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CCE Chugs Along and Walks Away From Germany

CCE reported Q1 2013 EPS this morning in which the company saw meaningful volume improvement in the quarter, yet we believe persistent economic weakness and a challenged consumer will remain headwinds in the coming quarters. The announcement to walk away from acquiring the German bottling business will equate to $1 billion in share repurchases in 2013; future expectations around how the company may position itself with a strong balance sheet (net debt/ebitda of 2.5-3x) may further stoke the stock. We remain neutral on the stock until there’s more clarity on the sustained improvement in the underlying business. That said, easy Q2 2013 revenue comps of -8.3% may make CCE attractive into the print.


We expect that the decision to walk away from Germany will disappoint some investors - there is certainly some percentage of the shareholder base that is special situation/merger oriented in its investing style.  However, while this deal moves into the rear view mirror, KO certainly isn't through re-imaging its global bottling network and CCE is very likely in those plans, perhaps even as a target at some point down the road.


What we liked:

  • EPS $0.39 vs consensus of $0.38
  • FY EPS growth 11%-12% versus prior guidance of ~10%
  • The decision to let the right to acquire the German bottling business from The Coca-Cola Company expire spells an increase in share repurchases of approximately $1 billion in 2013
  • The company moves further past aggressive excise tax measures, in France in particular

What we didn’t like:

  • Revenue came in below expectations at $1.85B vs consensus of $1.90B, or +0.5% Y/Y (Volume -1.5; Pricing +2%)
  • FY Net sales growth guidance was lowered to the low to mid-single-digit range v. prior guidance of mid-single-digit range


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Growth Accelerating: Home Sales

Both existing home sales and new home sales are showing positive trends in housing as one of the drivers of US growth. Existing inventory was largely unchanged in March at 1.93 million units but median home prices rose 11.8% on a year-over-year basis. That kind of growth hasn't been seen since November of 2005.


Growth Accelerating: Home Sales - GROWTHPART1


Organic demand is helping drive sales on the new home sales front. New home sales rose 18.5% year-over-year in March to 417,000 units. We believe that over time, new home sales could double based on current levels as household formation trends show increased demand combined with a jump in new housing starts.


Growth Accelerating: Home Sales - GROWTHPART2

Growth Accelerating: Mortgage Applications

Mortgage Purchase Applications hit another year-to-date high this week and have yet to slow down. Demand for home purchases rose 0.2% week-over-week and with the 15-year fixed-rate mortgage at an all-time low rate, housing continues to be one of the primary drivers of growth in America. It's clear that homebuyers are anxious to lock in rates while they remain low as mortgage demand ticks up.


Growth Accelerating: Mortgage Applications - MBA purchase


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U.S. #GrowthAcccelerating – Momentum Where it Matters

Takeaway: Housing and Labor Market Trends, core inputs to our view on domestic consumption, both continue to improve.

Belying the broader slowdown in the domestic macro data in March is the continued improvement in the principal Household Balance Sheet and Income Statement metrics we've been focused on relative to our view on consumption – specifically, Housing & Employment. 



Housing:   Home prices have continued along their path of parabolic acceleration while the prevailing trend of strong demand and tight supply continues to support our bullish expectations for ongoing Home Price Appreciation over the intermediate term.   


While Home price acceleration has been discrete, the market has shown some recent (apparent) disappointment with the volume of residential real estate activity.  As our head of Financials, Josh Steiner, recently commented following the release of the March Existing Home Sales data, we think this concern is misplaced: 


“There's a paradox of inventory right now. On the one hand, low inventory precipitates rising prices, while on the other hand low inventory marginally constrains volume growth. All things equal, low inventory helps the housing market far more than it hurts. In other words, the market should be more focused on prices rising due to tight inventory than on volume going sideways for the same reason”


So, in the context of our view of Housing as a Giffen Good, price should be the key metric of investor focus as price growth serves to drive demand in a reflexive cycle.  Capacity will follow rising demand on a lag in the new home market and rising prices should drive existing home transaction volumes as housing equity turns positive for underwater borrowers alongside rising home values.    


Recapping the recent housing data: 

  • Mortgage Purchase Applications:  Mortgage Purchase Applications are showing no signs of slowing with this week’s data registering another higher YTD high.
  • Existing Home Sales:  Inventory was largely unchanged in March at 1.93M units, just north of the recent trough.  Median Home Prices rose 11.8% y/y, the fastest rate of growth since November 2005.
  • New Home Sales:  New Home Sales rose 18.5% Y/Y in March to 417K units.   From a mean reversion perspective, if new home sales as a percentage of total home sales returns to it’s 1 average, new home sales could double from current levels.  With household formation trends currently tracking at ~2.0M in implied demand, and new housing starts running at 1M, both mean reversion and organic demand should support ongoing strength in the New Home market. 
  • Corelogic & FHFA Home Price Index:  Preliminary Corelogic data for March estimates home prices grew 10.2% y/y, flat with growth in February, and up from 9.41% y/y growth in January.  Yesterday's FHFA Home Price index data reflected similar trends with prices accelerating 70bps m/m to 7.07% y/y growth in February, marking the fastest pace of growth since November 2009. 
  • NAHB Homebuilder Survey:  The NAHB Homebuilder HMI index registered a third consecutive month of softening, declining from 44 to 42 in the latest April reading. The decline was almost exclusively related to concerns over cost pressure as material and labor input costs have risen alongside rising demand and emergent, marginal capacity constraint.  We think the concern is largely misplaced with respect to the broader housing trends.  Pricing trends are strong, organic demand should remain supportive, and capacity issues will be transient. We would also note that, historically, 6M Forward Expectations for activity always run at a positive spread to the composite index while the Current Traffic reading typically runs at a negative spread to the composite reading. The recent widening of those spreads is more reflective of a return to normal then it is an outlier divergence.   

U.S.  #GrowthAcccelerating – Momentum Where it Matters - Mortgage Apps


U.S.  #GrowthAcccelerating – Momentum Where it Matters - Corelogic parabolic Rise


source: Hedgeye Financials

U.S.  #GrowthAcccelerating – Momentum Where it Matters - Inventory lt normal 042413


U.S.  #GrowthAcccelerating – Momentum Where it Matters - NHS   of Total


U.S.  #GrowthAcccelerating – Momentum Where it Matters - Homebuilder Survey


INITIAL CLAIMS:  This week’s Initial Jobless Claims data was again positive with both the SA and NSA series showing sharp sequential improvement.   We consider the 4-week rolling average in NSA claims to be the more accurate representation of the underlying labor market trend and on that metric, the trend improved 250bps w/w as the y/y change in 4-wk rolling claims went from -6.3% Y/Y from -3.8% Y/Y the week prior.   The headline number fell 13K to 339K w/w versus the prior week’s unrevised number while the 4-week rolling average in SA claims dropped 4.5K w/w to 358K. 


So, despite initial sequester related impacts beginning in April and the seasonal distortion in the seasonally adjusted data shifting to a headwind, labor market trends continue to show steady improvement.  We continue to expect a ~10K drag on claims on a smoothed basis (with the potential for a negative shock to any given release) related to sequestration alongside the slow build in the negative seasonal impact through August. 


source: Hedgeye Financials

U.S.  #GrowthAcccelerating – Momentum Where it Matters - Claims SA


U.S.  #GrowthAcccelerating – Momentum Where it Matters - NSA Claims 042413



Positioning:  Strong Dollar – Strong Domestic Consumption remains the simplified Macro strategy playbook.  The Dollar remains in Bullish Formation (Bullish across TRADE, TREND & TAIL Durations) in our Risk Management model and we expect further upside given our bearish view on the Yen, slowing growth and an increasingly dovish policy outlook in Europe, decent domestic economic data, declining federal deficit spending and an incrementally hawkish fiscal and monetary policy stance.   


Continued USD appreciation should drive ongoing energy/commodity deflation, further relative underperformance in commodities and commodity levered exposure (XLB, XLE, Russia, Brazil, Peru, etc), and relative outperformance for domestic consumption oriented exposure (XLY, XLV) as discretionary share of wallet rises. 


Keith bought the Dollar (UUP) and shorted Oil (OIL), Gold Miners (GDX), and Freeport-McMoran (FCX) in our Real-Time Alerts this morning.  



Christian B. Drake

Senior Analyst 


HSY Continues Its Indulgent Run

HSY reported Q1 earnings this morning. The company is largely on track, growing in all categories across multiple channels, including club, and has good marketing support behind the launch of Brookside (dark chocolate, wellness). Q2 will be challenged based on tougher comps in a historically weaker quarter. Volume should drive performance in the year in which HSY expects a 12% gain in EPS. We like the story, but would prefer a better entry point - perhaps Q2 concerns and performance provide it.   


What we liked:

  • Revenue slightly missed consensus $1.83B vs $1.84B, but up a healthy 5.5% (Volume +5.3%; Price +0.5%; FX -0.3%)
  • EPS of $1.09 beat estimates of $1.04, up 13%, and FY guidance adjusted up to $3.61-$3.65 vs previous $3.56-$3.63 - first quarter guidance increases are rare
  • Gained market share in every category that it competes in
  • Higher dollar sell-through for Easter despite shorter season
  • GM +240bps in the quarter on lower commodity costs of $35MM and supply chain efficiencies
  • Strong brand support for Brookside
  • Focused on continued expansion to emerging markets (China, Brazil, India, and Eastern Europe)

What we didn’t like:

  • Q2 is historically a weaker quarter and is facing higher tax rate and more difficult comps
  • Valuation, though more easily supported in the case of HSY given its growth profile and categories than for the balance of the staples group

Call with questions, 




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Can The VIX Be Fixed?

The CBOE Volatility Index (VIX) has taken a beating as the S&P 500 and US stocks continue their bull run. Over the last five trading days alone, the index has fallen -19.3%. If you recall our trading strategy, when the VIX is oversold and the S&P 500 is overbought, it's a time when we'll consider selling the S&P. Right now, the key levels we're looking for are 1603 in the S&P 500 and 10.8 in the VIX. 


Can The VIX Be Fixed? - CBOEVIX today

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