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BBBY: Finally Looking Interesting

Takeaway: Risks are passing, and consensus estimates look low to us. This is when being cheap actually starts to matter for a high return business.

Conclusion: There's been no shortage of reasons for us to be negative on BBBY, and it's underperformed accordingly. But the risks are passing, and there are emerging factors that cause us to model EPS/EBITDA above consensus. This is when being cheap actually starts to matter. If our model is right, this is a $90 stock in 12-18 months.

 

 

DETAILS 

We’ve been bearish on BBBY for much of the past year, as we couldn’t get over a) a slowing core business, partially due to increased pressure from on-line competitors, b) acquiring businesses (Cost Plus, Linen Holdings) to mask weak organic growth, c) integration risk associated with those businesses, d) BBBY’s office relocation in 2H, and the associated headcount/execution risk, and lastly e) stepped-up levels of capital investment to build-out new facilities, which we thought would erode returns.

 

Ultimately, BBBY was worth staying away from, as it disappointed in five of its past six quarters.  But things are changing on the margin. Specifically…

a)      While still anemic, the rate of growth in the core business has stabilized and is picking up. Comps in the latest quarter were only 2.5%, but they accelerated sequentially to 4.7% (from 2.9%) on a 2-year run rate.

 

b)      Housing prices up 11% year-to-date. That’s not exactly a newsflash to anyone keeping up with the market, but it definitely flies in the face of the ‘bearish consumer spending’ call that is fueled by the payroll tax hike and sequestration. The degree to which this will help discretionary spending is debatable, but historically, every 1% change in house prices resulted in 6-8bp increased consumer spending – typically on a one-year lag.  The point is that housing alone could offset the payroll tax hike (42-64bp hit to GDP). Tack on commodity deflation – which we think is in the cards – and it could all add up to be very bullish for the consumer, and for BBBY.

 

c)       The two acquisitions and the headquarters transition have passed through the riskiest periods, and the company emerged reasonably unscathed. It is now at a point where it can grow square footage at CPWM, and optimize SG&A and working capital.

 

d)      BBBY is past the halfway mark in a mini capex bubble to fuel non-store-related corporate projects. We should see a significant slowdown in the rate of capex in 2014.

 

e)      Inventories look solid, as the company had the best SIGMA move we’ve seen out of any company year-to-date. These moves are usually coincidental with some iteration of an upward stock price move. But they are just as often a setup for a greater move in quarters to come.

 

BBBY: Finally Looking Interesting - bbbysigma

 

The stock obviously realizes this to an extent, as it is up 20% year-to-date versus the S&P Retail Index at +16%. Despite the move, it’s underperformed the retail index by a whopping 29% over the past 12 months.

 

The point here is that BBBY remains an extremely high return company with a 44% RNOA, and it is trading at 13x earnings and 7x EBITDA. ‘Cheap without a catalyst’ usually means nothing to us, but we think that while the Street ended up with estimates at the higher end of guidance, they’ll end up being on the low end of what BBBY will ultimately print. If our model is right, then we’re looking at $2.2bn in EBITDA in 2014 and $6.12 in EPS. Every EBITDA multiple w BBBY equals $10 in the stock price.   A 20% year-to-date might sound rich. But 9x $2.2bn in EBITDA is a $90 stock. That’s another 36% upside from here.

 

BBBY: Finally Looking Interesting - bbby2


CHART DU JOUR: LVS WIDENS EBITDA SHARE LEAD IN MACAU

  • Macau gaming operators’ property EBITDA grew 9% QoQ to $1.9 billion. 
  • With a high VIP hold of 3.1% in Q4 2012, Sands China increased its market-leading property EBITDA share to 32.5% from 27.8% in Q3 2012.  It is the highest level since Q2 2010.   Remember that Sands Cotai Central opened on April 11, 2012.
  • MGM and MPEL rose slightly while Galaxy, SJM, and Wynn all lost share.  Despite VIP hold near 3%, Wynn’s share broke below 15%, a steep drop from its 25% peak in Q4 2010.

CHART DU JOUR: LVS WIDENS EBITDA SHARE LEAD IN MACAU - nn


Q1 2013 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY)

Volume weaker while number of transactions picked up slightly in Q1

 

 

Upper upscale (UUP) & Luxury Transaction Trends for Q1 2013

  • Q1 2013 worldwide hotel transaction volume (UUP & Luxury brands) was $2.0 billion, down from Q4 2012's $3.2 billion but higher than Q1 2012's $1.1 billion. 
  • The number of US luxury/UUP hotel transactions was 7 in Q1 2013 compared with 9 in Q4 2012 and 7 in Q1 2012. 
  • The number of non-US luxury/UUP hotel transactions was 7 in Q1 2013 compared with 3 in Q4 2012 and 4 in Q1 2012.
  • REITs were very active and there was a spike in portfolio deals.
  • Relative to a two-year trailing average, US average price per key (APPK) in the UUP segment gained 7% at $280k.  Non-US APPK in the UUP segment fell by 10% to $287k; however, IHG received a solid >$1MM APPK for its sale of the InterContinental London Park Lane. 

Delinquency rate

  • According to Fitch, the hotel delinquency rate in March was 7.71%, lower than the 8.87% seen in December.  The delinquency rate remains well below the relative high of 14% seen in Q3 2011.

 

Q1 2013 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY) - h2

 

Q1 2013 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY) - 1

 

Q1 2013 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY) - 2


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%

CASUAL DINING COOLING?

Knapp released his casual dining same-restaurant sales estimates for March comparable sales and traffic growth.  The Knapp data do not jive with Black Box Intelligence’s numbers, likely due to the many discrepancies between the indices, but suggest a sequential improvement in March from February as all five weeks that impacted last month’s data had positive comparable sales growth. That said, some noise in the data, as Easter fell on March 31st 2013 versus April 2nd 2012 and spring breaks shifted year-over-year, makes it difficult to discern exact magnitudes of the sequential moves in comparable sales and traffic growth.

 

Black Box Intelligence reported that March 2013 same-restaurant sales grew +0.5% while comparable traffic trends declined -2%.  This results differed significantly from the Knapp results, detailed below.

 

 

Knapp Sequential Moves

 

March estimated Knapp Track same-restaurant sales growth came in at +2.2%. If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of +200 bps. This would be the greatest acceleration in two-year average trends since January 2010 but follows the -240 bps deceleration seen in February, which was partly caused by the impact of weather.

 

March estimated Knapp Track same-restaurant traffic growth came in at +0.7%.  If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of +180 bps.  This would be the greatest acceleration in two-year average traffic trends since January 2010 but follows a weak February deceleration of -250 bps.

 

 

Casual Dining Stocks Continue to Outperform...In Fewer Numbers

 

Casual dining stocks continued higher in March.  We have found it interesting that the number of casual dining stocks outperforming the S&P 500 has dropped off a cliff in the last week.  While this could be a normal correction after a period of strong performance, the general trend in casual dining same-restaurant sales growth has been negative and would suggest that casual dining stocks – on average – could see a longer period of underperformance if the general malaise in casual dining sales trends continues.

 

CASUAL DINING COOLING? - casual dining stocks spx performance

 

CASUAL DINING COOLING? - casual dining index vs knapp

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 


BANK EARNINGS PREVIEW: LOW EXPECTATIONS

Takeaway: Top line pressure is likely to be center stage this earnings season, coming from multiple fronts. How much pressure can the industry offset?

This note was originally published April 11, 2013 at 11:15 in Financials

 

Overall, we expect this earnings season will be lackluster for the banking sector. Outside of ongoing credit quality improvements and a recovery in housing, there will be little good news for management to discuss. Top line pressures will become more notable, while credit tailwinds, vis-a-vis provision expense/reserve release, will be simultaneously fading. Offsets to these two pressure points will be expense reduction initiatives and falling sharecount from active repurchase programs. Another offset may be relatively upbeat guidance with respect to a reduction in future costs, both legal and operational, relating to legacy mortgage troubles. We think 1Q results are likely to set expectations fairly low for the duration of 2013.

  • Loan Growth - Status Quo - Overall, loans grew by 0.8% QoQ in 1Q13, which was flat with 0.8% QoQ growth in 4Q12. 
  • Margin Headwinds Ongoing - 1Q13  saw some relief in the average yield spread QoQ, but banks have largely run out of room on the funding side and are now facing unmitigated earning asset yield pressure. CBSH is a good example today with NIMs down 28 bps QoQ vs. expectations for down 11 bps. 
  • Credit - Fading Tailwinds - Credit is still improving, but provision expenses have largely flattened out. The odd silver lining may be that with little to no loan growth there's no need to grow provision expense.

 

1Q13 Revenue: Expect To Be Disappointed

* Loan Growth - Total loan growth appears to have grown at 0.8% QoQ, which was roughly flat with growth in 4Q12, based on seasonally-adjusted H8 data. That said, The overall trend in loan growth remains lackluster. Loan growth through 1Q12 had been sequentially accelerating up to a peak of +1.6% QoQ, only to then decelerate in 2Q12 and 3Q12 and remain roughly flat since then. Overall, we don't see this as a notable source of strength for the sector.

 

* NIM - Net interest margin pressure will persist this quarter in spite of the sequentially improved yield spread. The sector's ability to further reduce funding costs continues to decelerate. Meanwhile, pressure on interest-earning asset yields persists. If Commerce Banc is any indication this morning, the sector is not conservative enough on NIMs. CBSH saw NIMs decline 28 bps QoQ vs expectations for 11 bps. Given the relatively modest expectations for NIM compression this quarter, roughly 5 bps Q/Q, we would expect to see more banks than not disappoint on this front. On the other hand, CBSH shares are down less than 2% this morning, 

 

* Non-Interest Income - Mortgage banking is the primary driver of Q/Q change here, and the news isn't great. Application volume in 1Q13 was down 6% QoQ, but primary/secondary spreads have compressed by ~20 bps Q/Q from 1.16% to 0.96%. Taken together, this implies sequential declines of roughly 21% in production revenue. There will be some offset to this from the servicing side as rates ended the quarter a bit higher than where they started. A small silver lining is that as of the latest data, spreads have modestly re-widened to 106 bps.

 

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BANK EARNINGS PREVIEW: LOW EXPECTATIONS - 15

BANK EARNINGS PREVIEW: LOW EXPECTATIONS - 16
 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 



Morning Reads From Our Sector Heads

Rob Campagnino (Consumer Staples):

 

Herbalife Ties to ‘Work From Home’ Promoters May Draw New Scrutiny (via NYT Dealbook)

 

Todd Jordan (GLL):

 

Singapore economy contracts in first quarter (via Channel NewsAsia)

 

Howard Penney (Restaurants):

 

McDonald's Tackles Repair of 'Broken' Service (via WSJ)

 

Brian McGough (Retail):

 

Sears Holdings Establishes New Business Unit Focused on Entertainment-Driven Fashion Brands (via Sourcing Journal Online)

 


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