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DF – Trading A Leg Down On Earnings Outlook

DF reported Q2 2013 results today with a $0.01 miss on EPS and revenue below expectations ($2.23B vs $2.25B). The company cited a challenging environment in which milk volumes appear softer than previously estimated, and flagged that Q3 volumes should be the most challenged in the year. This gives us pause on buying the stock on today’s pullback that broke its trade line of $10.98. Our quantitative levels suggest buying closer to our intermediate term TREND price level of support at $9.81.

 

DF – Trading A Leg Down On Earnings Outlook - zz. df

 

DF milk volumes were down -6% in Q2 year-over-year (vs industry milk down -2.1%) and the company’s U.S. market share dropped to 36.4% in the quarter versus 37.8% in Q1.  The company expects mid single digit declines in milk in 2013, and on the call narrowed its FY adjusted diluted EPS guidance to $0.47 to $0.53 versus a prior $0.47 to $0.55.

 

Despite the negative print, and subdued outlook for Q3, DF, having spun off 67% of Whitewave (WWAV) in May 2013 and reaped $589MM through the sale of its remaining stake of WWAV in July, has bolstered its financial position and is in a strong cash position should it want to make an acquisition in 2H; certainly deployment of this cash could awaken animal spirits on the long side.

 

The company trades at a P/E of 14.4x versus a peer average of 17.2X and EV/EBITDA of 10.6x versus 11.6x. Despite the discount to the group, we are not buyers here and now on today’s pull back. 

 

Matthew Hedrick

Senior Analyst


INITIAL CLAIMS: COMING UP ROSES

Takeaway: We wouldn't be surprised to see the elusive 2-handle on the seasonally-adjusted initial jobless claims reading by late 1Q14.

U.S. labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%.

 

INITIAL CLAIMS: COMING UP ROSES - js1

 

Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a year-over-year improvement of 9.7%, extraordinary for this point in the cycle. This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k.

 

There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14. For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA initial claims weekly prints. 

 


INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE

Takeaway: Labor Market & Confidence both hitting their strongest level since 2007.

We’ve already breached the rarified 2-handle on the downside on the NSA series with non-seasonally adjusted claims printing 287K and 282K the last two weeks, respectively – the first sub-300K prints since September 2007. 

 

Looking forward we see a rising probability that the headline, seasonally-adjusted claims number see's a 2-handle in 1Q14 as well as the seasonal distortion in the data, currently a headwind, again shifts to a tailwind.  

 

Meanwhile, today’s Bloomberg Confidence reading improved to -23.5 from -27, marking its highest reading since December of 2007.

 

Labor Market the strongest it has been since 2007, Confidence improving to its strongest level since 2007 – Who’da thunk? 

 

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 .

 

- Hedgeye Macro 

 

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Less Than 5% of the Time

Labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%. Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a YoY improvement of 9.7%, extraordinary for this point in the cycle.

 

This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k. There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14.

 

For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA IC weekly prints. 

 

Our favorite ways to play a stronger-than-realized improvement in the labor market remain financials with levered exposure to home price recoveries as well as unsecured lenders. Capital One (COF) and Bank of America (BAC) remain two of our favorite ideas on the long side.

 

 

The Data

Prior to revision, initial jobless claims rose 7k to 333k from 326k WoW, as the prior week's number was revised up by 2k to 328k.

 

The headline (unrevised) number shows claims were higher by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.25k WoW to 335.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.8%

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 1

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 2

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 3

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 4

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 5

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 6

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 7

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 8

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 229 bps. 3Q13TD, the 2-10 spread is averaging 225 bps, which is higher by 54 bps relative to 2Q13.

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 9

 

INITIAL CLAIMS: STALKING THE ELUSIVE 2-HANDLE - JS 10

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 


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Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

Doug Kass: I’m still a bear and Twitter is useless (via MarketWatch)

 

Morning Reads on Our Radar Screen - bullbear

 

Daryl Jones – Macro

LINN Energy Announces Second Quarter 2013 Results (via GlobeNewswire)

Tech Magnates Bet on Booker and His Future (via New York Times)

Carney BOE Rates Guidance Meets Investor Skepticism (via Bloomberg)

 

Darius Dale – Macro

Why China and Japan should have you worried (via Fortune)

 

Josh Steiner – Financials

Arizona’s mortgage delinquencies plummet (via azcentral.com)

Traders Look for New Jobs as Charges Loom Over SAC (via Bloomberg)

Wells Fargo Mortgage lays off 126 in St. Louis (via St. Louis Biz Talk)

 

Jonathan Casteleyn – Financials

Jumbo Shrimp. Random Order. Active ETFs. (via Bloomberg … JC note: The next class of ETFs...active ETFs now being added to fundamental, sampling, and replicate ETFs)

 

Kevin Kaiser - Energy

LINN Energy Announces Second Quarter 2013 Results (via GlobeNewswire)

 

Howard Penney – Restaurants

VIDEO: McDonald’s vs. Franchise Owners? (via Fox Business … HP note: Looks like the $MCD CEO needs to works harder on franchisee relationships)

 

Tom Tobin – Healthcare

Many Docs Don't Follow HPV/Pap Test Guidelines (via Medline Plus)


INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY

Takeaway: We continue to regard levered credit plays as the best long side thematic trade amid a faster-than-realized improvement in the labor market.

Less Than 5% of the Time

Labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%. Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a YoY improvement of 9.7%, extraordinary for this point in the cycle. This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k. There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14. For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA IC weekly prints. 

 

Our favorite ways to play a stronger-than-realized improvement in the labor market remain financials with levered exposure to home price recoveries as well as unsecured lenders. Capital One (COF) and Bank of America (BAC) remain two of our favorite ideas on the long side.

 

The Data

Prior to revision, initial jobless claims rose 7k to 333k from 326k WoW, as the prior week's number was revised up by 2k to 328k.

 

The headline (unrevised) number shows claims were higher by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.25k WoW to 335.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.8%

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 1

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 2

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 3

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 4

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 5

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 6

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 7

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 8

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 9

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 10

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 11

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 12

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 13

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 19

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 14

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 229 bps. 3Q13TD, the 2-10 spread is averaging 225 bps, which is higher by 54 bps relative to 2Q13.

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 15

 

INITIAL CLAIMS: THE ELUSIVE 2-HANDLE LOOKS LIKE A RISING PROBABILITY - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


CASUAL DINING TRENDS PREDICTABLY POOR

We’ve been bearish on the casual dining sector since early June, and, last night Malcolm Knapp gave us a glimpse of how ugly sales trends were in July when he released his estimates for the month.

 

Knapp reported that July 2013 same-restaurant sales declined -3.8%, while comparable traffic trends declined -5.1% -- both metrics slowed sequentially over a markedly weak June.  These estimates come against July 2012 comps of 1.1% and -1.3%, respectively.

 

While all four weeks had negative comparable sales and traffic results, we did find positive news on the margin, as Knapp indicated that each successive week in July was sequentially better than the prior.

 

Overall, July sales and traffic trends are in-line, if not slightly worse, with what we expected.  Consistent with what we’ve heard in recent earnings calls, this summer is presenting a challenging top line environment for the casual dining industry.  Our favorite short in the space remains RRGB, as they are set to report 2Q13 earnings a week from today on August 15th.

 

 

 

Howard Penney

Managing Director

 


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