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PM – Getting Smoked

Philip Morris International reported Q2 2013 results this morning and as we expected volumes were heavily impacted, down -3.9% Y/Y, contributing to top and bottom line misses versus consensus. FY 2013 EPS guidance was revised down to $5.43-5.53 versus prior guidance of $5.55-5.65, and FX was a $0.07 headwind to earnings.

 

CFO Jacek Olczak described today’s results as a “surprise”, despite being foreseen as a challenged quarter. Volumes were down across all four of its regions (EU, EEMA, Asia, and LA), with only Asia outperforming expectations with a result of -3.5%.

 

We think PM will be challenged to meet its full-year guidance, given a weak macro environment, dampened consumer spending across many of its regions, a persistent FX headwind with our #StrongDollar call, and the company’s only main lever against volume declines: taking up price.  

 

Our quantitative levels are flashing bearish across the immediate and intermediate term TRADE and TREND durations.

 

PM – Getting Smoked - VV. PMI

 

 

What we liked:

  • CFO’s belief that Russia’s excise tax increase will be passed on to consumer and outlook for a reasonable tax environment in 2H
  • Japan - expected FY 2013 volume down only  2% 
  • In the EU, PM cited slight optimism in the reduction of government austerity measures throughout the region as a tailwind for discretionary spending and was optimistic that the region’s volume results, at -5.9% Y/Y this quarter (versus -10.1% last quarter), would improve in 2H

What we didn’t like:

  • Q2 adjusted EPS $1.30 vs consensus $1.41
  • Revenue $7.92B vs consensus $8.17B, and down -4.4% Y/Y
  • Devaluation of the Australian Dollar, Indonesian Rupiah, Mexican Peso, Russian Ruble, and Turkish Lira cost 7 cents to the bottom line
  • EU volume -7% for FY 2013 vs 6.5% previously
  • Russia - impacted by higher excise taxes (9-22%) implemented in the beginning of the year, expect FY 2013 volumes down 6-7%
  • The CFO cited the impact of higher excise taxes in Russia and macro headwinds on discretionary income: Lower wage dynamic, as utilities prices up 10% this quarter (vs 5% last year), with broader inflation running at 7%
  • Turkey - resurgence of illicit trade. Expect FY 2013 volumes down by 7-9%
  • Philippines weak on tax increases

 

Other: On E-cigs


On the Q&A there were a couple questions on E-cigs. CFO Olczak kept his words brief but said that the market is difficult to estimate, and he doesn’t think it is more than 1% of the industry, which itself might be a high estimate. He believes demand and interest overall is much stronger in the U.S. than in Europe and that what’s distinguishing the category is its lower price points versus traditional cigs, and that the taste profiles don’t compare. He cannot size up if the category will be one with staying power, or one that is a fad. Finally, he hinted that PM could get involved in the market in 2016/7.  

 

Matthew Hedrick

Senior Analyst


Stock Report: Starbucks Corporation (SBUX)

Stock Report: Starbucks Corporation (SBUX) - HE II SBUX boxes 7 17 13

 

THE HEDGEYE EDGE

 

Starbucks is the premier roaster, marketer, and retailer of specialty coffee in the world, operating in more than 50 countries.  The company sells drip brewed coffee, espresso-based hot drinks, tea, cold drinks, a variety of food items, as well as mugs and similar products.

 

 

 

As of March 31, 2013, there are more than 18,850 Starbucks locations across the globe, 52.2% company owned.  During the first half of fiscal 2013, company-operated stores accounted for 78.8% of total net revenues.

 

 

 

Risk factors for Starbucks’ business include costs for commodities that can only be partially hedged, such as fluid milk and high quality Arabica coffee, labor costs such as increased health care costs, and other variables beyond management’s control.

 

 

 

Trading Starbucks today, it’s all about the duration.

 

TIMESPAN

INTERMEDIATE TERM (the next 3 months or more)

We remain positive on the intermediate-term TREND for Starbucks as the company should continue to post stable revenue growth thanks to strong growth potential in international markets as well as the ongoing expansion of its CPG business.  If the US employment picture continues to improve, that would give investors further confidence in Starbucks achieving its targets.

 

LONG-TERM (the next 3 years or less)

The long-term TAIL for Starbucks is attractive; the company has plenty of white space to grow through several channels and geographies with ample expertise and capital to execute its strategies.  The company must retain focus on the core business and we believe that management is acutely aware of this following their prior (‘07/’08) experience.

 

ONE-YEAR TRAILING CHART

Stock Report: Starbucks Corporation (SBUX) - HE II SBUX chart 7 17 13


Initial Claims: Looking Good

Takeaway: Another week of solid labor market improvement.

The US labor market continues to improve at an accelerating rate. This week, rolling Non Seasonally Adjusted (NSA) initial claims were 10.6% below their level last year. This compares with the 10.1% year-over-year improvement posted in the prior week and 9.5% improvement in the two weeks prior to that.

 

Initial Claims: Looking Good - steinerjobs

 

There are a couple potential explanations for the amount of strength we're seeing in the data.

 

The first is Obamacare prompting the hiring of more part-time and temp workers -- on the margin. The second is the auto industry, which normally shuts down its production plants for two weeks around July 4th. Auto workers are entitled to file initial unemployment claims for these two weeks. This year, however, due to stronger new car demand and critical, new model rollouts from GM and Chrysler, many of these plants have remained open. 

 

The bottom line here, however, is that the labor market continues to mend at an impressive rate. 

 

Joshua Steiner, CFA

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

jcasteleyn@hedgeye.com

 


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INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG

While the Fed’s employment of its dovish-leaning “communication tool” continues to deliver a diminishing marginal impact on yield chase and inflation hedge assets, the positive gravity of the domestic macro data, and the labor market data specifically, continues to pull the growth trade (small/mid cap, higher beta, domestic, consumption oriented) higher. 

 

This week’s data extended the trend of positive acceleration in the labor market, which continues to buck the seasonal trend of the last 3 years and register ongoing improvement despite any existent fiscal policy related drag.   

 

Below is the breakdown of this morning's claims data, along with some sector specific takeaways, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

 

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Auto Tailwinds, But Robust Nevertheless


The labor market continues to improve at an accelerating rate. This week, rolling NSA initial claims were 10.6% below their level last year. This compares with the 10.1% YoY improvement posted in the prior week and 9.5% improvement in the two weeks prior to that.

 

There are a few potential narrative overlays (i.e. explanations) for the amount of strength we're seeing in the data. The first is ACA, i.e. Obamacare, prompting the hiring of more part-time and temp workers, on the margin.

 

The second is the auto industry, which normally shuts down its production plants for two weeks around July 4th. Auto workers are entitled to file initial unemployment claims for these two weeks. This year, however, due to stronger new car demand and critical, new model rollouts from GM and Chrysler, many of these plants have remained open. For instance, Ford said back in May that 21 of its North American factories will shut for only one week this summer. GM said it would idle its factories for only short periods, and Chrysler said it would close just 4 of its 10 North American assembly plants during the traditional two-week break.

 

While it's tough to know how many workers this positively affected, it is likely to exert some upward pressure on SA claims in the week or two ahead.

 

The bottom line here, however, is that the labor market continues to mend at an impressive rate. We think credit-levered, value Financials (BAC, COF) remain optimal ways to play this on the long side. BAC's results on Tuesday were very strong, fueled primarily by housing's improvement and its associated benefits to falling lititgation costs, but underpinning that is the recovery in labor. COF reports tonight. We recently published a note outlining our bullish view on COF across all three durations (short, intermediate and long term).

 

The Data

Prior to revision, initial jobless claims fell 26k to 334k from 360k WoW, as the prior week's number was revised down by -2k to 358k.

 

The headline (unrevised) number shows claims were lower by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.25k WoW to 346k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -10.1%

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 1

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 2

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 3

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 4

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 5

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 7

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - JS 6

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

China’s Richest Man Sees Economic Growth Slowing in Second Half (via Bloomberg)

China June Home Prices Rise as Big Cities Post Record Gains (via Bloomberg)

Russian Court Convicts Opposition Leader (via New York Times)

Greek MPs back public sector cuts amid protests (via BBC)                                                                    

U.K. Retail Sales Increase as Discounts Spur Consumer Demand (via Bloomberg)

 

Morning Reads on Our Radar Screen - china

 

Josh Steiner & Jonathan Casteleyn – Financials

Jobless claims fall sharply in positive sign for hiring (via Reuters)

Morgan Stanley Tops Analysts’ Estimates on Trading Revenue (via Bloomberg)

 

Howard Penney – Restaurants

McDonalds' Minimum Wage Gaffe (via YouTube)

 

Jay Van Sciver – Industrials

Jim Chanos: Caterpillar is doomed (via CNN)

 

Matt Hedrick – Macro

Italy: A new (and unexpected) ally on EU reform for David Cameron? (via Open Europe Blog)

 

Tom Tobin – Healthcare

Reducing health care costs easier said than done (via Albuquerque Business First)

Mount Sinai merges with owner of Beth Israel, St. Luke's creating one of the nation's largest not-for-profit health systems (via NY Daily News)


INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG

Takeaway: Another week of solid labor market improvement. Take advantage of still-cheap, credit-levered value names on the long side on this data.

Auto Tailwinds, But Robust Nevertheless

The labor market continues to improve at an accelerating rate. This week, rolling NSA initial claims were 10.6% below their level last year. This compares with the 10.1% YoY improvement posted in the prior week and 9.5% improvement in the two weeks prior to that. There are a few potential narrative overlays (i.e. explanations) for the amount of strength we're seeing in the data. The first is ACA, i.e. Obamacare, prompting the hiring of more part-time and temp workers, on the margin. The second is the auto industry, which normally shuts down its production plants for two weeks around July 4th. Auto workers are entitled to file initial unemployment claims for these two weeks. This year, however, due to stronger new car demand and critical, new model rollouts from GM and Chrysler, many of these plants have remained open. For instance, Ford said back in May that 21 of its North American factories will shut for only one week this summer. GM said it would idle its factories for only short periods, and Chrysler said it would close just 4 of its 10 North American assembly plants during the traditional two-week break. While it's tough to know how many workers this positively affected, it is likely to exert some upward pressure on SA claims in the week or two ahead.

 

The bottom line here, however, is that the labor market continues to mend at an impressive rate. We think credit-levered, value Financials (BAC, COF) remain optimal ways to play this on the long side. BAC's results on Tuesday were very strong, fueled primarily by housing's improvement and its associated benefits to falling lititgation costs, but underpinning that is the recovery in labor. COF reports tonight. We recently published a note outlining our bullish view on COF across all three durations (short, intermediate and long term).

 

The Data

Prior to revision, initial jobless claims fell 26k to 334k from 360k WoW, as the prior week's number was revised down by -2k to 358k.

 

The headline (unrevised) number shows claims were lower by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.25k WoW to 346k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -10.1%

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 1

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 2

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 3

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 4

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 5

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 6

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 7

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 8

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 9

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 10

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 11

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 12

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 13

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 19

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 14

 

Yield Spreads

The 2-10 spread fell -7.4 basis points WoW to 219 bps. 2Q13TD, the 2-10 spread is averaging 184 bps, which is higher by 13 bps relative to 1Q13.

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 15

 

INITIAL CLAIMS: AUTOS HELPED BUT THE CORE TRENDS REMAIN VERY STRONG - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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