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FDX: Another Notch of Credibility

Summary

 

We will save our main commentary until after the 10-Q tomorrow, but we think it is fair to say that the FedEx report today exceeded muted expectations and added credibility to the Express restructuring program.  FedEx continues to show that it can deliver higher Express margins and, as it does, the market should move to price in continued success.  We continue to think that there is significant potential value at FedEx Express that the market is not pricing in. 

 

 

The Quarter vs. Our Thesis

  • Express Margin:  Despite continued negative mix of IE/IP, FedEx Express held onto its 50 basis points of margin expansion from FY4Q (YoY).  That is good enough, since we would guestimate a net headwind of 10 to 30 basis points from mix, fuel, depreciation etc.
  • Valuation & Sum of the Parts:  As the shares move higher, our DCF-based fair value range suggests a bit less upside.  That said, in this market, the potential still looks favorable.  There was nothing new that moved the needle on our valuation.  An updated sum of the parts presentation showing the low implied market valuation for FedEx Express is presented below.

FDX: Another Notch of Credibility - as1

 

  • Thesis Playing Out:  We think the market has been overly fixated on the 'trade down' headwinds at FDX, while missing the underlying potential of FedEx Express.  FedEx Express is a competitively advantaged player in a structurally favorable industry.  Many of its challenges have been self-imposed, with higher energy costs and inventory trends filling the balance that are not.  We believe that FedEx Express should be able to meet or exceed competitors’ margins in pretty much any operating environment.  This was just the second quarter where we have seen a focus on closing that gap, with further progress likely through FY14 and FY15. 
  • Pricing In Success:  As FedEx gains credibility on the Express restructuring, the market is likely to price in success well before it is actually completed.   That anticipation may explain the strong reaction to merely maintaining the FY4Q 2013 Express margin gains amid a more difficult operating environment.  

 

We continue to think that FDX will prove a rewarding long-term position, as FedEx Express focuses on profitability instead of market share.  FedEx is also well positioned to benefit from signs of stronger economic growth.

 

 

 

 

 

 

Jay Van Sciver, CFA

Managing Director


HEDGEYE RISK MANAGEMENT
111 Whitney Avenue

New Haven, CT 06510


 


The Outlook on U.S. Debt + Growth

In the Hedgeye Chart of the Day below, we show the trend in the Deficit-to-GDP ratio. After reaching a peak of ~10% in 2009, the ratio has showed steady decline with accelerating improvement over the last year, alongside stronger economic growth, higher taxes, a retreat in stabilizer payments, and a number of non-recurrent inflows.   

 

The Outlook on U.S. Debt + Growth - drake1

 

We expect the ratio to retreat further as the domestic macro data continues to reflect ongoing, albeit modest, improvement. 

 

Indeed, yesterday, in its latest update to the long-term budget outlook (Here), the CBO projected deficit spending would continue to drop over the next few years, falling to 2% of GDP by 2015 with the Debt-to-GDP ratio declining to 68% from its current level of ~73%. 

 

Yes, we are keenly aware that the long-term budget outlook, saddled with unsustainable growth in entitlement obligations, remains dire. We’ll break down the budget outlook in detail, by duration, in subsequent notes, but the key takeaway here is that the outlook for both growth and debt spending over the intermediate term remains positive.   

 

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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

Options market has eyes on Fed, but more worried about weeks ahead (via Reuters)

6 Fun (Frightening?) Fed Facts (via Hedgeye)

Berkshire Billionaire Found With More Shares Than Gates (via Bloomberg)

Syria tells Russia it has proof rebels used chemicals (via BBC)

Irish to Keep Chunk of Anglo Irish Loans as Wealth Funds Circle (via Bloomberg)

China woman survives 15 days trapped in well (via BBC)

 

Morning Reads on Our Radar Screen - beb

 

Kevin Kaiser - Energy

WEBCAST: Kinder Morgan Conference Call (via Videonewswire)

 

Daryl Jones – Macro

With the end of Fed's QE in sight, U.S. public says 'Huh?' (via Reuters)

 

Jonathan Casteleyn – Financials

Bernanke Saves Companies $700 Billion as Verizon Leads Sales (via Bloomberg)

 

Jay Van Sciver – Industrials

FedEx posts profit; express shipping rates will rise next year (via Reuters)

 

Tom Tobin - Healthcare

Medicare and Reform: Fifty States of Confusion (via Express Scripts)        

 

Matt Hedrick – Macro

BOE Officials See No Case for More Stimulus (via Bloomberg)


Pummeling of the Perma-Bears

Client Talking Points

US

The Trend slope of improvement in U.S. growth, credit and confidence are all positive. Meanwhile, both Treasury Yields and the US Dollar remain Bullish from a price perspective. #RatesRising has been reflecting that positive fundamental reality as have market prices as pro-growth exposure continues to get marked higher (new year-to-date highs yesterday for the QQQ’s and another new all-time high for the Russell 2000). Meanwhile the underperformance spread for slow growth, yield chasing assets (Utilities, MLP’s) continues to expand.   

COMMODITIES

You may recall that #CommodityDeflation was our Macro call in Q1 2012. Well, it continues. Gold remains an unmitigated train wreck. It's still crashing with $1304 the last print. Gold bugs are down -22.4% year-to-date and down -32% from the 2011 Bernanke Bubble high. Hedgeye risk range on gold is $1288-1349. We're still keeping a close eye on Brent oil which obviously has important economic implications. Brent range is $107.58-111.43. If there's one thing Obama can do for this economy it's tell Janet Yellen to bring back #StrongDollar which will lead to Down Oil.

Asset Allocation

CASH 30% US EQUITIES 24%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Yield Spread (10yr minus 2yr) plenty wide at +246bps - Financials $XLF +25.2% YTD for good reason @KeithMcCullough

QUOTE OF THE DAY

Always forgive your enemies - nothing annoys them so much.

- Oscar Wilde

STAT OF THE DAY

The median wage of workers age 25-34 with a bachelor's degree is $44,970. The median wage of workers age 25-34 with a high school diploma is $29,950. The median student loan balance is $12,800. 


Shatteringly Simple

This note was originally published at 8am on September 04, 2013 for Hedgeye subscribers.

“Money is one of the shatteringly simplifying ideas of all time; it creates its own revolution.”

-Paul Bohannan

 

That’s the opening quote to an important book I started reading this week, The History of Money, by Jack Weatherford. The book’s first paragraph goes on to ring the Gold bull bell with “The Dollar is dying; so too are the Yen, the mark and the other national currencies…”

 

When it was published in 1997, Charles Schwab called this “the book to read.” And I agree, you should read every economic history book you can get your paws on – your hard earned money is too important to leave to the people opining on it from Washington.

 

The shatteringly simple observation about money is context. Its history is at least 3,000 years old. And when debating it, consensus tends to cram its craw into the moment in which it lives. The Dollar isn’t dead this year; it’s breaking out from a 40 year low. The Yen didn’t die after 1997 either (it ended up hitting a 40 year high by 2011). Everything, including the value of your moneys, is relative.

 

Back to the Global Macro Grind

 

After another shatteringly strong string of US economic data points (starting last Thursday with US roiling jobless claims hitting another YTD low and culminating with a blockbuster New Orders component of yesterday’s ISM report for August), yesterday’s US stock market ripped a +1% morning move to the upside and Treasury bonds continued to collapse.

 

Up for the 4th consecutive week, another #StrongDollar move was nipping on the heels of #RatesRising too. Consensus isn’t positioned for that, so I loved it. Then, all of a sudden, the most bearish catalyst of all hit the tape – a US politician’s opinion.

 

In the last year, there have been very few market risks that have scared me more than US central planners intervening during critical periods of market entropy. Going back to November of 2012 (when bond yields bottomed), Boehner’s voice was as market bearish as any you could find. He was the bearish factor yesterday too – the whole thing is just plain sad to watch.

 

Back to the economic gravity part…

  1. New Orders (in the ISM report for August) hit a monster shot of 63.2! yesterday (vs 58.3 in July)
  2. Go back to 2003 (see Chart or The Day) and look at how quickly economic gravity shocked growth bears to the upside
  3. Not unlike 2000-2002, consensus has become shatteringly bearish about growth; it’s a lagging indicator

To be clear, there’s a big difference between consensus being bearish and Mr. Market’s bullish opinion. While yesterday’s intraday gains in the SP500 were cut in half, the decliners were led by the slow-growth sectors (gainers were once again all about growth):

  1. Slow-Growth Utilities (XLU) got smoked again (after being down -5% for AUG), leading losers on the day at -1.2%
  2. Dividend Yield Chasing Consumer Staples (XLP) were down -0.1% in an up market as well (XLP -4.5% in AUG)
  3. Nasdaq (QQQ) +0.63% and Financials (XLF) +0.9% led gainers, as they have throughout 2013

In other words, if you are bummed out about Kimberly Clark (KMB) or Kinder Morgan (KMP) not getting you paid on the principal appreciation side of the equation, that’s just too bad. This Bernanke Yield Chaser style factor was as much a bubble as Gold was.

 

#RatesRising for the right reasons (growth expectations rising), is public enemy #1 for overvalued, slow-growth, securities. Whether it feels right or not, money chases positive returns. It flows away from draw-down risks.

 

Since I’m already out of everything Commodities, Fixed Income, and Emerging Markets (0% asset allocations), I have had relatively low stress on the draw-down risk side of big macro asset class moves in 2013 (Gold bounced, but is still -17% YTD and bonds are getting smoked), but that doesn’t mean I can afford to give up a lead for the sake of being beholden to this great growth data.

 

There are 3 big Macro things that would get me out of being long growth equities:

  1. If #StrongDollar snaps its long-term TAIL risk line of $79.11
  2. If #RatesRising stops and the 10 yr UST Yield breaks 2.44% @Hedgeye TREND support
  3. If #GrowthAccelerating Style Factors (like Nasdaq diverging from the Dow) reverse and break TREND

Johnny one-time Boehner’s intraday comments mattered because they kept the #1 risk to what’s been strong US consumption growth in play. It’s called an Oil tax at the pump. And Putin likes it.

 

The best way for Obama to pulverize Putin in St. Petersburg this week would be to stick a weapon of mass currency appreciation in his grill. If I was advising the President, I’d have him bring that #StrongDollar ace to the table – and maybe say something like this:

 

“Vlad, if you don’t tone this down, I am going to taper, then tighten – and if you don’t think I can get Summers to do it, try me – your little Petro-Dollar Putin power problem will look like Fukushima, and fast.”

 

But that’s just me – I’m a doer type of a guy who likes to make decisions without asking the bureaucracy of the world for its opinion. I’d like to see a US President build a #StrongDollar, Strong America revolution on the back of your hard earned currency.

 

Our immediate-term Macro Risk Ranges are now:

 

UST 10yr Yield 2.73-2.93%

SPX 1630-1658

Nikkei  13362-14093

VIX 15.93-17.98

USD 81.78-82.65

Brent 113.12-117.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shatteringly Simple - ISM new Orders

 

Shatteringly Simple - vp94


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