Kellogg – A Challenged Outlook in 2H 2013

Kellogg raised a number of red flags in its earning call this morning. The stock traded down -1.1% today versus SPX +1.2% alongside the company reducing its FY sales estimate to 5% (prior 7%) and reducing its FY EPS range to account for a  $0.09 FX headwind (prior $0.02). Despite beating consensus EPS in the quarter ($1.00 vs $0.97) revenues were lighter than expected (+6.9% versus +9.9%) with weakness in key categories and geographies.


Today K broke its TRADE line of support at $65.96 (to become its new level of resistance) and TREND resistance is at $64.37. We would not be buyers of this stock just on today's weakness.


Kellogg – A Challenged Outlook in 2H 2013 - VV.K


We’re optimistic that the Pringles acquisition can help fuel returns in 2H (Q2 revenues without the Pringles acquisition were down -0.5% on the quarter), however the weakness seen in the U.S. business (sales of $2.44B vs consensus $2.56B, or -1.6%) and continued weakness in the cereal segment, signal that K has taken its eye off the ball and will need the coming quarters to realign its marketing spend and innovation to get back on track. 


Matthew Hedrick

Senior Analyst


While not as material as PNK's, BYD’s “non-recurring” charges have been a mainstay exclusion from Adjusted EBITDA.


  • BYD’s quarterly GAAP operating expenses excluded from Adjusted EBITDA have been consistent and sometimes material
  • As a percent of company reported Adjusted EBITDA, excluded expenses have represented 1-10%
  • While not as egregious as PNK's, BYD’s reported Adjusted EBITDA should probably be adjusted again – downward.  Shall we call it ‘Adjusted’ Adjusted EBITDA’?



In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • MAR hit their guidance for Q2 but quality was low.  RevPAR came in at the low end of guidance.  Going forward, Group and DC remain the laggards.




  • SAME:  Reiterates the 'steady as you go' theme.  Comparable systemwide US REVPAR increased 5.2% in 2Q, at the low end of its 5-7% guidance.
    • "As we look at the U.S., we think it's steady as you go, good growth environment."
    • "We would expect North America to be the stronger of the continents out there."


  • SAME:  2Q REVPAR was 1%.  France/Russia led the strength.  London will have difficult comps in 3Q due to the Olympics but they're optimistic on 4Q given much easier comps.
    • "We get about 10% of our fees out of Europe. It's still flat. The economies in Western Europe, Germany, France, some of those countries, obviously still have some structural issues to get through. Southern Europe, Spain, Portugal, Italy, suffering with high unemployment, so I think Europe's going to be kind of flat for a while."
    • "One area in Europe that is doing well is Eastern Europe, Russia, the 'stans', Georgia, those areas with the natural resources, commodities, continue to drive well and especially Russia seems to be doing well right now."


  • SAME:  REVPAR rose only 1% but MAR gained 6% in market share.  2H 2013 have will easier comps.
  • PREVIOUSLY:  "China, same thing, growing middle class, growing business community, so a lot of new travel that's taking place in that part of the world. We think it'll be choppy, but over the long-term it's a great place."


  • WORSE:  Group revenues are up only 2% in 2014.  They have 50% of the MAR brand business booked for 2014.
    • "In fact, they were up significantly in the first quarter, the pace for 2014, and we saw big movement in the year for 2014 bookings.  On the shorter horizon, though, on what we call, in the year for the year, that short-term bookings, as we said in the first quarter, we are seeing a little hesitancy at corporate America pulling the trigger on those."
    • "For 2014, we'll probably have 40%, 45% of the group business on the books I would think. And so we're building that book and obviously by the time we get to the end of year we should be something closer to 70%, actually we could be 50%-ish now, maybe low 50% for the total business for 2014 that's already on the books."


  • WORSE:  Remains a challenging environment.  % of group business coming from DC has declined from 5% to 2% for 2013. 
    • "On DC, in referring to the government, I guess, DC obviously feels sequestration more than others. But it hasn't been a big mover. I think the government, quite frankly, started cutting costs and stopped traveling or slowed down their travel pretty dramatically in 2012...I think we talked in the first quarter that it's going to cost us 60 basis points to 70 basis points. That hasn't changed. We still see that probably holding up. I think DC, it's interesting as you look at DC, it kind of leveled off. And it's holding its own."


  • BETTER:  Transient REVPAR gained 6% in 2Q and the positive trends have continued. 
  • PREVIOUSLY:  "Transient business was very strong, particularly nonqualified or retail-rated business as we eliminated discounts, pushed business into higher rated categories and raised rates."


  • SAME:  Strong incentive fee growth in the US offset flat incentive fees internationally.   
  • PREVIOUSLY:  "Incentive fees exceeded our expectations, largely due to strong performance among our full-service hotels in the U.S., particularly in New York and Florida."


  • BETTER:   Termination fees of $13MM added 2 cents to the bottom line.
  • PREVIOUSLY:  "We expect lower year-over-year termination and residential branding fees and higher pre-opening costs."



  • SAME:  Due to the delay in Obamacare, MAR is forecasting high single digit increases for healthcare costs for 2014 and a doubling of that rate in 2015. 
  • PREVIOUSLY:  "When you look into 2014, certainly ObamaCare is the biggest new potential wrinkle in the cost profile. Our estimates today for the managed portfolio in the United States is about $60 million to $100 million, and that would be, oh, I don't know, maybe about half of a point, so a 50 basis point impact on margins....obviously these are system costs that will ultimately be borne by the hotel. We will pick up a share of that through incentive fees for the managed portfolio. We don't know what the number would be for the franchise portfolio, but in terms of number of rooms, the franchise portfolio is about the same as the managed portfolio in the United States, so the numbers could be around the same order of magnitude."


  • BETTER:  Expects 100-150bps improvement in margins for 2013
  • PREVIOUSLY:  "We're more likely to see inflation go up than vice versa, and that will have some modest impact. On the other hand, with each passing year, more of the REVPAR growth comes from rates, and obviously a REVPAR coming through rate is better for margins then REVPAR coming through occupancy. And I think, guys, it's way too early to be giving guidance for 2014 and 2015, but I think our expectations would be that we will net-net see margin growth above 100 basis points in each of those years."

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SAM – The Stock Rockets; EPS and Cap Ex Revised Higher

SAM report after the close yesterday and the stock is up on a rope at +13.1% today. In a quarter that saw a nice turnaround in the performance of Samuel Adams in its Q2 2013 results versus last quarter, we’re a bit surprise by the move (clearly some short covering is involved)  as we still expect challenges ahead given the competitiveness of the craft segment as well as increased fragmentation alongside new categories like cider and teas.   SAM did raise its FY EPS guidance and also announced increased investment in the business for longer term profitability (more below), which we think is prudent for the business but could lead to bumpy quarters ahead.


The chart below shows our immediate term TRADE level of support. We could see the stock blasting shorts all the way up to the $183 - $204 range.


SAM – The Stock Rockets; EPS and Cap Ex Revised Higher - VV. SAM


This quarter’s strength in Sam Adams as well as the bottlenecks it experienced to meet demand came as somewhat of a surprise to the company. On the call it increased its capital expenditure for 2013 and 2014 to improve efficiencies at its existing breweries to address its inability to meet demand this quarter (while running at full capacity and leveraging higher than planned usage of third party brewerie). It’s also increasing its keg purchases, and spends on media and marketing, its sales-force, and innovation (including the launch of its new can in May) in the back half of the year.


SAM increased its FY 2013 cap ex guidance to the range of $100MM to $140MM versus the previously communicated range of $85MM to $105MM, and $100MM to $130MM in 2014 versus prior estimates of $30MM to $50MM.


What we liked:

  • EPS $1.45 beat consensus of $1.36
  • Revenue $181.3MM vs consensus $175.7MM, or an increase of $33.8MM or 23% versus the prior-year quarter
  • Q2 Depletion growth of 24% versus 16% in Q2 2012 primarily due to Angry Orchard (rolled out Q2 2012), Samuel Adams, and Twisted Tea
  • Core shipment volume increased 21% versus the prior-year period
  • FY EPS guidance increased to $5.10 - $5.40 versus previous estimate of $4.70 - $5.10
  • FY depletion growth increased to 17% - 22% versus previous 10% - 15%
  • New can, in line in terms of volume perspective, ~ 4%


What we didn’t like:

  • In the quarter, GM backed off to 53.6% versus 54.5% in the prior-year quarter
  • FY GM guidance reduced to 52% - 54% versus previous 53%-55% due to increases in product and ingredient costs

Matthew Hedrick
Senior Analyst 

Draghi’s Two Forecasting Heads

Continuing with our call since June that Draghi and the ECB would be on hold with changes to the main interest rate until at least the Fall, today’s decision by the ECB to keep rates unchanged was no surprise. Interesting, what has faded over recent months is a call for additional non-standard measures like increased lending facilities to small and medium-sized enterprises (SMEs) or talk of cutting the deposit rate to negative. We continue to think that policy measures of the ECB will continue to propel most Eurozone capital markets higher as underlying fundamentals remain challenged with only slight improvement in year-end.


Draghi’s Two Forecasting Heads  - vv. interest rates


Today’s mantra on the ECB conference call was a continuation of previous expectations, namely a gradual recovery in the back half of 2013, and Draghi reiterated more recent “forward guidance” that interest rates will remain at present or lower levels for “an extended period of time”.


Yet Draghi’s optimism around any great improvement in the economic outlook remains clouded. He lists underlying indicators of this recovery as export growth, recent gains in real income due to lower levels of inflation, improvement in confidence figures and PMIs, and deposit rates at levels last seen in 2007. Yet in the same breath he mentions at least equal downsides risks to this improvement: deterioration of global money and financing conditions, low credit growth, rigid labor markets, and the slow pace of economic reform at the country level. 


Taken together, we expect economic performance to be challenged over the intermediate term, despite selective gains, and believe capital markets will continue to act favorably in response to the ECB’s interventionist policy stance (a continuation of the OMT policy announced a year ago) rather than in response to significant real improvements in the underlying health, which we do not expect in 2013. Our Eurozone growth forecast for 2013 is -0.8% to -0.6%.  We expect credit conditions to remain clogged for a protracted period (more below), fiscal and labor reformers to be ignored or have little impact, and confidence and consumer spending to return only gradually in a backdrop of political uncertainty in Spain, Italy, and Portugal.


Draghi’s Two Forecasting Heads  - vv. equities


On the ECB adding minutes to its communication tools, Draghi signaled that there will be a proposal on minutes in the Fall.




  • One cause for concern remains credit conditions across Europe. In the chart below we show ECB Loans to Non-Financial Corporations and Households. The former is near all-time lows at -2.3% and the latter has held at the low level of +0.3% for the past three months.  We’re also hearing of more Eurozone banks (particularly in the periphery) report increasing non-performing loans, which will diminish credit quality and with it boost rates, further clogging the credit channel. S&P cut the ratings of 18 Italian banks just last week.
  • Non-performing loans for Italian banks surged +22% in May from the same month of 2012 to €135.5 billion and lending by Italian banks to the private sector dropped -3.3% in June from a year ago to €1.6 trillion, according to the Italian Banking Association.

Draghi’s Two Forecasting Heads  - vv. loans




  • Today’s Manufacturing PMIs proved mostly better in the July reading versus June. The Eurozone aggregate was 50.3 JUL (exp. 50.1) vs 48.8 JUN, which represented the first expansionary reading since July 2011. We expect some improvement in these levels into year-end.
  • Eurozone Confidence Figures (Economic, Consumer, Business, Services, Industrial) for July were also stronger versus the previous month and have trended higher over the last three months.

Draghi’s Two Forecasting Heads  - vv. pmis


Draghi’s Two Forecasting Heads  - vv. manu and service confid



Our critical immediate term TRADE lines of support and resistance are $1.31 and $1.33, respectively.  Our intermediate term TREND Line is at $1.31, and we expect the cross to be range bound in August barring any political events that could shake the range.


Draghi’s Two Forecasting Heads  - vv. eur new


Draghi’s Two Forecasting Heads  - vv. cftc


Matthew Hedrick

Senior Analyst

Overbought: SP500 Levels, Refreshed

Takeaway: Employment #GrowthAccelerating (best jobless claims print since 2007) and #RatesRising are driving both the US Dollar and US Stocks higher.



Overbought, but a very bullish overbought at that!


Today’s new all-time high is sponsored by confirming evidence that both employment #GrowthAccelerating (best jobless claims print since 2007) and #RatesRising can drive both the US Dollar and US Stocks higher.


Sell Gold and Treasuries yet? They are being appropriately tapered. That’s not new as of today – that’s the TREND.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1705
  2. Immediate-term TRADE support = 1690
  3. Intermediate-term TREND support = 1621


In other words, everyone and their brother will be waiting for the next “correction”, but now almost everyone has to chase.


I’m not a fan of chasing, but I’m not a fan of the end of the world trade either. Stay with what’s been working - long growth as #GrowthSlowing expectations continue to be misplaced.




Keith R. McCullough
Chief Executive Officer


Overbought: SP500 Levels, Refreshed - SPX



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