Today we bought the S&P 500 (SPY) at $153.96 at 10:19 AM EDT in our Real-Time Alerts. S&P 500 is holding the low-end of our risk range as the VIX signals immediate-term TRADE overbought. We remain bullish on US Consumption stocks.
Data from the BLS pertaining to March employment trends suggest that employment growth is becoming, on the margin, less of a tailwind for restaurant sales.
According to Christian Drake, Senior Analyst on the macro team at Hedgeye, today’s data “confirmed the sequential deceleration observed in both the ADP and NSA Jobless claims numbers earlier in the week. On balance, the labor market trends for March have followed the broader trends in the domestic macro data (ISM, PMI, Auto’s) where strong January and February numbers have been chased by been sequentially weaker March reports.”
For the restaurant industry, this sequential deceleration is a negative, on the margin. Casual dining same-restaurant sales have been decelerating and this is being confirmed by a deceleration in hiring in the industry.
Employment Growth by Age
Employment growth by age data implied a relative strength in QSR versus casual dining, on the back of positive growth in the employment of younger age cohorts, albeit sequentially slower versus January and February. The chart below illustrates continuing (slight) employment growth in the 20-24 and 25-34 YOA cohorts while employment growth in the 35-44 YOA and 45-54 YOA cohorts declined in March.
Restaurant Industry Employment
If we assume that hiring within the restaurant industry serves as a proxy for operator confidence, it seems that QSR operators have a much different outlook than casual dining operators.
The Leisure & Hospitality employment growth decelerated in March, suggesting that overall trends for the restaurant industry may be turning negative. The QSR industry is still hiring at a much faster rate than the full-service industry but February (the more narrow data is on a lag) was the first month since August 2012 that the spread between the respective employment growth rates declined month-over-month.
This note was originally published April 05, 2013 at 16:01 in Gaming
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Takeaway: Bears seem lost in quarterly minutia and badly structured regressions.
FedEx: Countering Negative Narratives, Bears Lost in the Weeds
Below, we respond to some of the criticism that FDX has received from the traditional sell-side following FY3Q earnings. Broadly, we are suspicious of anyone who thinks it is useful to write a report detailing how their model differed from actual results. More specifically, we think the negative reports have gotten the timing and magnitude of the FDX opportunity wrong. We think they have gotten bogged down in quarterly detail and meaningless regressions. Below, we respond to these details and try to place them in the context of the broader FedEx value opportunity. If we have missed key points of the bear thesis, feel free to let us know.
Bears Missing the Broader Opportunity
Stepping back, the value opportunity in shares of FedEx is clear, at least to us. The market ascribes little value to any FDX business other than FedEx Ground, in our view. This is odd, for example, because the market does not appear to ignore the value in UPS’s express revenue or its competitively disadvantaged ground revenue. While there are probably better ways to show it, FDX currently trades at an EV/Sales of 0.67 while UPS trades at 1.56. In our view, the primary differences are the multi-decade low margin at FedEx Express and a persistent rich valuation given to shares of UPS since its IPO (and, no, not leases).
There is no structural reason that the FedEx Express division cannot match competitor’s margins over the next few years, in our view. Capital spending and management focus are now being directed toward that end, and faulting management for not doing it sooner is pointless. The FedEx Express division has ~$27 billion in revenue and produces little income relative to its potential. It flies expensive, outdated aircraft and maintains excess capacity, both of which are fixable. The division could also get a margin boost, we think, from better balancing its network through a TNT acquisition. Deutsche Post was able to improve its express margins from much, much worse levels in a few years. If Deutsche Post can do it, anyone can, right? Importantly, the express industry is highly consolidated and is, excepting an unlikely-to-reoccur >300% increase in fuel prices in the last decade, structured for very solid returns.
FedEx Ground enjoys a substantial competitive advantage from its non-unionized labor force, among other factors, which has allowed it to steadily take market share. There is little reason to expect that to stop, in our view, which is to say we expect FedEx Ground to eventually take UPS’s spot as the largest ground delivery service in the U.S. (Has a heavily unionized company facing non-union competition in the U.S. ever succeeded?) Given the e-commerce driven prospects for package volume growth, FedEx Ground is likely to remain a valuable franchise.
Too much data can be toxic to clear thinking. While we do not precisely subscribe to the cocktail napkin requirement, a great value opportunity can rapidly get lost amidst 20 basis points here and 15 basis points there. Business and economic results are noisy, so we look for very large value opportunities relative to the uncertainty in our estimates. FedEx Express margins are running at over 700 basis points behind UPS, by our estimates. That is quite large. Our bull case valuation for FDX tops out around $180/share, with a conservative base case valuation in the $130-$150 range. Most importantly, our bear case shows little downside from current levels – an asymmetry even bearish reports agree with. We think that is the signal amidst all of the noise.
Bearish Minutia: FedEx Ground
41% of the KOSPI index, which is South Korea's major stock index, is comprised of tech/industrial companies that compete head-to-head with Japanese manufacturers. As a result of the Bank of Japan's recent announcement that it would be injecting $1.4 trillion in stimulus into the economy, the KOSPI has been hammered, dropping -1.6% overnight into today after breaking its TREND line of support at 1975 yesterday; it's down -3.5% year-to-date. The burning of the Japanese Yen by the Bank of Japan certainly doesn't help Korea's situation in any way shape or form.
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