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Morning Reads From Our Research Team

Takeaway: A quick look at what's on the Hedgeye radar screen.

Keith McCullough – CEO

Feeling Like Gatsby? Net Worth Hits Another Record (via BloombergBusinessWeek)

Fed Seen Reducing Asset Buying by Smaller Amount (via Bloomberg)

Russia's Vladimir Putin and wife Lyudmila divorce (via BBC)

Defiant Turkish PM Erdogan urges end to protests (via BBC)

 

Howard Penney - Restaurants

Taco Bell CEO: Traditional marketing no longer works (via Nation’s Restaurant News)

 

Daryl Jones – Macro

Carter: A Guide to Washington’s Scandals (via Bloomberg)

 

Josh Steiner - Financials

Mortgage rates ticked down 18 bps day-over-day to 3.98% (via Bloomberg)

 

Tom Tobin - Healthcare

Health insurance costs to rise for Ohioans, state says (via ModernHealthcare.com)

 

Kevin Kaiser – Energy

Centrica in shale talks with Cuadrilla (via Financial Times)

 

Matt Hedrick – Macro

Police brutality threatens restart of EU-Turkey talks (via euobserver.com)

 

Morning Reads From Our Research Team - reading


UA: Exceeding Our Expectations

Takeaway: UA exceeded our expectations at its Analyst Meeting. We wouldn't chase it here. But to short it you need a rev miss. Increasingly unlikely.

This note was originally published June 06, 2013 at 08:20 in Retail

 

UA: Exceeding Our Expectations - ua

 

Conclusion: UA exceeded our expectations at its Analyst meeting in Baltimore. We had UA on our Best Ideas list on the short side due to our concern that increasing capital costs to facilitate growth would erode margins in 2H. For reasons discussed below, we don't think we'll see that. We were wrong on the research here, and are not going to sit idle and hope it turns in our favor -- especially with a company where we believe so strongly that it will be a long-term share gainer. There are plenty of other lower-risk places we can look on the short side. UA officially off our list.  We're taking up our EPS estimates by a dime this year, and $0.20 in 2014 to $1.46 and $1.72, respectively, due to lower SG&A spend and slightly higher gross margins. We definitely would not chase the stock here at 40x earnings. Even though some of our best ideas are expensive (and deserve to be), this valuation is stratospheric. But to be short UA here, you need either a revenue miss, which we don't think we'll see, or a pick-up in opex, which now seems increasingly less likely.

 

 

DETAILS

Anyone who cares about the story likely heard the headline already -- that UA endorsed a $4+bn top line forecast in 2016 (revenue CAGR of about 22%).  By and large, that's consistent with what we're seen in recent years -- so no real shocker there.  But it's not really the revenue story that we doubted. After all, this is one of the few 'power brands' in retail that has blue sky revenue growth opportunities.

 

Our concerns have been two-fold. First and foremost, it was the cost of the growth. We believed that UA would have to take up its level of SG&A and Capital Spending to support growth in areas (footwear and international) that have higher barriers to entry, more competitive pressure, and are  inherently lower margin. Nike and Adidas, for example, have 90% of the global soccer/football market locked up, and they won't roll over and play dead in this space (a critical sport needed to reach every country except US).  In other words, we thought that UA would succeed in growing, but would go the way of other brands that came before it like Reebok, which had to take down margins from 11% to a high-single-digit rate in order to achieve its lofty growth goals.

 

Secondly, we were concerned about the revolving door of talent that started with changes in the supply chain organization two years ago through the departure of Footwear SVP Gene McCarthy in January of this year. Rarely have we seen so many executive departures without some kind of adverse consequences.   

 

But at the meeting yesterday, a few things became clear to us:

1)  Finally The Right Team? The team Kevin Plank has in place to take the company to the next level is probably the right one. We were most surprised by what we saw coming out of the footwear team. The irony is that we're finally seeing the beginning of a sustainable business AFTER McCarthy departed, which is ironic because he is one of the most talented executives in the space (at least that's our opinion). But for whatever reason, those skills did not translate well to UA. Don't get us wrong, some of the footwear product on the display wall was downright ugly -- most notably on the basketball wall (think of a dozen unmatched colors poured into a blender and then molded into a shoe). But then again, I (McGough) am hardly the authority on what product is 'cool' vs not. I'm probably a good contra-indicator. Personal preference aside, what I can make an authoritative statement on is that I was impressed by the company's focus on new platforms of product.

 

2) Why do platforms matter? Think way back to Nike versus Reebok. What makes Nike so successful is that it invests R&D dollars to come up with new platforms which become new lines of business. This dates back to Nike Air, but also includes Shox, Free, Lunar and FlyKnit.  In the Case of Reebok, they'd make a lot of noise about producing a new Iverson shoe -- which simply replaced the same shoe they sold at a different price point a year ago, but would rarely add new platforms. That's not a growth mentality. Under Armour is tearing a page out of Nike's playbook. It started with its Spine technology in Footwear, and is also doing it with the new Speed Form, which will be released en masse over the next 12 months. In apparel, we're seeing this with the Alter Ego line (think compression apparel meets superhero unitards). Sounds crazy, I know. But it was the best selling product in all of 1Q13 despite the fact that it only sold in March. We're seeing the same 'platform' development in apparel with things like Storm, InfraRed, ColdBlack, Scent Control, ArmourBra and a new men's underwear line. Products flop all the time, but platforms rarely fail in this business unless the R&D or the Marketing is severely botched.

 

We're doing further analysis on the specific areas of revenue growth potential for UA based on new information given at the analyst meeting (including international, retail and a deeper dive in footwear), and will return with more depth thereafter.


June 7, 2013

June 7, 2013 - tradingranges

 

Bullish Trends

June 7, 2013 - 10yr

June 7, 2013 - dxy2

 

Bearish Trends

June 7, 2013 - VIX

June 7, 2013 - oil

June 7, 2013 - gold

June 7, 2013 - copper


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 7, 2013


As we look at today's setup for the S&P 500, the range is 62 points or 0.96% downside to 1607 and 2.86% upside to 1669.       

                                                                                                                    

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.76 from 1.79
  • VIX closed at 16.63 1 day percent change of -4.97%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, May, est. 165k (prior 165k)
  • 8:30am: Change in Private Payrolls, May, est. 175k (prior 176k)
  • 8:30am: Chg in Manufacturing Payrolls, May, est. 4k (prior 0k)
  • 8:30am: Unemployment Rate, May, est. 7.5% (prior 7.5%)
  • 1pm: Baker Hughes rig count
  • 3pm: Consumer Credit, April, est. $13.3b (prior $7.966b)

GOVERNMENT:

    • House not in session; Senate schedule TBA
    • 8:30am: Mental Health America holds conf. on wellness breakthroughs, whole health
    • 10am: House Transportation and Infrastructure panel field hearing on improving the rail service in the northeast corridor
    • 11am: ABA, Economic Advisory Committee news conf. to present monetary policy predictions, consensus economic forecast, including consequences of sequester, spending cuts, housing recovery, whether banks are prepared to finance stronger consumer and business spending

WHAT TO WATCH

  • Job gains probably restrained in May amid U.S. fiscal cutbacks
  • Aso says Japan won’t intervene in market after surge in yen
  • Apple, other tech cos., deny giving U.S. access to servers
  • Glaxo may get Avandia reprieve after FDA panel vote on risks
  • Fed seen reducing asset buying by smaller amount: survey
  • Microsoft unveils trade-in rights for games on Xbox One console
  • AT&T 2Q customer growth improves as margins shrink
  • German exports rose more than economists forecast in April
  • Bundesbank cuts German growth forecasts while signaling recovery
  • Pimco defends $8.5b BofA mortgage accord as “outstanding”
  • U.S. Retail Sales, BOJ, Iran, U.S. Open: Week Ahead June 8-15

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Fewest Hedge Funds Invest in Gold Since ’10 as Assets Slump
  • Gold Traders Most Bullish Since Bear Market Began: Commodities
  • Urals Exports Plunge as Russia Refiners Keep Oil: Energy Markets
  • Tin Miners in Indonesia Stop Output on Raid Concern, Arsani Says
  • Gold Premiums in India Double as Imports Decline on Restrictions
  • Soybeans Head for Best Weekly Run in Four Years on Export Sales
  • EU Suspends Some Licenses to Import Sugar After Tender in May
  • Rubber Books Fourth Weekly Loss on Strong Yen, Demand Concerns
  • WTI Crude Heads for First Weekly Gain in Four Before Jobs Data
  • Low Dry Bulk Rates Boost Scrapping, Control Fleet Growth
  • Palm Oil Heads for Fifth Weekly Gain as Stockpiles Seen Dropping
  • LME Chief Abbott Plans to Leave After $2.2 Billion Takeover
  • Dalian Soymeal Gains Limited by Bollinger: Technical Analysis
  • Commodities Daybook: Gold Traders Most Bullish Since Bear Market
  • Gold Heads for Best Weekly Run Since March Before U.S. Jobs Data

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team


Buckle Your Seatbelt

Client Talking Points

YEN

There's been a big mean reversion blowout to my intermediate-term TREND line in USD/YEN. This level matters, big time. The intermediate-term TREND line is 95.66. This is a new risk to manage on a much more important duration than what I have been working on for the last 6 months (just risk managing the immediate-term TRADE range of #StrongDollar vs Burning Yen). Japanese Finance Minister Aso didn’t intervene overnight, so that’s what’s getting you this last push. If the Yen doesn’t stop going up from here, my model is going to be confused

USD

TREND support for USD Index is 81.34. One thing that can get the dollar to bounce is a blowout jobs report this morning. It's not clear what consensus thinks about the report into the print, as that seems to change every 3 hours of trading. The last 3 hours yesterday gave us a nice rip. 1624 or higher in the SP500 puts the 2013 bears under siege again. I think both 10yr UST yields and USD will be going up at the same time if that happens.

10YR UST

2.02-2.22% is the immediate-term risk range for the 10yr. So at 2.05%, we’re testing the low end of that range into the jobs print. That suggests consensus expectations remain bearish on growth. A blast toward 2.22% in a day would be interesting, but not surprising. We have no edge on the jobs report, and never will. Weekly rolling NSA Jobless Claims is what matters in our model most.

Asset Allocation

CASH 20% US EQUITIES 31%
INTL EQUITIES 19% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 30%

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

We don’t pretend to have an edge on the payroll number - anyone who does is paid to pretend #NFP

@KeithMcCullough

QUOTE OF THE DAY

"The best thing one can do when it is raining is to let it rain."

- Henry Wadsworth Longfellow

STAT OF THE DAY

According to Forbes, the 400 wealthiest Americans have more wealth than the bottom 150 million Americans combined.



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