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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 7, 2013


As we look at today's setup for the S&P 500, the range is 38 points or 1.26% downside to 1676 and 0.98% upside to 1714.                                    

                                                                                           

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.33 from 2.34
  • VIX closed at 12.72 1 day percent change of 7.43%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Mortgage Applications, Aug. 2 (prior -3.7%)
  • 11am: Fed to buy $1.25b-$1.75b debt in 2036-2043 sector
  • 10:30am: DOE Energy Inventories
  • 1pm: U.S. to sell $24b 10Y notes
  • 1:40pm: Fed’s Pianalto speaks on monetary policy in Cleveland
  • 3:00pm: Consumer Credit, June, est. $15b (prior $19.6b)
  • Bank of Japan sets target rate, 2014 monetary base rate

GOVERNMENT:

    • 6:30am: Quinnipiac Univ. N.J. likely voter poll on Senate race; including Democratic, GOP primary voters
    • 3:50pm: President Obama delivers speech to troops at Camp Pendleton in Calif.

WHAT TO WATCH:

  • Amgen said to boost Onyx Pharmaceuticals bid to $130/shr
  • Mead Johnson to pay $33m to end China formula probe
  • Disney profit little changed, “Lone Ranger” hits film unit
  • Bats said glitch yday was network issue, not w/ software
  • Direct Edge, Nasdaq exchanges also had issues yday
  • Anadarko doubles qtr div. to 18c/shr from 9c, est. 11c
  • Wal-Mart may bid for Li Ka-Shing’s ParknShop: Reuters
  • TPG, Carlyle, GIC may bid for H.K.’s Quality Healthcare: SCMP
  • Omnicom Investor sues over merger with Publicis Groupe
  • Yuan advances to 19-yr high on PBOC fixing, convertibility bet

EARNINGS:

AM EARNS:

    • AMETEK (AME) 7am, $0.52
    • AOL (AOL) 7am, $0.43
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.40)
    • Avnet (AVT) 8am, $0.96
    • Carlyle Group (CG) 6:30am, $0.55
    • Cimarex Energy (XEC) 6am, $1.27
    • CommonWealth REIT (CWH) 6:28am, $0.64
    • Devon Energy (DVN) 8am, $0.95 - Preview
    • Duke Energy (DUK) 7am, $0.93
    • Gogo (GOGO) 7:30am, $(0.37)
    • HollyFrontier (HFC) 7:30am, $1.39
    • Icahn Enterprises (IEP) 8am, No est
    • ING US (VOYA) 5:55am, $0.63
    • Lexington Realty Trust (LXP) 7:30am, $0.24
    • Marsh & McLennan (MMC) 7am, $0.67
    • Melco Crown (MPEL) 7:51am, $0.27
    • Molex (MOLX) 7:30am, $0.35
    • Newcastle Investment (NCT) 6:30am, $0.11
    • Pepco Holdings (POM) 6:03am, $0.23
    • Ralph Lauren (RL) 8am, $1.94
    • Sinclair Broadcast (SBGI) 7:30am, $0.15
    • SunEdison (SUNE) 6am, $(0.15)
    • Time Warner (TWX) 7am, $0.76
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.28

PM EARNS:

    • Agrium (AGU CN) 5:30pm, $4.97 - Preview
    • American Water Works (AWK) 4:15pm, $0.61
    • Array BioPharma (ARRY) 4:19pm, $(0.13)
    • ARRIS Group (ARRS) 4pm, $0.26
    • Brookdale Senior Living (BKD) 4:43pm, $-
    • CenturyLink (CTL) 4:07pm, $0.66
    • Concho Resources (CXO) 5pm, $1.00
    • Continental Resources (CLR) 4:37pm, $1.25
    • Corrections Corp of America (CXW) 4:10pm, $0.65
    • Diamond Resorts Intl (DRII) After-Mkt, No est.
    • DryShips (DRYS) 4:05pm, $(0.07)
    • Energy Transfer Equity (ETE) 5:05pm, $0.54
    • Energy Transfer Partners (ETP) 5:09pm, $0.47
    • Fifth Street Finance (FSC) 4:28pm, $0.28
    • Franco-Nevada (FNV CN) 5:18pm, $0.21
    • Frontier Communications (FTR) 4:01pm, $0.06
    • Fusion-io (FIO) 4:05pm, $(0.03)
    • Green Mountain Coffee (GMCR) 4pm, $0.76
    • Groupon (GRPN) 4pm, $0.02
    • Halozyme Therapeutics (HALO) 4:05pm, $(0.14)
    • MarkWest Energy (MWE) 4:01pm, $0.22
    • MBIA (MBI) 4:01pm, $0.14
    • Mondelez Intl (MDLZ) 4:01pm, $0.34 - Preview
    • Polypore Intl (PPO) 4:01pm, $0.39
    • Prudential Financial (PRU) 4:07pm, $1.99
    • Redwood Trust (RWT) 4:15pm, $0.34
    • SolarCity (SCTY) 4:01pm, $(0.38)
    • St Joe (JOE) 4:01pm, $0.02
    • Sun Life Financial (SLF CN) 5:10pm, C$0.66
    • Tesla Motors (TSLA) 4:01pm, $(0.20)
    • Transocean (RIG) 4:30pm, $1.08
    • Tronox (TROX) 5:43pm, $(0.05)
    • WageWorks (WAGE) 4:05pm, $0.17

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • JPMorgan Sued With Goldman Sachs in Aluminum Antitrust Case
  • p Commodities Market, Industry News »             
  • Palmer’s ‘Mad’ Mine Costs China on Learning Curve: Commodities
  • Gold Drops to Three-Week Low on Speculation Fed to Trim Stimulus
  • Wheat Declines as Iraq, Egypt Shun Grain From U.S. in Tenders
  • Copper Falls on Speculation Fed Will Opt to Limit Debt Purchases
  • WTI Crude Fluctuates Amid Signs of Declining U.S. Inventories
  • Rebar Climbs to Three-Month High as Iron Ore Prices Gain
  • Bank of America’s Blanch Says WTI Crude Could Fall $8 to $10
  • Palm Oil Declines to One-Week Low as Peak-Output Cycle Begins
  • BHP’s CEO Sees US Shale Expansion as Mineral Demand Grows
  • Silver ETF Holdings Approach Record and Critical Price Levels
  • Palladium’s Pennant Pattern Signals Increase: Technical Analysis
  • Easy Cash Ebbs for $300 Billion Asean Port-to-Rail Cost: Freight
  • Corn in U.S. Seen by Cordonnier at Risk of Damage From Frost

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

 

 

 

 

 

 

 

 

 

 

 


THE M3: SMOKING CONTROL LAW

THE MACAU METRO MONITOR, AUGUST 7, 2013

 

 

GOV'T PLANNING TO REVISE SMOKING CONTROL LAW Macau Daily Times

Lei Chin Ion, director of the Health Services, said, “We are now collecting opinions and our work is progressing well, so we will conduct a first revision of the law in 2015.”  Lei Chin Ion said that, following an assessment period, the government will reveal what kind of measures will be applied to casinos that do not meet air quality standards.  He said that the administrative regime predicts the reduction or removal of smoking areas for casinos that do not comply with the Health Bureau standards. 

 

This month it was revealed that 28 casinos failed the first air quality test conducted by the Health Services Bureau.  Those casinos had to undergo a second test and the Bureau is currently analyzing the results and looking to decrease the size of some smoking areas.


Just Charts: Eye-Catching Industrial Data (8/6)

Summary

 

Broader Industrial data have gotten resoundingly stronger since May.  Since the 2009 recovery, most measures of U.S. industrial growth had shown a relatively steady deceleration.  Recent data appear to break that trend.  As always, industry specific data vary. 

  • Nonresidential construction has been notably weak, but the Architectural Billings Index suggests that we should see a rebound in coming months.
  • North American Heavy Truck orders (preliminary) in July do not show much impact from new Hours of Service regulations.
  • Intermodal rail carload growth appears likely to follow the ISM New Orders index higher in coming weeks.
  • Fastenal’s Average Daily Sales have continued to decelerate through July, while small business credit conditions have continued to ease.

 

ISM New Orders

 

The rebound in new order activity in both the Manufacturing and Non-Manufacturing ISM indices appears to be a meaningful breakout.  However, these measures also spiked higher in February 2013, only to fade in the following months.  Nonetheless, strength in this measure is an encouraging sign amid recent stall-speed industrial activity.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw1

 

 

Durable Goods Orders

 

The February 2013 spike in the ISM Manufacturing New Orders sub-index was not well reflected in several other measures of industrial order activity, including Durable Goods Orders.  The coinciding upward move in July Durable Goods Orders provides support for the higher ISM New Orders reading.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw2

 

 

Heavy Truck Orders

 

Preliminary North American Class 8 truck orders were relatively tame in July.  A potential decline in truck demand from new Hours of Service (HOS) regulations, which became effective July 1, could set-up a buying opportunity for high quality truck OEMs, like PCAR.  We will monitor the next few months, which are seasonally higher volume than July, for any HOS-related weakness/opportunity.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw3

 

 

Nonresidential Construction


A notable pocket of weakness has been nonresidential construction.  The weakness is in part due to reduced government spending and a slow recovery in certain commercial real estate markets.  Nonresidential construction tends to be ‘late cycle’ and may pick-up later this year.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw4

 

 

Architectural Billings Index (ABI)

 

The ABI only turned slightly positive in August of 2012 and typically leads non-residential construction activity by 9-12 months.  If the index performs as a leading indicator in the current environment, nonresidential construction should strengthen through the back half of 2013.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw5

 

 

Residential Home Improvement Spending

 

In contrast to nonresidential, construction spending on residential home improvement continues to spike higher, following a long period of stagnation after the housing bust.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw6

 

 

Fastenal Average Daily Sales

 

Fastenal’s average daily sales growth has continued to decelerate, failing to reflect the bounce in the ISM or Durable Goods measures.  While that could just be a lag between industrial orders and FAST sales, we think that easing credit conditions have been and will remain an important headwind.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw7

 

 

NFIB Credit Conditions

 

Business credit continues to ease.  Industrial supply companies served as an attractive source of working capital during the tight credit conditions following the financial crisis.  As credit conditions thaw, industrial supply companies may see that tailwind turn into a growth headwind.

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw8

 

 

Intermodal Rail Carload Growth

 

Intermodal Rail Carload growth has not yet reflected recent strength in the ISM and Durable Goods new orders readings.  Looking at the historical relationship between new orders and intermodal rail volumes, we would expect to see a pick-up in coming weeks.  

 

Just Charts: Eye-Catching Industrial Data (8/6) - tw9

 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR?

Takeaway: This is not a sound buying opportunity; in fact, we’d welcome a continued squeeze in the Aussie dollar as an opportunity to short into.

SUMMARY BULLETS:

 

  • A structurally depressed growth outlook should continue to dictate Australian monetary and fiscal policy over the long-term TAIL – compressing the relative policy spread between Australia and peer economies (most notably the US). As such, we would not identify this as a sound buying opportunity in Australia’s currency.
  • In fact, we’d graciously welcome a continued squeeze in the Aussie dollar as a ripe opportunity to short into. Having outlined our bearish bias on Australia’s currency back in JUN ’12 in a note titled, “SLOWDOWN-UNDER” we’ve been purposefully quiet [in print] on Australia since. Indeed, this is one of those rare cases where the [bearish] fundamentals have played out largely according to plan.
  • Moreover, it can be reasonably argued that we’re still in the early-to-middle innings as it relates to the aforementioned bearish fundamental story (which we detail below). Unless you’re of the view that US growth is set to TREND lower from here and that Bernanke/Yellen/Summers/Unknown is likely to roll back tapering expectations or foster outright expectations of incremental easing out of the Federal Reserve (we definitely aren’t), we can’t see why FX market participants would expect the Aussie dollar to sustainably buck its young trend, given how stretched the currency was on both a nominal and REER basis.

 

THE AUSSIE DOLLAR IS A CROWDED, LIKELY WELL-UNDERSTOOD SHORT

Prior to and likely inclusive of today’s short covering, the Aussie dollar was/is a crowded short. It’s -12.4% depreciation vs. the USD over the past 3M is far and away the steepest decline across DM FX and the most recently reported net short position among non-commercial futures and options contracts (74.2k) was an all-time high for the shorts and -2.4x standard deviations below the trailing 1Y mean.

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 1

 

Having outlined our bearish bias on Australia’s currency back in JUN ’12 in a note titled, “SLOWDOWN-UNDER” we’ve been purposefully quiet [in print] on Australia since. Indeed, this is one of those rare cases where the fundamentals have played out largely according to plan:

 

  1. #GrowthSlowing: Raw materials account for 60% of Australian exports and the mining industry accounts for 65.3% of all incremental CapEx in Australia… With the CRB Raw Industrials Materials Index down -12.3% YoY, it’s fairly easy to do the math on why Australian real GDP growth has fallen in a straight line from the cycle peak of +4.4% YoY in 1Q12 to +2.5% YoY in the most recently reported quarter (1Q13).
  2. #MonetaryEasing: Over the past year, the RBA has cut its benchmark cash rate by a cumulative 100bps to a record low of 2.5% – matching the benchmark rate of fellow commodity currency and central banking rival New Zealand (RBNZ) for the first time since APR ’09.
  3. #CommodityRelatedFiscalDeterioration: The latest budget outlook from the Australian Treasury confirms our view that Australian policymakers inappropriately levered their country’s fiscal coffers up to a topping mining CapEx bubble under the leadership of the Labor Party (which may or may not be on its way out; we’ll learn more after elections that must be called by NOV 30). Citing “faster than expected falls in commodity prices”, new Treasury secretary Chris Bowen revised down the country’s 2013-17 revenue estimates by -A$33 billion from forecasts that he inherited from outgoing Treasury secretary Wayne Swan just ~2.5M ago. The most recent budget outlook also calls for the country’s unemployment rate to back up to a 10Y-high of 6.25% by the end of 2Q14… Assuming the [currently] more popular Kevin Rudd captures the premiership in the upcoming election for the Labor Party (in lieu of the more fiscally-hawkish Tony Abbot of the Liberal-National Coalition), we would expect to see Australia’s fiscal position continue to deteriorate over time. International investors own 70% of Australian gov’t debt, so as US Treasury rates continue to back up, they may be less willing to finance the Australian sovereign, at the margins.

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 2

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 3

 

In accordance with the title of this note, we don’t think it’s prudent to run-out and short the Aussie dollar here; in fact, we’d argue that today’s short squeeze is has quite a few more pips to run because it is underpinned by what we’d argue is a moderately hawkish shift in the RBA’s policy bias.

 

In the process cutting its benchmark cash rate to a record low of 2.5%, the RBA board conspicuously left out a clear path for further easing in its guidance, instead stating that the board “will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time”. It also chimed in with the following statement on the AUD: “It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.”

 

THERE’S LIKELY MORE PAIN TO COME, THOUGH… BUT DON’T JUST TAKE OUR WORD FOR IT

It should be duly noted that the RBA was in a small pool of DM central banks that helped its economy steer clear of recession during the 2008-09 Global Financial Crisis; the fact that they are just now cutting rates to an all-time low TODAY only augments our structurally bearish bias on the Australian economy – which itself continues to be supported by our structurally negative biases on Chinese economic growth and commodity prices (email us if you’d like to get up to speed on either view) – the confluence of which have underpinned marginal improvement in Australia’s current account dynamics over the past 5-10 years.

  

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 4

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 5

 

Moreover, it can be reasonably argued that we’re still in the early-to-middle innings as it relates to points #1-3, as outlined above. Unless you’re of the view that US growth is set to TREND lower from here and that Bernanke/Yellen/Summers/Unknown is likely to roll back tapering expectations or foster outright expectations of incremental easing out of the Federal Reserve (we definitely aren’t), we can’t see why FX market participants would expect the Aussie dollar to sustainably buck its young trend, given how stretched the currency was on both a nominal and REER basis.

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 6

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 7

 

IS THIS A “SHORT-COVERING” OR “BUYING” OPPORTUNITY IN THE AUSSIE DOLLAR? - 8

 

In that light, we’d graciously welcome a continued squeeze in the Aussie dollar as a ripe opportunity to short into. More importantly, we would not identify this as a sound buying opportunity in Australia’s currency – particularly from an intermediate-to-long-term perspective.

 

Darius Dale

Senior Analyst


SEC: Worried About a Bond Bubble?

Takeaway: If the SEC is tweeting this out now, we guess they are belting themselves in for higher rates.

By Moshe Silver

 

This just in: When interest rates go up, bond prices go down.

 

In case you didn’t know, now you know – courtesy of an SEC Investor Education tweet.

 

If the SEC is tweeting this out now, we guess they are belting themselves in for higher rates, and the near-certainty that retail investors are in for the shock of their life as they see the value of their bond funds erode. 

 

SEC: Worried About a Bond Bubble? - bub2

 

You Mean There’s Risk?


Media reports about “chasing yield” and the “bond bubble” warn about possible declines in bond prices if interest rates rise.  The Investor Bulletin says this interest rate risk is common to bonds, especially those with fixed payment rates (“coupons”) – including Treasury bonds.

 

After explaining the basic definition of “interest rate risk” – that bond prices rise as interest rates fall, and vice versa – the Bulletin explores the severity of a bond’s price movement associated with moves in interest rates (see Hedgeye’s Investing Ideas of last week, 2 August – Sector Spotlight: Financials – for a discussion of “duration”).  The lower the bond’s coupon rate, the greater the volatility in the price of the bond as interest rates change.

 

Using the Commission’s own example, if ten-year interest rates move from 4% to 5%, a Treasury bond with a 4% coupon rate will have to decline in price to adjust its current yield to the higher rate.  But a Treasury bond with a 2% coupon will have to decline much more in price to achieve that same 5% yield.

 

On the other side, the longer the maturity, the greater the price volatility in response to interest rate changes.  Conversely, shorter maturities are associated with lower volatility.  Thus, a 30-year bond will have much greater price volatility than a 2-year note. 

 

Finally, the Commission emphasizes that all bonds are subject to interest rate risk, even those guaranteed by the government.  The coupon payments are guaranteed, as is the final payment at maturity, but not to the price of the bond in the marketplace.

 

SEC: Worried About a Bond Bubble? - bub1

 

Your Tax Dollars Still At Work… Just Not As Many Of Them Any More


Fed Chairman Bernanke says he will continue buying tens of billions of dollars’ worth of mortgage securities every month to ease the burden on the nation’s banks by helping them offload debt.  But Bernanke’s jawboning has been increasingly ineffectual and the bond markets are moving on without him, counteracting the impact of the Fed’s ongoing QE efforts.

 

On July 31st the Chicago Tribune reported “bank portfolios have lost more than $36 billion of their value since the end of the first quarter, according to Fed data.”  Some banks have seen the paper profits on their mortgage-bond holdings drop by two-thirds in the second quarter alone, but “because of accounting rules, losses on mortgage bonds that banks hold in their securities portfolios do not affect their quarterly profits.”

 

Hedgeye pointed out in our Q3 Macro Themes that there is a massive supply / demand mismatch globally, with only about one-third of the world’s investment money in equities.  This is a historic low.  We think investors will continue to bid up equity prices while, in a mad dash for the exit, bond prices could be crushed beyond recognition. 

The lesson appears to be really simple: if you haven’t already sold your bonds, what are you waiting for?

 

What Are We Gonna Do With All Those Bonds? 

 

As bond prices decline, banks are not required to take a mark to market charge against earnings.  Still, the deterioration of their bond portfolios cuts into the banks’ net worth, which ends up affecting stock prices over the long term. 

 

Like other banks, the Fed carries its bonds at face value and doesn’t mark its portfolio to market.  But unlike other banks, the Fed doesn’t have to take a reserve against the billions of Treasurys and Fannie Maes – and other less savory securities – on its books.  The Fed doesn’t have a stock price to keep an eye on, or shareholders to worry about.  And the Fed itself, with its massive printing press, is the reserve.  (Well actually, the taxpayer is the reserve, as recent history continues to demonstrate.  If you want to see the Buyer of Last Resort, look in the mirror.)

 

The market value of the Fed’s massive holdings – currently over $3.3 trillion – could decline sharply in a rising rates environment.  This could turn into a boon for the incoming Fed chief.  (President Obama appears to have already “pre-fired” Bernanke, telling TV interviewer Charlie Rose in June that “he’s already stayed a lot longer than he wanted or he was supposed to.”)  Bernanke has said that, even after they stop the massive bond buying program, the Fed will continue to hold these bonds and not sell them back into the market.  Maybe the goal is for Bernanke’s replacement to coordinate with Treasury to retire billions of dollars’ worth of bonds at lower prices, covering them with newly-issued bonds at higher yields. 

 

Is this the Geithner-at-Treasury-Summers-at-Fed scenario?  Stranger things have happened in Washington, and will certainly continue to do so.  This would actually not be a great deal for Treasury, which would have to fund higher annual debt service.  And even though that bill would come due in some future, as-yet-undreamed-of Administration, we are already terrified at the thought that the new Masters of the Financial Universe will come up with a solution.  In the Orwellian world of Washington, this will be presented as “a win for the taxpayer.”  And no, you will not receive a check.

 

Fore-tweeted is fore-armed.

 

Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.


UA Nailed The Q, But Don't Chase It

Takeaway: In line with our view that UA would beat because of revs and gross margins. But we definitely would not chase it here.

This note was originally published July 25, 2013 at 12:44 in Retail

UA's beat was in line with our comments from earlier this week that revenue trends were looking strong, and the favorable spread between sell-in and sell-though on top of a lean inventory base headed into the quarter suggested a favorable gross margin set-up (see comments below). Lo and behold, UA came out and beat on revenue and printed its biggest gross margin improvement in three years. Simply put, UA continues to achieve its growth goals with impressive consistency. We've got to give credit where it's due.

 

UA Nailed The Q, But Don't Chase It - ua

Despite the solid numbers, there were a few things that bugged us.

1) Inventories were high -- +29% vs revenue growth of 23%. This reverses the positive sales/inventory trend we've seen for the past three quarters. Granted, it is consistent with the company's guidance that inventories would build to ensure that they have sufficient product headed into back-to-school and Holiday. But the dynamic is notable.


2) With all the talk about International opportunity on the conference call, you'd think that UA was knocking the cover off the ball outside the US. Yes, sales were respectable at 22%, but it grew modestly below the rate of the US business. UA made it clear that 2014 would be the year for Int'l to really accelerate. But the reality is that UA's Int'l success is kind of like Bigfoot -- lots of hype, but we have yet to actually see it.

  
3) Footwear surprised us on the downside. While 21% growth is respectable, we think it should be at least 2x that rate for a company with UA's growth runway. On one hand, we like that it is being very deliberate and cautious with the launch of Speedform -- and not flooding the market with product. But we balance that with the simple fact that UA has 1% share of an industry that is absolutely begging for someone to step up and become a viable alternative to Nike.

 

When all is said and done, we like the TAIL call on UA -- as there are not many companies that we think can grow top line in excess of 20% for 5+ years. On the flip side, this is absolutely not a margin story. What you get in top line is what you get in EPS growth. That's all, and  nothing else. That's not half bad given that the company can feasably triple in size.  But there are other names like RH, FNP, (and to a lesser extent) WWW that have similar Blue Sky opportunity but with significant margin and return upside as a kicker. We can justify the higher multiples with those stories more easily than with UA. We'd prefer to step in and buy UA when there's more controversy on the name, or  when the company is hitting a near-term speed bump in one of its new business initiatives. That's certainly not what we have today.

 

UA Nailed The Q, But Don't Chase It - mcg1

 

 

 

07/22/13

UA: OUR THOUGHTS HEADED INTO THE PRINT

Takeaway: Expectations aren't low into UA's print, but based on trends we're seeing, they shouldn't be. If we were forced to bet, it'd be positive.

 

CONCLUSION: UnderArmour footwear and apparel trends look solid headed into Thursday's print, especially in comparing wholesale sell-in versus retail sell-through. Retail inventory implications are bullish, and combined with a positive sales/inventory spread trend at UA, it's left with a particularly positive Gross Margin set-up. That's a big plus, because at 35x EPS it needs to beat, and expectations aren't low. If we had to make a bet one way or another (which we don't), we'd come out with an upwards bias.

 

DETAILS 

We think that UA's trends look quite positive headed into its print on Thursday.  Our analysis shows that a) sell-through of apparel continues to outstrip sell-in, b) footwear is doing so at even a greater rate (and the Speedform launch is gaining traction), and c) the Gross Margin set-up is bullish given easing product costs and a favorable sales/inventory spread.  All that said, we think that these trends are necessary to materially beat consensus estimates (a beat is critical for a 35x p/e growth stock). The good news is that our sentiment monitor suggests that this name remains extremely hated, which is a bullish stock setup.

 

One of the few risks we'd point to is if UA comes out and takes up SG&A requirements to grow the business as initiatives into Footwear and International markets become more important. This had been a concern of ours for a while, but after the company's analyst meeting last month we threw in the towel and altered our view (and our model) such that it could attain 20% top line growth without having to take the margin levels of the company sub-10%.  But if it nudges up spending rates again after just having the investment community in Baltimore to sell its strategy -- then there are going to be credibility issues. We'd be surprised if this turns out to be the case.

 

So when we put it all together, we think that this is one of times where the consensus has it about right,  but if we had to make a bet one way or another (which we don't), we'd have an upward bias. 

 

UNDERARMOUR'S APPAREL RETAIL SALES HAVE BEEN GROWING AT A RATE FASTER THAN ITS WHOLESALE SELL-IN

UA Nailed The Q, But Don't Chase It - ua app sellin

Source: SportscanINFO and Hedgeye

 

UNDERARMOUR'S FOOTWEAR BUSINESS HAS BEEN OUTSTANDING -- AGAIN, WITH RETAIL OUTSTRIPPING WHOLESALE

UA Nailed The Q, But Don't Chase It - fwsellin

Source: NPD and Hedgeye

 

SPEEDFORM HAS BEEN A RECENT DRIVER FOR THE FOOTWEAR BUSINESS. THIS IS THE MOST COMMERCIAL LAUNCH UA HAS HAD TO DATE

UA Nailed The Q, But Don't Chase It - uafast

Source: UnderArmour

 

THE GROSS MARGIN SET-UP IS SOLID THANKS TO AND EXTREMELY FAVORABLE SALES/INVENTORY SPREAD AND FAVORABLE PRODUCT COSTS

UA Nailed The Q, But Don't Chase It - uagmsis

Source: Company Reports and Hedgeye

 

OUR SENTIMENT MONITOR SHOWS THAT THIS STOCK REMAINS VERY HATED

UA Nailed The Q, But Don't Chase It - uasentiment

Source: Hedgeye


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