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Morning Reads From Our Sector Heads

Keith McCullough (CEO):


Twitter: Great Investor Tool That Won’t Make You Money (via Yahoo! Finance)


Rob Campagnino (Consumer Staples):


Herbalife Unlikely to Get Auditor Before Investor Meeting (via Bloomberg)


Is Pepsi better off without Pepsi? (via Quartz)


Matthew Hedrick (Europe):


Financial transaction tax contravenes G20 agreements, warn global markets bodies (via The Telegraph)


Kevin Kaiser (Energy):


Baker Hughes Announces First Quarter Results (via Baker Hughes)


Schlumberger Announces First-Quarter 2013 Results (via Schlumberger)


Howard Penney (Restaurants):


The McDonald’s Dollar Menu is Popular, But Can it Be Profitable? (via WSJ)




KMB - Tough Quarter to Poke Holes In

KMB is on the tape with Q1 EPS of $1.48, well ahead of consensus of $1.33.  The company’s better than expected result was almost entirely flowed through to full year guidance that now stands at $5.60 to $5.75 (+$0.10 at the high and low end versus prior).  The first quarter represented the toughest revenue comp on both a reported basis (+4.2%) and constant currency (+6.0%) as well as a difficult gross margin comparison (+246 bps).   Reported revenue increased +1.5% while constant currency organic revenue increased 3.0% as gross margins improved 146 bps.

What we liked:

  • Big beat and flow through on full-year guidance
  • Solid performance against difficult comparisons on revenue and gross margins
  • Superb operating leverage with +15.6% EBIT growth on 1.5% sales growth
  • Company overcame $35 million of commodity inflation in the quarter
  • Well-managed balance sheet as accounts receivables (+1.7% year over year) and inventories (+0.4%) increased in line with sales growth

What we didn’t like:

  • FCF growth (+2.1%) lagged EBIT growth (+15.6%)largely due to an increase in capital spending
  • $115 million in year over year EBIT growth continues to be primarily driven by cost savings ($85 million in the quarter)
  • Substantial portion of year over year EBIT growth driven by delta in strategic marketing spending - +$45 million in Q1 2012 and “down slightly” in Q1 2013
  • Valuation, which admittedly isn’t a catalyst and certainly matters less when estimates are going higher

Comparisons ease through the balance of 2013 on the top line as gross margin comps remain difficult for the next two quarters.  However, the company decreased strategic marketing sequentially through 2012 so the significant benefit the company saw by decreasing marketing in Q1 2013 will become less impactful as 2013 progresses.    However, the decline in the commodity complex should provide some margin benefit as we move through 2013, which is tough to fight.  In addition, we recognize that we are fighting sentiment and money flows, but we also recognize that valuation matters at some point and we will keep KMB on our least preferred list.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


CMG reported EPS of $2.35 ($2.45 including tax refund) up 19% on a 13.4% increase in revenues and 1% in same store sales. The big upside to estimates ($0.20) came from G&A savings (lapping 1x costs & lower stock comp expenses) and $0.10 in tax credits.  


Sales Trends


The comp was driven by traffic of +0.7% and a 0.3% increase in average check (mix was negative due to fewer drink sales).  Same-store sales were impacted by two fewer trading days, compared to last year, as the restaurants were closed on Easter and due to leap day in 2012. As a result the underlying same-store sales were closer to 3%.  On a two-year basis, same-store sales declined from 7.5% in 4Q12 to 6.9% in 1Q13.  Management maintained the flat to low-single digit same store sales guidance for 2013.  The forward looking commentary on sales trends in April did not provide much insight into overall industry trends.





Margin Trends


Overall food costs came in slightly better than expected.  Food costs were 33% in 1Q13, up 80 bps YoY, but sequentially food costs were down 50bps from 4Q12 due to lower avocado and dairy costs.  CMG was surprisingly able to leverage some labor on a 1% same store sales.  Labor costs were 23.6%, down 10bps YoY.  The leverage was driven by higher menu prices and some labor efficiencies.  Overall, restaurant-level margins declined 100bps YoY.



Sales Drivers


Looking ahead, CMG plans to continue rolling out catering (should help mix) as well as spend on enhanced traffic-driving

and brand building marketing initiatives.  The street is modeling to 4% for 2013, which is above management guidance and an acceleration from the current 3% implied run rate. 





Overall, CMG’s fundamentals remain unchanged.  Restaurant-level margins will likely trend lower on low single-digit same-store sales.   Catering will not be a big driver of same-store sales in 2013 and we see the company reluctance to take addition price is telling and they are concerned about their ability to take price.  The $700 million in cash and debt few balance sheet is a potential weapon that would make me nervous if I was short this stock.   


The company’s growth rate, margin structure, returns profile and cash position are all supportive of the 30x P/E multiple.   We would like to see the stock come in from the current levels to get long.



Howard Penney

Managing Director


Rory Green

Senior Analyst

Special FX

Client Talking Points

Currency Wars

Big moves on the currency front this morning. With Japan's finance minister and central bankers saying that their plan to debauch the Yen is unopposed and A-OK, more people know that further pain in the Yen is coming. It dropped -1% this morning overnight versus the US dollar to 99.12 - a new low. A lower Yen isn't just a mess for Japan, it's hurting Korea too, as evidenced by recent declines in the KOSPI index. Meanwhile, in China, the Yuan is floating high and dry, making a big move to the upside to 6.17 versus the dollar - a 19 year high! This is good for the Chinese consumer. Like the American consumer, they too can appreciate lower prices at the pump and grocery store. 

Playing Ball

The US stock market has been all over the place this week and is constantly changing. We don't sit still when the market makes moves; we move along with it and adjust our risk levels accordingly. We remain bearish on commodities and bullish on consumption, which helps drive global growth. Trust us when we say that no American consumer is out there complaining about lower gas prices at the pump and cheaper food at the store. As far as the almighty S&P 500 goes, our immediate-term TRADE risk range is 1539-1570. We'll be keeping an eye on it today and if our process indicates we should be buying the SPX, then we'll buy it. For now, we're comfortable sitting on the sidelines waiting for our turn to trade.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.

Three for the Road


"It's Japanese POMO time: BOJ OFFERS TO BUY 300B YEN IN DEBT LONGER THAN 10 YEARS" -@zerohedge


"Well-timed silence hath more eloquence than speech." -Martin Fraquhar Tupper 


IBM reported a profit of $3.03 billion, or $2.70 a share, down from $3.07 billion, or $2.61 a share, a year earlier, missing expectations.

In #StrongDollar, We Trust

This note was originally published at 8am on April 05, 2013 for Hedgeye subscribers.

“Kennedy Pledges He Will Maintain Value of Dollar”

-New York Times, 1960


As William Silber points out in Volcker – The Triumph of Persistence, that’s what JFK was rolling with 2 weeks before the 1960 US Presidential Election. It was a pro-growth campaign about American progress. A #StrongDollar has always symbolized that.


After LBJ, Nixon, and Carter spent 15 years devaluing the Dollar, this progressive conservative American mantra lost its place in the vernacular of what Hayek called the Political Economy. Why? Currencies and the central bankers that manipulate them get politicized.


After watching Bernanke devalue the Dollar as aggressively as any Fed Chairman since Arthur Burns (1970s), now you are watching the Japanese take a page out of his un-American playbook. That’s not a partisan comment either. Long-time Democrats will recall Kennedy’s thoughts about the US Dollar and monetary policy were crystal clear:


Price stability belongs on the social contract. We give the government the right to print money because we trust our elected officials not abuse that right, not to debase the currency by inflating… Failure to maintain those promises undermines trust in America. And trust is everything.” (Volcker, pg 53)


The world no longer trusts the Japanese.


Back to the Global Macro Grind


But do Americans trust President Obama and Ben Bernanke? Does Wall Street? Do we trust that if the US unemployment rate continues to surprise on the downside in 2013 that these politicians will get out of our hard earned currency’s way?


Today is a big day on that score. While it’s tough to get comfortable with a number that the US government effectively makes up, we’re confident that the market is confident that Bernanke is somehow confident betting the entire bond bubble farm on one made-up number.


To be balanced, if there’s one thing we are overly confident in, it’s that Bernanke’s growth forecasts will continue to be wrong. We think both US employment and consumption growth surprises to the upside during #StrongDollar periods like the one you are seeing now.


Does the market like this? Which market? First, let’s look at what USD Correlation Risk is telling us on a 1-month duration: 

  1. US Dollar vs SP500 = +0.84
  2. US Dollar vs Brent Oil = -0.71 

Hooowah! Al Pacino couldn’t have said it better. Like taking a flyer in a Ferrari for free, American Consumers absolutely love #StrongDollar, Down Oil. Basic Materials and Energy stocks, not so much.


Commodity-linked country stocks markets don’t like it either:

  1. Russia – RTSI down again this morning and down -13.3% since January 28th 2013
  2. Brazil – Bovespa is a big commodity index, and continues to be just nasty YTD (-10.3%) 

For Commodities overall, the last 2 months have been flat out nasty:

  1. Rubber -21.1%
  2. Silver -15.2%
  3. Corn -14.2%
  4. Copper -10.9%
  5. Platinum -10.7%
  6. Wheat -9.0%
  7. Brent Oil -7.9%
  8. Soybeans -7.8%
  9. Lean Hogs -7.4%
  10. Gold -7.4%

So, I guess if you are really long commodities, being long Gold right now would be your outperformer!


Long-time market history fans know that Gold has been annihilated, multiple times, during #StrongDollar periods. Until Nixon and Connolly (his politically compromised Treasury Secretary – the guy who rode in the car with JFK during the assassination) figured out how to Burn The Buck for political victory (1971), US Dollar strength (particularly in the 2nd half of 1969) crushed the Gold bugs.


But this is much larger than #AngryBugs at this point. This is really the first opportunity since Q1 of 2009 where #StrongDollar Commodity Deflation has provided a real-time Tax Cut to American Consumers of food and oil.


The Fed’s Bill Dudley would disagree with me on this, but I don’t think you can eat platinum or rubber. That said, producers who need such things to make what we consume will pay less for their inputs, if pervasive Dollar strength continues.


So, again – I call on the great market minds in Washington D.C. to do what’s right and:

  1. End the most dovish Fed policy in US history
  2. Continue with the shift toward conservatism in fiscal policy
  3. Spread the love about #StrongDollar’s benefits (Obama, Yes You Can!)

Especially at the pump and at our dinner tables, we can trust that a lot more than we’ve trusted the #PoliticalClass under any of the Nixon, Carter, Bush II, or Obama regimes. “And trust is everything.”


Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1548-1588, $105.68-108.93, $82.52-83.41, 94.04-96.35, 1.76-1.92%, 12.31-14.61, and 1549-1574, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


In #StrongDollar, We Trust - Chart of the Day


In #StrongDollar, We Trust - Virtual Portfolio


The Macau Metro Monitor, April 19, 2013




Marina Bay Sands' casino license has been renewed by another three years by the Casino Regulatory Authority.  The Authority said that it had imposed additional requirements on MBS during this new licence period. While no details were given on what these additional requirements were, the purpose of the requirements was to " institute, strengthen and maintain a rigorous compliance framework that is in line with Singapore's laws and regulations".  MBS' new licence will come into effect from April 26. A CRA spokesman added that MBS' compliance record was one of many factors considered when assessing the licence application.


MPEL is expecting to be given an extension by the government on the completion deadline for the entire City of Dreams project on Cotai.  Under the current land concession contract, MPEL is still authorized to build an additional four-star apartment hotel at the site. But the company is looking to build one other five-star hotel tower instead.


A deal with the government was struck in March, but it has yet to be published in the Official Gazette. Depending on when gazetting occurs, the deal will give MPEL a new completion deadline, extending it by as much as four years from the original deadline of August 2013.



Gongbei customs post supervisor Lao Ngai Leong said that it is unlikely that the Gongbei border crossing will be opened for two extra hours during the upcoming May 1 Golden Week period, in which many mainland workers get one week off.


During the Ching Ming festival holiday period, from April 4 to 6, the Gongbei crossing opened at 6:00am instead of 7:00am, and closed at 1:00am instead of midnight.  Lao said that for the Gongbei crossing to be open for longer periods during all national holidays, the Zhuhai customs first had to overcome its lack of staff.

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