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Hedgeye Expanding Consumer Staples Coverage

We are pleased to announce that Senior Analysts Rory Green and Matt Hedrick will be taking over and expanding our Consumer Staples coverage.  Both Rory and Matt have been at Hedgeye for over four years and have made immense contributions to our world class consumer and macro franchises. 

 

Matt will be focused on food and beverage and Rory will be focused on home products.  Similar to other verticals, their focus will be on developing intensively researched investment ideas-  both longs and shorts.  This duo will allow us to expand our consumer staples coverage and cover more names.  They will be rolling out coverage over the next few weeks and will be upping the velocity of deep dive ideas.

 

On a separate note, Rob Campagnino recently left the firm.  We would like to thank him for his work and wish him all the best in the future.

 

If you have questions, please contact your sales representative or email .

 

Daryl G. Jones

Director of Research

 


Trade of the Day: LNCO

Takeaway: We shorted LinnCo (LNCO) at 10:22AM at $38.94.

Hello darkness my old friend, it's good to talk to you again... Yup. That’s right. Hedgeye Jedi Kevin Kaiser reiterates the bear case on LinnCo. And all its insecurities. Timber.

 

Trade of the Day: LNCO - lnco

 


DF – Looking for $0.60 Dollars? Look No Further Than Dean Foods

Takeaway: At 5x EBITDA with an under leveraged balance sheet, we think DF has a conservative 20 – 30% upside from here.

Our Consumer Staples team has been touting Dean Foods (DF) for the past couple of months and although the stock has moved, we believe there remains significant value and upside in the name.  Before getting into an updated valuation analysis, we wanted to tell you why we like this business (especially at 5x firm value / 2013E EBITDA).

 

We think DF is a compelling business for the following reasons:

  • National scale – DF is the largest processor and distributor of fluid milk in the United States at more than 5x the size of its nearest competitor.  As such, it is a natural and synergistic acquirer of smaller competitors, especially given its ample free cash flow and low debt load.
  • Market share within the market – In 80% of its IRI defined geographies, DF has the #1 or #2 market share of branded milk.  This dominant market share will make it difficult for a competitor to compete on price, since DF typically has a volume advantage.  (DF national market share has been stable and ranged between 37.5% and 38.2% for the last nine quarters ending in Q1 2013.)
  • Strong management – We could drill deeper into this topic, but this is a management team that has shown an ability to execute, as evidenced most recently by the successful spin-off of WhiteWave and monetization of Morningstar. As well, management has met or exceeded expectations for the last nine quarters.  This was also in a period in which they reduced operating costs by $53MM, or ~9%, from Q1 2011 -> Q1 2013.

That all said, DF is still a commodity company, even if a branded one, so we do need to consider that fact when evaluating the business along with the highlights above.   In our view, the current valuation provides substantial downside protection and fully accounts for the commodity nature of the business.

 

In the table below, we provide an upside / downside analysis based on 2013E EBITDA and multiples of enterprise value / EBITDA.  Currently, we think the stock is at a price in which the risk / reward is compelling.  On the downside, absent a dramatic change in the milk market or poor management execution (unlikely), we think the reasonable downside is 4.5x EBITDA, or ~16% from current levels.

 

DF – Looking for $0.60 Dollars? Look No Further Than Dean Foods - zz. 1

 

In terms of the upside, as noted we do acknowledge that this is a commodity company with only modest top line growth rates, but we do believe given the compelling business characteristics and high free cash flow yield reasonably justify a multiple in the 6.5X – 7.0x EBITDA range, which implies 32% - 44% upside from current levels.  From our perspective, a situation in which there is 2:1 upside / downside with fundamentals trending our way is a compelling investment.

 

The argument for the upper end of the multiple range of course is based on the generous free cash flow nature of this business.   While 2013 is a bit of an odd year given the corporate activity (notably the spin-off of WWAV), we believe that on a normalized basis DF will generate in the range of $140 - 150 million of free cash flow to the equity annually.  This implies a rough 8% free cash flow yield.  In combination, a 8% free cash flow yield and a debt-to-EBITDA ratio of just over 2x makes this a compelling LBO candidate.  (Moreover, the debt-to-EBITDA is closer to 1x if we net out the WWAV stake.)

 

In addition, DF’s publicly traded debt seems to validate our view of the stability of the cash flow, and potential to add more debt to the balance sheet in a LBO type scenario, as all three tranches are trading well above par and tight versus Treasuries.  In fact, 5-year DF paper is trading at only 210 basis points above comparable Treasuries.

 

The key pushback from many is that DF is a “value trap”, or a business in decline, so it is a cheap stock that can get cheaper.  Indeed, there have been a number of publicized articles recently that highlight that per capita milk consumption has been in decline since 1970.  Even if this is accurate, total volumes have shown a steady increase in recent years, which is more relevant for a market share leader like DF.  In fact, in the chart below we show that total volumes have increased by 20% over the last nine years.  Not stellar, but definitely the kind of growth and cash flow that gets a private equity firm licking the milk off their moustache!

 

DF – Looking for $0.60 Dollars? Look No Further Than Dean Foods - zz 2

 

Daryl G. Jones

Director of Research

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Top-9 Tweets to Keith Today

Takeaway: A quick highlight reel of today's top tweets to @KeithMcCullough.

TV embarrassment to the max. You are the only one on my feed or tv this week that didn't say get long $GLD but short it.

@Cole__Hines 3:57PM

 

Do you plan on wearing jorts to bed tonight? Does Mrs. Mucker approve of the look?

@PetersenRChris 3:54 PM

 

I don't always agree with your calls. But you've been on fire. Well done.

@RandyNichols24 3:11PM

 

thanks for the GLD short. Used options made 30% this week. Have good weekend.

@amhanlon19 12:44PM

 

You and your Hedgeye crew are leading a very positive paradigm shift in accountability in the investing community. Kudos!

@Kilkha 11:32AM

 

Nice $GLD short yest on highs enough $ for my new Harley ill grab it next week... Thanks @KeithMcCullough #stockaction #winning

@hedgeyejedi 11:21AM

 

it takes stones to make the calls u make in the face of all this hate and you keep crushing it! Cheers

@GriswoldCapital 10:13AM

 

Hedgeye is kicking A$$ and taking gnomes..oops I mean names..sorry freudian slip

@ExtraDividends 9:46 AM

 

Am thinking @KeithMcCullough is the hottest lighting rod in Twitterdom. It’s a love/hate scenario of epic proportions.

@sommer1 9:23AM

 

Top-9 Tweets to Keith Today - tweet


MCD SALES PREVIEW

McDonalds is set to release its May sales results before the market open on Monday. We expect sales to disappoint versus consensus expectations as the difficult competitive environment in the U.S., as well as economic malaise in Europe, continues to impact results.

 

We’ve been the lone bears on Wall Street when it comes to MCD since turning negative on the name on 4/25.  For May, much of the downside in global same-restaurant sales growth expectations comes from Europe. See our recent work on this here. For 2013, we still believe MCD is not going to hit the numbers that Wall Street is expecting.

 

Below, we provide charts with our estimates for each region of the world versus consensus expectations. We will follow up Monday’s release with our thoughts on the data and our updated view of the stock. The long-term trend in MCD’s sales trends needs to reverse. As things currently stand, we believe the data suggests a strategic failure on the part of the company as well as a disconnect between investors’ expectations and the reality of the company’s fundamentals. As this continues, we are looking for more underperformance versus peer consumer and S&P 500 benchmarks.

 

MCD SALES PREVIEW - mcd may sales

 

MCD SALES PREVIEW - mcd us sales preview

 

MCD SALES PREVIEW - mcd euro preview

 

MCD SALES PREVIEW - us apmea sales preview

 

MCD SALES PREVIEW - mcd global preview

 

MCD SALES PREVIEW - mcd srs global ttm

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


HEARD ON THE MORNING CALL: #BurningYen

Takeaway: Japan is a completely dysfunctional country. If you live there, you may want to consider moving.

HEARD ON THE MORNING CALL: #BurningYen - yen

 

If you’re living in Japan, you should probably think about moving. It is a completely dysfunctional country. My favorite guy over there right now, Finance Minister Taro Aso (the guy who is going to rip his country a new one) came out yesterday and basically said, “We’re not going to intervene – yet.

 

Guess what? The market understands what that means. That’s the big move that really caught people offside’s yesterday—the currency move. It stoked a massive mean reversion move on the order of five standard deviations in my model. What did I do? I took the other side of it. I’m very comfortable with #StrongDollar. I’m even more comfortable #ShortYen relative to the USD.

 

Bottom line is that it was a freak out day and you’ve just got to deal with it. There’s nothing you can do about it, other than make a decision. You’re either not going to be short the Yen and long the Dollar, or you’re going to do more of both which is of course precisely what we’re telling you to do.

 

(Excerpted from Hedgeye's morning conference call)


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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