prev

PM: Battling The Dollar

Philip Morris International (PM) reported weak first quarter earnings for 2013. One of the major headwinds the company is up against is a stronger US dollar. In the chart below, we've highlighted periods of dollar strength and weakness and how it is inversely correlated with strength and weakness in the share price of PM. When the dollar is weak, PM's share price tends to rise and vice versa. The outlook for Philip Morris is not a positive one on our end and we believe the company will have a rough time meeting earnings per share (EPS) estimates going forward.

 

PM: Battling The Dollar - PM dollar


Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Najib Warns Anwar Malaysia Election Win Spells Disaster (via Bloomberg)

 

Facing Arrest, Musharraf Flees Courtroom in Pakistan (via New York Times)

 

Josh Steiner (Financials):

 

Rising Bank Profits Tempt a Push for Tougher Rules (via NYT Dealbook)

 

Fed’s Rosengren: Broker-Dealers Are Potential Threat to Stability (via WSJ MoneyBeat)

 

Hedgie Playing Hooky (via NY Post)

 

Kevin Kaiser (Energy):

 

CLB Q1 2013: DEEPWATER DRIVES MOST PROFITABLE QUARTER EVER (via Corelab)

 

Matthew Hedrick (Europe):

 

Senate Blocks Drive for Gun Control (via New York Times)

 

Brian McGough (Retail):

 

Apparel Makers Face Profit Squeeze as Prices Drop and Labor Costs Rise (via Sourcing Journal Online)

 

Howard Penney (Restaurants):

 

Traders Eat Up Restaurant Stocks on Growth Bet: EcoPulse (via Bloomberg)

 

 



 




PM – Currency can be a Bear

PM is on the tape with Q1 2013 EPS of $1.29, a shortfall of $0.05 versus consensus – however, currency was a $0.07 headwind in the quarter.  Currency is now forecasted to be a $0.19 headwind for the year (versus $0.06 prior) resulting in a $0.13 downward adjustment to EPS at both the top and bottom end (now $5.55 to $5.65).  Underlying guidance remains unchanged.



PM posted a volume decline of 6.5% (against the toughest comparison of the year, +5.4%).  Volume was weaker than consensus in multiple regions – European Union (-10.1% reported versus -6.7%), Asia (-10.4% reported versus -5.4%) and Latin America and Canada (-7.5% reported versus -1.0%).  However, again, Q1 was the most difficult comparison of the year in each of those regions.  Despite the volume shortfall versus consensus, reported revenue (net of excise taxes) of $7.584 billion came in slightly better than consensus, against a very difficult comparison.  Constant currency organic revenue growth was +3.2% despite the volume print, indicating to us that the pricing architecture for 2013 is in place and intact.



Operating income declined year over year (-0.6%), currency neutral EBIT +2.9%, so the company saw negative operating leverage for the first quarter since Q4 2011 – not surprising given the volume print in the quarter.

 

What we liked:

  • Preservation of underlying operating guidance
  • Solid pricing architecture in place for 2013
  • Respectable constant currency organic revenue growth of +3.2% against a difficult comparison
  • Comparisons ease substantially through the balance of 2013

What we didn’t like:

  • EPS miss and reduction of guidance (even if for no reason other than currency)
  • Volume weakness across multiple regions versus consensus (and even versus our more bearish estimates)
  • Lack of operating leverage (first time since Q4 2011)
  • Awful FCF generation in the quarter (-32.8%, and -17.1% adjusting for currency)

It’s tough for us to be positive on a stock when EPS estimates are heading lower (regardless of the reason) and when we couple that with a firm view of continued strength in the U.S. dollar, we have a hard time getting behind PM at this point despite what we readily acknowledge as strength in the underlying business model.

 

Call with questions,

 

Rob

 

PM – Currency can be a Bear - rr. 1

 

PM – Currency can be a Bear - rr. 2

 

 

Robert Campagnino

 

Managing Director

 

HEDGEYE RISK MANAGEMENT, LLC

 

E:

 

P:

 

 

 

Matt Hedrick

Senior Analyst 

 

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY

Takeaway: So far, this year is following in the footsteps of the prior three years on both a seasonally and non-seasonally adjusted basis.

Back on Track

We realize there are a lot of charts in this note, so in the interest of everyone's time we'll direct you to the two that we consider most important: the first and second.

 

The first chart shows the illusion. You can see from the bottom right series that seasonally-adjusted initial jobless claims are beginning their steady rise that will continue through August, just as they have in the prior three years. In fact, the slope of the line is steeper than what we've seen in the last three years - a negative sign. As a reminder, we think this dynamic is one of the primary contributors to the recurrent pattern we've seen in the XLF over the last three years. For more on that see our note yesterday "Beware the Ides of April?".

 

The second chart shows the reality. The reality is that non-seasonally adjusted claims are 4.0% lower than last year, which is right in-line with the trend line of improvement we've been seeing since the recovery began in early-2009. You can see that the slope of the 2013 YTD change is nearly identical with what we saw in 2012.

 

The takeaway from this is that the market still focuses on the first chart when it should be focusing on the second chart. While we recommend battening down the hatches for the immediate term, we would view weakness as a buying opportunity so long as the second chart remains on track. 

 

The Numbers

Prior to revision, initial jobless claims rose 6k to 352k from 346k WoW, as the prior week's number was revised up by 2k to 348k.

 

The headline (unrevised) number shows claims were higher by 4k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2.75k WoW to 361.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.0% lower YoY, which is roughly flat with the previous week's YoY change of -4.4%.

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 1

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 2

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 3

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 4

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 5

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 6

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 7

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 8

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 9

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 10

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 11

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 12

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 13

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 14

 

Yield Spreads

The 2-10 spread fell -10.6 basis points WoW to 147 bps. 2Q13TD, the 2-10 spread is averaging 153 bps, which is lower by -14 bps relative to 1Q13.

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 15

 

INITIAL CLAIMS: A GROWING DIVERGENCE BETWEEN PERCEPTION & REALITY - 16

 

 

Joshua Steiner, CFA


CAT: Heavy Exposure

Takeaway: Looking for slower growth or small declines in resources-related capex is inconsistent with history and logic. That may be bad news for CAT.

This note was originally published April 17, 2013 at 15:00 in Industrials

CAT: Why Consensus Is Coming Our Way

 

 

Resource-related Capital Investment Cycle:  When commodities rise sharply, resources-related capital spending ramps quickly to bring on additional supply.  A subsequent flattening or decline in commodity prices can bring resource-related capital spending back to trend levels – typically not far above maintenance levels, since the industries are generally mature.  Currently, resources-related capital spending is very high following 100+ year outlier gains in many commodity prices, like iron ore, copper and gold.

 

CAT: Heavy Exposure - 1qq

 

 

Expect Very Large Declines:  Some are looking for slower growth or small declines in resources-related capital spending.  That expectation is inconsistent with history and logic.  As the chart above shows, resources-related capital spending declined 80% over a five year period following peak orders in the late 1970s.  CAT posted very large losses in the early/mid 1980s, in part as a result of this readjustment.  As the chart below shows, a return to slow output growth levels of capital spending (approximated by depreciation and amortization) would bring a ~70% decline in capital spending at large miners.  Mining is not a growth industry.  In the long-run, capital spending should be expected to approximate DD&A.

 

CAT: Heavy Exposure - 2qq

 

 

Resources Capital Equipment Is Where CAT Makes Money:  Approximately three-quarters of CAT’s 2012 operating income was derived from Resource Industries and Power Systems.  Both of those divisions are heavily exposed to resource-related capital spending.  Resource Industries counts sales of mining equipment to coal, copper, iron ore and gold mines as its largest end-markets.  Power Systems sells locomotives to mines and railroads, power generation systems to mines/resource companies and power plants, turbines to gas compression and energy extraction sites, and other end markets.  Picturing the impact of a 50% decline in resources-related capital spending (not at all unlikely in our view) on the operating income of CAT does not require much imagination.

 

CAT: Heavy Exposure - 3qq

 

 

Value Traps:  CAT, Komatsu and other diversified resource-equipment suppliers are likely to look cheap on multiples for years to come.  They will go down and investors will buy them thinking they are values, only to find that results weaken yet further.  Beware the low PE in cyclicals – it is frequently a sign of a cycle peak or decline. 

 

 


Taking A Beating

Client Talking Points

Whipping The KOSPI

South Korea's KOSPI index is down another -1.2% overnight, which brings the index to another lower-low for the year and is -5% year-to-date. Ouch. The country has plenty of external factors going against it, ranging from Japan's debauching the Yen to Kim Jong Un crying war up north. Tech in the US is taking a beating - just look at AAPL yesterday. All this spells trouble for Korea.

Doctor Copper

The Great Commodity Bubble brought on by Federal Reserve Chairman Ben Bernanke has already taken out gold, so who's next? Doctor Copper, step right up. While gold struggles to recover this morning, copper is taking another beating, down -1.1% to $3.08/lb. This comes on the heels of a fresh six month low, so don't forget: bad can get worse.

Asset Allocation

CASH 34% US EQUITIES 20%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

IGT

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

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.

Three for the Road

TWEET OF THE DAY

"If VZ activated 4 million iPhones, that's 25% YoY growth." -@Commodity_Bull

QUOTE OF THE DAY

"It is dangerous to be sincere unless you are also stupid." -George Bernard Shaw

STAT OF THE DAY

U.S. weekly jobless claims edge up by 4000 to 352,000.


investing ideas

Risk Managed Long Term Investing for Pros

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.

next