Q1 Earnings in a Single Chart

Offered with minimal commentary, other than to say that revenues were marginally light of consensus and EPS modestly ahead, on average.  We still don't see material upside to 2013 consensus estimates across consumer staples.


Q1 Earnings in a Single Chart - Q1 EPS Summary



Buyers of Corn, Beware

Takeaway: Hedge fund buyers of corn underestimate the power of modern farming techniques at their own peril.

Accommodating weather last week literally created fertile ground for a record corn planting pace, with a full 43% of the U.S. corn crop getting into the ground over the seven day period from Sunday to Sunday. U.S. farmers are expected to plant 97.3 million acres of corn this year, so 43% of that is an area roughly the size of Wisconsin. That's a lot of corn. Hedge fund buyers of corn underestimate the power of modern farming techniques at their own peril. Yes, we are sticking with our bearish bias on corn.


Buyers of Corn, Beware - corn

Corn - Record Week for Corn Planting

Very accommodating weather through most of last week allowed for a record corn planting pace, with a full 43% of the U.S. corn crop getting into the ground over the seven day period from Sunday to Sunday.  As of a week ago Sunday, only 28% of the crop was in the ground and that number has moved to 71% as of this Sunday (5/19).  This compares favorably with the multi-year average of 79%.


Farmers are expected to plant 97.3 million acres of corn this year, so 43% of that is approximately 41.8 million acres or 16.9 million hectares or 169,000 square kilometers or an area the size of the state of Wisconsin (169,639 square kilometers). Hedge fund buyers of corn underestimate the power of modern farming techniques at their own peril.

Further, this past weekend saw heavy rainfall over most of the Western Corn Belt (moving east, slowly) so most of the corn states look to be getting a good soaking.  When we marry the moisture with improving soil temperatures, we see that corn emergence has improved as well with the crop now 19% emerged (versus multi-year average of mid-40%).

We are sticking with our bearish bias on corn and continue to see the corn crop development as constructive for the protein companies and agricultural processors.  The chicken producers (SAFM and TSN) look a little frothy to us in terms of valuation and expectations, so we prefer SFD at this point.  ADM continues to make sense to us.


Corn - Record Week for Corn Planting - Crop Progress


Corn - Record Week for Corn Planting - Crop Progress 5.17


Robert Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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Takeaway: $JPM looks very mispriced at the moment. We think resolution of Dimon's role, CCAR and Brown-Vitter will catalyze upside.

Focused on the Wrong Things 

JPMorgan is getting a lot of airtime, but we think for the wrong reason. While the media is preoccupied with Dimon's fate and the potential implications for the company, we're more interested in the fact that JPMorgan looks extremely compelling on an P/TBV:EVA basis.


For those unfamiliar, our approach to determining fair value for the banks looks at the interplay between EVA and price/tangible book value. The first chart below shows the strength of the relationship between these two factors. The R-Squared is 0.90. For reference, the strength of the relationship between P/TBV and Return on Tangible Capital alone is a less meaningful 0.68. In other words, EVA explains 90% of the variability in the price to tangible book value multiple. Our EVA approach looks at the difference between return on tangible capital and cost of capital. For cost of capital we're using CAPM with a 2% risk-free rate, a 9% long-term market return and a beta for JPM of 1.26. 


By our calculations, JPMorgan is going to generate a return on tangible of 14.4% over the next twelve months with a cost of capital of 10.8%, resulting in a positive EVA of 3.8%. On our model, y =7.971x + 1.4568, JPMorgan's fair value is 175% of tangible book value [ 1.75 = (7.971 * .038 + 1.4568) * TBV) ], or $67.81. The stock is currently at 135% of tangible book value, or $52.29. As we show in the second chart below, this works out to 30% upside, or the most within the group on a relative basis. 


There are a few narratives underpinning the discount.


* The first, and most obvious, reason is the carnival-like atmosphere surrounding today's annual shareholder meeting and the outcome of the dual CEO/Chairman role. That concern should be put to rest based on early reports that the shareholder proposal to split the roles has been defeated.


* The second reason goes back to CCAR, and the penalty box JPMorgan was put in by the Fed. As a reminder, the Fed didn't object to JPMorgan's plan, but required that they re-submit their plans to address weaknesses in their capital planning process by the end of the third quarter. If the Fed feels the weaknesses have not been sufficiently addressed, it can reject JPMorgan's plan. Recall that the company suggested that the Fed's concerns were qualitative in nature, not quantitative. On this issue, we think expectations are fairly low. It was a surprise when JPM and GS were flagged, but now, with expectations low, the surprise is more likely to be to the positive.


* Third, uncertainty around the Brown-Vitter DC dynamic is also unsettling investors. This is an interesting dynamic. As friend of the firm, Peter Atwater, who has held various senior management roles at Banc One and JPMorgan, likes to say, bank regulation is strongly inversely correlated with bank stock prices. We agree. Just look at the last five years. With financial markets hitting new, all-time highs and banks making progress alongside them, we think the probability of Brown-Vitter or something analagous is very low in the current environment. Moreover, there's an element of win/win here. As we see it, breaking up the global banks would ultimately unlock value, but we acknowledge the path from A to B would be unpleasant. 


Valuation is never a catalyst, and we're not suggesting this time will be different. However, with the ongoing improvements in the labor, housing and capital markets we think the current discount in JPMorgan reflects overdone concerns around issues that should resolve themselves in the coming 6-12 months. 








Joshua Steiner, CFA


Interconnected Risk Rising

Client Talking Points


We witnessed no selloff in long-term Treasuries yesterday when US stocks went red. The rotation here is still very early as one of the most bullish net long positions in all of the CFTC data (futures/options) 3 weeks ago was in the long bond (and short SPY); 1.96% and looking like 2.02% is very easy to achieve if Bernanke acknowledges economic gravity in his testimony tomorrow. (Fed’s Evans just did)


Public enemy #1 for gold is Bernanke laying off QE5. That is key. Closely behind that is bond yields rising. The “End of the World” trade remains under pressure after an unconvincing 1-day bear market bounce yesterday to lower highs. I have another lower-low of $1339/oz support in play now.


We are witnessing some solid follow through in one of the world’s most asymmetric moves off all-time lows (long-term JGB yields); 10yr JGB yield up another full 5bps this morning to 0.89% (+31bps in the last month) after breaking out above my TAIL risk line of 0.81% last week. We’re short.

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


“My research  team is crushing it on the long side right now – world class team, on  a run.” @KeithMcCullough


“The only man who never makes a mistake is the man who never does anything.” – Teddy Roosevelt


$253,000,000 – the amount of money 26 year old Tumblr CEO David Karp will receive from Yahoo’s $1.1B acquisition; $278,000,000 – the amount of money this weekend’s lone Powerball winner will walk away with after taxes.


In our recent note, “JACK HITS A SPEED BUMP”, we outlined our reasons for turning cautious on the stock given its outperformance versus the S&P 500 YTD. Qdoba’s disappointing performance was the key factor that moved us to change our stance following 2QFY13 earnings results. 



Qdoba Issues Not Transient


Having dedicated further time to Jack in the Box, since the May 15th earnings release, we have come to the conclusion that the issues facing Qdoba are most likely related to the location of its stores than a lack of brand acceptance among consumers. Tim Casey, the new president of Qdoba, was hired in March 2013 and has been given free rein to make the necessary changes to move the concept toward greater profitability and growth.


Over the next three-to-six months, we believe there is a high likelihood that Qdoba restructures its operations by closing stores and, perhaps, exiting certain markets completely. Currently, Qdoba has system stores in 44 states and others in Canada. Of those 44 states, 16 have 5 stores or less and generate lower-than-satisfactory returns due to the unit base being below the critical mass needed to raise brand awareness over the near-term. It’s difficult to say, at this stage, what number of Qdoba stores should comprise the system or which states or markets should be exited, but it is clear that significant changes are needed.



JACK Mgmt More Objective Than Most


Management teams tend to form a strong (almost unconditional) sense of allegiance to their own ideas but we believe that the executives in San Diego will attack the concept’s shortcomings with appropriate rigor.





From early 2012 until last week, we had described Qdoba as a call option for shareholders given the concept’s long-term growth potential. We still believe the upside potential in the stock, due to Qdoba’s growth potential, is perhaps 30% or more, but our confidence in shareholders realizing that return over the next three years has diminished. 


If or when the company moves to restructure Qdoba, we believe the impact on the stock could be a negative over the short-term but, ultimately, the decision will pave the way for the brand’s profitability to be improved, allowing investors to become more confident in assigning it a growth multiple. 



Howard Penney

Managing Director


Rory Green

Senior Analyst


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