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ENR - Big Beat on EPS, But No Flow Through

ENR reported a big beat versus consensus this morning, $1.80 versus $1.27, but oddly didn’t take the opportunity to increase its full-year guidance (remains $6.75 to $7.00).  Odder still, the maintained guidance range includes a higher level of cost savings – to a range of $50 to $60 million from the prior range of $25 to $35 million.  We expect a positive stock reaction given the magnitude of the EPS beat, but that the reaction should be muted given the lack of flow through to full-year EPS and the likely need for negative EPS revisions in 2H.



What we liked:

  • Big beat versus consensus
  • Increased annual cost savings target (to a range of $50-$60 million from $25-$30 million)
  • Increased total project cost savings target to $225 million from $200 million
  • Very good gross (+148 bps) and operating (+398 bps) margin performance
  • A promise to increase advertising and promotion spending in 2H

What we didn’t like:

  • No flow through to full year guidance on huge EPS beat and higher annual cost savings, implying a material reduction to 2H consensus
  • Lackluster (+0.3%) currency neutral sales growth
  • Advertising and promotion expenses declined 8.2% in the quarter after declining 1.7% in Q1
  • Weird revenue guide down in the Personal Care segment (to low single digit increases from prior mid-single digit sales growth), but only reflects 1H weakness, as the company expects 2H sales growth in the 3-5% range – so a call for material improvement in sales trends in this segment
  • Company is still anticipating low single digit sales declines in Household Products, but an odd Q4 2013 call out of weakness

Bottom line, sales trends remain anemic, but cost savings provide substantial income statement flexibility.  The name isn’t particularly expensive on consensus numbers (14.1x calendar ’13) but our issue is that we have a difficult time seeing any opportunity for material EPS growth once cost savings have run their course.   The battery category remains challenging, and beyond that we don’t see the opportunity for sustained growth in the company’s other categories.

 

Call with questions,



Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst




Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Russia’s 20 Biggest Billionaires Keep Riches From Putin (via Bloomberg)

 

Fed Seen Slowing Stimulus With QE Cut by End of This Year (via Bloomberg)

 

Josh Steiner (Financials):

 

Paulson Leads Hedge-Fund Lobby Push to Privatize Fannie (via Bloomberg)

 

If the Federal Reserve ain’t broke, don’t fix it (via FT)

 

US banks: breaking up is hard to do (via FT)

 

Brian McGough (Retail):

 

Top Retail Executives Weigh In on the Customer (via WWD)

 

Jay Van Sciver (Industrials):

 

ADT Reports Second Quarter 2013 Results (via ADT)

 

Kevin Kaiser (Energy):

 

Brent Crude Drops a Second Day as Global Supplies Climb (via Bloomberg)

 

Matthew Hedrick (Europe):

 

Italian PM launches opening salvo against austerity - but where will the cash come from? (via Open Europe Blog)

 

Bailout scrapes through parliament (via Cyprus Mail)


 




MGM YOUTUBE

In preparation for MGM's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

YOUTUBE FROM Q4 CONFERENCE CALL

  • [MGM Cotai] "We remain on track, as we've said before, for an early- to mid-2016 opening."
  • "Last quarter, a referendum was passed in Prince George's County in Maryland, and we are now in the RFP process for what would be a very lucrative fixed license in Maryland. We have a deadline... of May to submit our proposal. We will easily meet that deadline. We believe that we will prevail for an MGM at National Harbor, which is a tremendous destination resort, literally minutes from our nation's capital. A decision on that by the State of Maryland will be before the end of the year, we expect." 
  • "Our international casino business continues to be strong, as this was a record fourth quarter for our Strip properties when you include ARIA for both the international drop and win. We're seeing some encouraging signs in our domestic casino play, as our non-baccarat table drop at our wholly-owned Strip properties increased 6% year-over-year."
  • "We are starting to see domestic customers again, starting to see their activity pick up."
  • "Looking at the room trends here in the first quarter, we anticipate the trends to be similar to what we saw in the fourth quarter, with room revenues up low single-digits and essentially flat REVPAR."
  • "While it is still early, ARIA is off to a good start in 2013, and we expect to continue to build traction throughout the year. Convention sales are pacing well, as room nights on the books for 2013 as of February 1 are 14% ahead of last year at this time....2014 is looking even stronger as we look forward. So there's still work to do in 2014, but its pace is actually even up higher than what we're experiencing here in 2013."
  • [MGM CHINA] "We're seeing early signs of success from our level 2 VIP gaming floor expansion, which opened in late September. We're also expecting to add another junket operator in the second quarter of 2013. The fourth quarter was our strongest volume quarter for the year for our own in-house VIP business. We expect to see continued growth in this business with the support from the MGM International marketing team."
  • [MGM CHINA] "This transition of mix has also driven an increase in our pre-branding-fee EBITDA margins by 60 basis points. We expect this positive trend of increasing main floor mix to continue, driven by upgrades to our main gaming floor product, marketing efforts, and of course the strong growth in the Macau mass market revenues."
  • "On the convention side, without the solid citywide convention base, what ends up happening is our lower-end properties Circus and Excalibur, they're the last to fill, and there's always a challenge there from a pricing perspective. With regards to Luxor, they're also usually a benefactor of Mandalay's overfill, and that hasn't quite happened as much as it used to happen in the past, but it's well-positioned to get that overfill coming up in the future here."
  • "We like the way our convention business is shaping up for the calendar year 2013, and obviously the leisure and transient business has been performing well for us. That's a big part of our business, so I think it's too premature right now to go out with full-year guidance. We like the way the calendar is shaping up, and we like the way the convention business is booked and the pace that we're on, and I think the best is to kind of leave it at that for now."
  • "I'd just reemphasize what's happening for us, in the second quarter, between when someone spends over $100 million on the corner of Tropicana and the Las Vegas Strip in Hakkasan to build a night club/lounge/bar, which right now has been a construction site and has been for the better part of nine months, is going to have a material impact on MGM Grand; having a Mayweather fight in May, material impact on MGM Grand; having a new Cirque show at Mandalay Bay, a material impact in the second quarter for Mandalay Bay; and the restaurants that we're adding there."

MGM YOUTUBE - mgm3


Early Look

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Top That!

Client Talking Points

Beckoning The Bulls

The Professional Top Callers (PTC) have come out of their bunkers this morning to call the top in stocks once again. Too bad that doesn't really work when you've been wrong several times throughout the year. With the S&P 500 hitting a fresh all-time high yesterday, global markets are following in the footsteps of the US with the following markets putting up impressive year-to-date returns thus far:

 

  • FTSE: +11% (in Bullish Formation)
  • Philippines: +24%
  • Indonesia: +18%

Commodities Cornered

Commodities rallied on the US dollar taking a hit but are back to the same old game of getting whacked this morning. Gold, corn and oil are all down this morning, which is a good thing for the consumption game. After all, lower oil and corn prices mean cheaper groceries and lower prices at the pump. Corn has no support here until $6.02 and was as high as $8.30 back in August of 2012. Ouch. 

Asset Allocation

CASH 17% US EQUITIES 25%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 32%

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.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.

FDX

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.

Three for the Road

TWEET OF THE DAY

"More Bad News is Good News "Good for QE, Just Buy Stocks" ADP National Employment Nov 276k Feb 237k April 119k" -@Convertbond

QUOTE OF THE DAY

"In a few minutes a computer can make a mistake so great that it would have taken many men many months to equal it." -Unknown

 

STAT OF THE DAY

ADP Employment Report shows US added 119,000 jobs in April. Estimates were looking for a gain of 150,000.


Grenadier Cigars

This note was originally published at 8am on April 17, 2013 for Hedgeye subscribers.

“Horse manure sprinkled with tobacco.”

-William Silber

 

That’s what “a cigar aficionado had once told him” (with him being Paul Volcker) about “his favorite A&C Grenadiar cigar.” In 1979, Volcker would take a big pay cut (“earning $57,500 a year rather than the $110,000 salary”) as President of the New York Fed. (Volcker: The Triumph of Persistence, pg 147)

 

Unlike some of these pretend patriots you see on Political Economy TV today, Volcker took serving his country in the wallet. Like Benjamin Franklin, he was a frugal man. He, like anyone tasked with central planning, had his issues. But one of those wasn’t credibility. The #PoliticalClass didn’t always like him, but history has treated him well, primarily because he earned The People’s trust.

 

When Bernanke proclaimed that he has “the best inflation track record of anyone since WWII”, it made me sick to my stomach. Today, in 1964, Americans bought their first Ford Mustang for $2,368. That was also a time when JFK explicitly marketed a #StrongDollar. Hopefully, we’re well on our way to deflating Bernanke’s Commodity Bubbles now. Lord knows, we all need a real-world Tax Cut.

 

Back to the Global Macro Grind

 

Within the context of the immediate-term risk I ranted about in yesterday’s Early Look, yesterday’s +1.43% rip in the SP500 was critical on all three fronts that matter in one of my most basic 3-factor models:

  1. PRICE – what was 1557 immediate-term TRADE resistance, once again became support (no resistance now to 1601)
  2. VOLUME – up +3.3% versus what I call my TREND average (up days on up volume = good)
  3. VOLATILITY – VIX smoked for a -19.2% down move, closing back below TRADE resistance (14.27); next support 10.53

So, I got a little longer (net), going to 10 LONGS, 7 SHORTS @Hedgeye. Process: as beta (SP500) recovered my TRADE line of support (1557), the first moves I made were A) covering consumption shorts and B) buying consumption longs (we’re bullish on US domestic Hospitals, so Tom Tobin had me buyback HCA on sale).

 

From both a gross and net perspective, I can obviously get a lot longer than this. I have throughout the last 5 months, and I will continue to buy pullbacks, provided that both the Research and Risk Signals tell me to do so. But I will do it at my own pace. Patience is an asset.

 

What generalist PMs and individual investors alike have to be getting impatient with is more of the same; especially if they aren’t yet positioned LONG CONSUMPTION vs SHORT COMMMODITIES.

 

Top Down, the YTD score is very straightforward:

  1. SP500, US Healthcare, and US Consumer Discretionary = +10.4%, +19.7%, and +13.3%, respectively
  2. CRB Commodities Index, Gold, Russia = -4.1%, -17.3%, and -11.5%, respectively

In terms of US Equity Sector performance, so are the month-to-date returns for April at mid-month:

  1.  Healthcare (XLV) +3.76%, Consumer Staples (XLP) +2.62%, Consumer Discretionary (XLY) +1.40%
  2. Energy (XLE) -4.50%, Basic Materials (XLB) -3.04%, Industrials (XLI) -1.72%

In other words, the performance divergence between CONSUMPTION and COMMODITY related investments is accelerating at an accelerating rate. We like that. It’s called convexity.

 

To be clear, like the conflicted and compromised bureaucrats that Volcker and Thatcher had to take head on in the early 1980s, people who don’t get paid by #CommodityDeflation do not like this. Neither do the dudes who get paid to market Gold commercials.

 

But, like I said on yesterday’s Global Macro Themes call for Q2 2013 (ping Sales@Hedgeye.com if you want the slides/replay), it’s not my job to pander to fear-based advertising for bitcoins. Neither is it to live a regressive life. What’s happening to Gold and Oil in particular is potentially one of the most progressive economic developments in the last 20 years.

 

Risk Management Questions I addressed on our Q2 Macro Themes call:

  1. Can the US Dollar Index go to $88, then $98?
  2. Can the Japanese Yen (vs USD) go to 110, then 150?
  3. Can the price of crude Oil drop to $19-56/barrel?

It’s all interconnected. And if the answer to all three of those questions were to become yes, all I can say is that A) being long Consumption will be really right, B) being short Commodities will be epic, and C) Putin will be pissed.

 

Putin? Yes, as in Vlady. Russian geopolitical and said economic-power runs on Oil inflation. He’s been whining in the press for the last few weeks, so expect his next move to be Japanese (devalue the Ruble). Then this flow show party can really get started.

 

Flow show? No, I’m not talking about my hair. I mean #EmergingOutflows (introduced as our latest Global Macro Theme in yesterday’s conference call). #StrongDollar = bad (for some Emerging Markets). So we’ll have a deeper dive Hedgeye Black Book pending on that. Knock on wood (my hockey head), but horse manure sprinkled with some Hedgeye Macro tobacco has never smelled so good.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, Euro/USD, UST10yr Yield, VIX and the SP500 are now $1284-1399, $99.43-103.99, 95.77-101.70, $1.29-1.31, 1.70-1.77%, 10.53-16.65, and 1557-1601, respectively.

 

Happy Birthday Laura, and best of luck to you out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Grenadier Cigars - Chart of the Day

 

Grenadier Cigars - Virtual Portfolio



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