The long-term (Tail in Hedgeye speak) and intermediate term (Trend) thesis can be summed up quite succinctly.  After a 2 ½ year period of consistent upward earnings revisions, outperformance in the best performing casino market in the world, three major growth drivers including highly profitable same- store revenue growth, and a $12 billion market cap, MPEL is now a real company deserving of a real multiple.  Over the near-term, we’re projecting another beat for Q1 2013 – despite lower than normal hold – and for FY 2013.


Shockingly, higher EBITDA drove most of the quintupling of the stock in 2 ½ years.  That’s how good management has performed (or how bad they were performing 3 years ago).  On a forward basis, despite the run, MPEL only trades at 8x 2014 EV/EBITDA after excluding Macau Studio City construction costs.  Back at $4 in 2010, the multiple was 7x.  The other US listed Macau operators currently trade between 9x and 14x.  Remember that operators in Macau pay no income tax on casino profits, so an 8x multiple seems utterly ridiculous to us.




We don’t think MPEL is yet considered an investable stock by most investors.  A glance at the top twenty shareholders indicates very few institutional long only investors, relative to a WYNN or LVS.  We think more long only investors are inevitable – it’s happening already, trust us – which will push the multiple higher, in our opinion.  What’s the right multiple?  We think a 11-12x multiple is sufficient for now, which implies a $30 stock with upside from there as investors begin to look forward to the opening of Macau Studio City.


In summary, here is why we think MPEL deserves a higher multiple:

  • Near-term: Macau booming again and MPEL maintaining/gaining share.  Q1 and 2013 estimates – and thus implied 2014 – need to go higher.
  • High ROI unit growth: Macau Studio City should open by 2015.  With one of the best locations in Cotai, the fastest growing region in Macau, a 20-30% ROI is not unreasonable.  Moreover, MPEL has structured a favorable investment/management contract in the Philippines with the Belle Casino.
  • Huge cash flow and cash balance:  Prohibitive covenants gone, net debt of roughly zero, and free cash flow (before project capex) well over $1 billion.  In other words, Macau Studio City will be funded entirely out of free cash.
  • Dare I say a proven management team?  I’m not sure it can be denied any more following the turnaround they have engineered.
  • Continued evolution of shareholder base toward more long only investors

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