ADM – Below Consensus, But Quarter is a Look Back – Let’s Look Ahead

Last night, ADM reported Q1 EPS of $0.48 versus consensus of $0.52 – most of the weakness in the quarter is related to lingering issues with the U.S. drought, and as a result represent more of a look back than a look at either the present or likely future state of the agricultural complex.  Recognizing that, we think investors should be using any opportunity that some reasonably unappealing results might present in terms of stock weakness to become involved in what we still see as a compelling investment case.

We remain bullish of the size of the coming corn crop (it’s admittedly early) and bearish on corn prices – if we are correct, both agricultural services and ethanol at ADM should be poised for substantial improvement.

What we liked:

  • Improved ethanol results, a trend that we think should continue
  • Completed due diligence on GrainCorp, will move forward to acquire company for A$12.20 per share – see our prior note on the topic - quick summary, we like the deal a heck of a lot
  • Balance sheet well-managed – working capital was neutral to cash flow in what is historically a quarter where it is a large use of cash
  • Positive free cash flow versus significant negative free cash flow in the year ago quarter

What we didn’t like:

  • EPS below consensus
  • 42% decline in operating profit in agricultural services (however, linked to ongoing impact of last year’s drought)
  • Oilseeds profit declined 42%
  • Results are likely to remain challenged until we see the U.S. crop

I know we are starting to sound like a broken record in terms of not seeing a great deal of opportunity across our universe, but ADM is one name where we see a favorable risk/reward profile – upside toward $40 per share if the U.S. crop breaks right and back toward $30 if we get a second consecutive year of a once in a lifetime drought.


Call with questions,




Robert Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Emotional Trading

Client Talking Points

Bad Brent

Brent crude oil is now in bearish formation and has been down for the last few days consecutively as global supply increases and commodity prices feel the wrath of a stronger dollar. Driving season is kicking into gear and consumption is due for a boost as prices come down at the pump. That'll have Americans using both cars in their household instead of carpooling it and getting out the Expect Brent to go lower on an up day for the dollar.

Bernanke Blues

People got really emotional over yesterday's FOMC meeting. Whether they wound up expecting change or not doesn't matter - we knew this was coming. More of the same. Low rates, asset purchases, keeping the markets happy - that's what Bernanke does. As for as America goes, we'll enjoy this tomfoolery for at least another year before anything material changes. But tomorrow, all eyes are on Europe and a possible rate cut from the ECB via Draghi. That'll get people really worked up - just wait and see. 

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. 


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. 


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


"When all is said and done, $FNP printed what it needed to make the stock not go down." -@HedgeyeRetail


"Only the shallow know themselves." -Oscar Wilde 


Initial jobless claims fall 18,000 to a seasonally-adjusted 324,000 last week, the lowest level since January 2008.

Equilibrium's Test

This note was originally published at 8am on April 18, 2013 for Hedgeye subscribers.

“Only in equilibrium can we not distinguish past from future.”

-Eric Chaisson


If it appears that I have been back and forth on the US stock market all week, that’s because I have been. The nature of any non-linear ecosystem of colliding factors is often just that – uncertain.


Remember, I think of markets in terms of chaos theory and thermodynamics. Markets have blasts of entropy (the price paid when the complexion of the overall market’s energy changes), but they also oscillate back and forth from equilibrium.


What does that mean? Markets are built to confuse. That’s why they impose a lot of pain on a lot of people at the same time. “If not periodically checked, entropy will tend toward a maximum in any system” (Cosmic Evolution, pg 25). Think about that in terms of Gold.


Back to the Global Macro Grind


When my Research and Risk Signals are aligned across durations, it’s easy to make buy/sell decisions. When my front-runner (my immediate-term TRADE duration) whips back and forth between bullish and bearish, making decisions gets a lot tougher.


That’s where the SP500 and VIX are today – and they are hyper correlated:

  1. SP500 = bearish TRADE (1557 resistance); bullish TREND (1515) support
  2. VIX = bullish TRADE (14.27 support); bearish TREND (18.89 resistance)

We also call this Duration Mismatch (i.e. when one duration’s signal has a different conclusion than the other). I get less concerned about our fundamental research view when the TRADE is bearish than when the TREND is – when both are bearish, I short the market.


That’s why bearish TRADE/TREND setups are our Best Short Ideas:

  1. COMMODITIES (CRB Index) = bearish TRADE (289 resistance); bearish TREND (298 resistance)
  2. GOLD = bearish TRADE (1496 resistance); bearish TREND (1641 resistance)
  3. FCX (Freeport McMoran) = bearish TRADE ($31.92 resistance); bearish TREND ($34.18 resistance)
  4. YEN (vs USD) = bearish TRADE (95.87 resistance); bearish TREND (91.17 resistance)
  5. ITALY (MIB Index) = bearish TRADE (15,991 resistance); bearish TREND (16,313 resistance)

It’s a lot more profitable to get bearish about these things when they initially confirm TRADE/TREND breakdowns than it is shorting them after big drops. Obviously the big stuff (Commodities, Gold, Yen) has been breaking down for almost 6 months now, so you want to be proactive in managing the mean reversion risk associated with the immediate-term Risk Range. Bearish TRENDs bounce.


What is the immediate-term Risk Range?


That’s what I consider the most probable range of price within an immediate-term (3 weeks or less) time frame. Since time and space changes, so does my model.


It’s dynamic – meaning I tweak it throughout every day for my volatility and volume assumptions. If you think of it like an engine, I need to monitor accelerations and decelerations and be both proactive and reactive (i.e. I need to manually change the gears).


To use the SP500 as an example:

  1. My immediate-term Risk Range = 1539-1570
  2. My immediate-term TRADE line = 1557
  3. So, I could buy it A) at the low-end of my range (1539) or B) buy it on a breakout > 1557

Since every move I make is #timestamped in real-time, you can see that over the years I’ve evolved. I am more and more indifferent than I have ever been on buying oversold signals versus buying breakout signals.


Theoretically, you’d always like to buy something lower and sell it higher. Sometimes that’s dead wrong (lower can go lower and lower). If the front-runner (TRADE line breakdown of 1557) continues to confirm and attacks the TREND line (1515), and you’re buying it all the way down, you A) better have deep pockets and/or B) a longer-term investment time horizon.


One of my favorite lines on that score is Jeff Gundlach’s coarse description of an “investor” – a trader who is underwater. And when I really think that through in terms of how I risk manage my research team’s best ideas – that’s dead on. If I buy something, I want it to be the right spot. Being too early is also called being wrong.


Astrophysicist, Eric Chaisson, says “the greater the randomness or disorder, the greater the entropy” (pg 24). Agreed. But, in my process at least, it’s a lot easier to make decisions when entropy is obvious than it is when equilibrium is testing my patience.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1303-1399, $97.58-102.91, $82.26-83.12, 95.87-101.91, $1.29-1.31, 1.68-1.76%, 14.27-17.46, 899-929, and 1539-1570, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Equilibrium's Test - Chart of the Day


Equilibrium's Test - Virtual Portfolio

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 80.52%
  • SHORT SIGNALS 78.67%


Not to take away from a very good quarter – better than we expected - but we’re coming up with a smaller hold adjusted number.



Q1 was a very strong quarter for LVS but we want to highlight a few things that stood out to us for the Q.  We calculate a net $17 million hold benefit in the quarter across LVS’s properties.  Immaterial yes, but materially different on a property by property basis from what LVS provided in their press release.  The differences can be seen in the table below.  Our respective methodologies primarily differ in that LVS uses theoretical hold for VIP of 2.85% while we use historical averages by property.




So we actually calculate a net hold benefit to the quarter, primarily relating to our use of the historical hold average of 2.70% at MBS versus 2.85% by management.  MBS generated $426 million of hold adjusted EBITDA, in our opinion, versus a $451 million number provided by management.  We would even argue that our number is probably aggressive given that volumes are likely pushed higher when punters play lucky (hold is low).  However, it’s impossible to determine the amount of excess play driven by low hold.  Overall, our hold adjusted property EBITDA estimate is $1.151 billion, $40 million below management’s estimate.   


The big picture here is that even with our lower estimate for hold adjusted EBITDA, this was a great quarter for LVS.  We’re positive on LVS over the long haul so don’t take our commentary as a slap against the company or the stock.  We just like to do our own analysis rather than accept any management's calculations as fact.  Call it healthy skepticism and we feel like we treat both our favorite and least favorite companies with the same approach.


Other Takeaways

  • Las Vegas:  A very unprofitable quarter in Entertainment (Tim McGraw show) drove down EBITDA despite a big increase in other non-casino revenue and good hold on the tables
    • Revenues were $27MM higher while EBITDA was $2MM lower YoY
    • Hold was 3.6% better in 1Q13 vs. 1Q12 (which was also higher than normal)
  • Macau:  Hold adjustment - why our math is different
    • Historical hold rate across all the properties since 2007 has been 2.90%
    • We don’t lump all the properties together but use historical hold for each property.  Flow-through varies across different properties since the mix of Rev Share and RC commission is different as is the level of direct play
    • We don’t have perfect information: don’t know the luck split between RevShare & RC junkets or the exact rebate to direct players; we don’t know the junket commission rate until the filings come out – that also impacts flow-through calculations
  • Despite the addition of tables, fixed expenses look like they declined across all of Sand’s China’s mature properties
  • Looks like Sands Macao shifted the mix of its slots more towards ETG’s as handle increased nicely but win rate continued to plunge to just 3.7%
  • The slot business at Four Seasons is all over the place.  Slot revenues more than doubled from 3Q12 to 4Q12 and round tripped in 1Q13.  After slot handle increased 44% YoY in 4Q; 1Q13 slot handle fell 7% YoY
  • FS direct play keeps shrinking as well.  It was down to 11% this quarter vs. 14% last quarter and 16% last year…and closer to 40% of total VIP roll in 2011.  RC volumes also declined 25% - the first decline in 5 quarters
  • Despite the addition of 2,100 rooms early in the quarter, net non-gaming revenues barely increased – less than 3% QoQ at SCC
  • MBS:
    • Rebate rate was 1.3%
    • Fixed expenses actually declined 2.6% YoY
    • Doubtful accounts were in-line with the last 3Q’s

Unstable Systems

“Certainty does not necessarily hold for unstable systems.”

-Eric Chaisson


Markets and economies are unstable systems. They could be less unstable if governments just left them alone – but that’s not going to happen, so Embrace Uncertainty. By changing a few words in a FOMC or an ECB statement, a central planner can change your life.


For the growing base of the gainfully employed trying to sell you certainty, I am becoming the anti-christ. I kind of like that. My team’s work is grounded in history (context), math (process), and evolution. Government forecasters are more like Newtonian navel-gazers.


The biggest risk to Bernanke (Fed), Draghi (ECB), and Kuroda (BOJ) policies isn’t the policy itself; it’s the expectation embedded in their forecasts that drive those policies . No one actually trusts that these guys will ever get it right – we’re all just trying to front run them.


Back to the Global Macro Grind


“When a system is orderly (that is, low in entropy and rich in structure), more can be known about that system than when it is disorderly and high in entropy” (Cosmic Evolution, pg 49). That’s a great way to characterize what the modern day market system is not (orderly).


Expectations drive volatility. Unless you are the guy on the other end of the phone getting inside information on a central planner’s next big move, there is nothing orderly about market expectations. Everything can change, fast.


For now, the only thing that’s been changing really fast (down Gold, Oil, etc.) is the expectation that Bernanke is going to be able to devalue the dollar in perpetuity. That expectation has two big year-over-year parts:

  1. ABSOLUTE – both US fiscal and monetary policy expectations are tighter, on the margin
  2. RELATIVE – both ECB and BOJ fiscal/monetary policy expectations are looser, on the margin

And, unless the collective consensus that is America’s new transparency/accountability/trust transmission mechanism (Twitter) fails at demanding more of what has been working in the US economy (and at the pump, and in the stock market, and in terms of home price appreciation) for the last 4 months, I expect to see more of the same on those two big parts throughout the coming months.


Remember, this isn’t like the April/May ‘sell and go away’ calls that Hedgeye has made, literally, every year for the last 3 years (2010, 2011, 2012 #timestamped). The spring/summer of 2013 is more like 2009 where:

  1. Q109 #StrongDollar drove #CommodityDeflation (lower prices at the pump into the spring/summer into Q209)
  2. Consumption #GrowthAccelerating (from Q109 to Q2/Q3 2009) when consensus didn’t expect it

Our proprietary Hedgeye GIP (Growth/Inflation/Policy) Model has not changed since 2008. That’s why we were as bullish in March of 2009 on the US Consumption #GrowthAccelerating front as we are now. Competitively speaking, the good news is that Old Wall’s models didn’t change either.


What was different in 2010, 2011, and 2012 (coming out of Q1 versus 2009), wasn’t our model – it was what makes an already (and endemically) unstable market system more unstable – incremental government policy expectations (ie. multiple QEs).


In each of the last 3 years, Bernanke imposed a Dollar Devaluation Policy on global market expectations in Q1:

  1. Inflation expectations then rose, sequentially, from Q1 to Q2
  2. Markets front-ran the Fed, chasing food/oil prices higher from Q1 to Q2
  3. And, rising inflation (sequentially) slowed real inflation-adjusted consumption growth

Then… the Fed’s finest, in their vigilant pursuit of selling their employers (politicians) “stability” and certainty, had to whisper sweet nothings to the old boys throughout the market swallows of the summer. Then… ta-dah… another QE coming out of Jackson Hole… markets (especially Gold) ripped… economy did nothing… etc. etc. etc.


Unfortunately (for him), that’s all Bernanke’s historical baggage to deal with now. I’m personally done with the guy. Away from some family weddings, the best news of my 2013 summer is that he’s not going to be in Jackson Hole this year.


When I read yesterday’s FOMC statement, I breathed a sigh of relief. My life is uncertain enough. Having a little more certainty that this man is going to be doing nothing for the next little while made me sleep easier. I hope it did the same for you too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1, $98.41-103.92, $81.42-82.53, $1.29-1.32, 97.11-100.53, 1.63-1.73%, 12.91-14.96, 918-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unstable Systems - Chart of the Day


Unstable Systems - Virtual Portfolio

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