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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 8, 2013


As we look at today's setup for the S&P 500, the range is 14 points or 0.31% downside to 1671 and 0.53% upside to 1685.                           

                                                                                                    

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.29 from 2.29
  • VIX  closed at 19.41 1 day percent change of 15.95%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism Index, Sept., est. 94
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 10am: IBD/TIPP Economic Optimism, Oct., est 43.5 (prior 46)
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 12:25pm: Fed’s Pianalto speaks on economy in Pittsburgh
  • 12:30pm: Fed’s Plosser speaks in Johnstown, Pa.
  • 1pm: U.S. to sell $30b 3Y notes
  • 7:50pm: Bank of Japan issues minutes of Sept. 4-5 meeting
  • 9pm: Bank of Japan’s Nakaso holds news conference

GOVERNMENT:

    • IMF issues World Economic Outlook; Chief Economist Olivier Blanchard gives press conference during annual meeting, 9am
    • FDIC Board Reviews Deposit Insurance Fund
    • House, Senate in session
    • Senate Armed Forces Committee Hearing on Sequestration
    • SEC Commissioner Michael Piwowar attends Chamber of Commerce’s Center for Capital Markets Competitiveness discussion on “Advancing and Defending the SEC’s Core Mission,” 11:30am

WHAT TO WATCH:

  • U.S. default specter has Japan joining China warning on debt
  • U.S. loses $1.6b from shutdown costing $160m/day
  • Alcoa begins earnings season for 1st time since drop from DJIA
  • Alcatel-Lucent to reduce 10,000 jobs worldwide as losses mount
  • Morgan Stanley seen leading bank profit gains
  • IMF to publish World Economic Outlook, 9am
  • McKesson is in advanced talks to buy Celesio: DJ
  • America Movil, AT&T discuss entering Europe: Telegraaf
  • Vodafone plans to spend $2b on Indian mobile unit buyout: FT
  • U.S. approves China co.’s takeover of Mooney Airplane: Xinhua
  • North Korea has restarted Yongbyon nuclear reactor: Yonhap
  • German exports gained in Aug. as euro-area economy recovered

EARNINGS:

    • Alcoa (AA) 4:03pm, $0.05
    • Wolverine World Wide (WWW) 6:30am, $1.03, preview
    • Yum! Brands (YUM) 4:15pm, $0.92, preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Cocoa Touches 23-Month High on Shortage Outlook; Sugar Climbs
  • Rubber Glut Shrinking as Car Sales Expand to Record: Commodities
  • WTI Crude Advances as Impact of U.S. Shutdown Seen Limited
  • Morgan Stanley Increases Iron Ore Outlook as Deficit Persists
  • Soybeans Poised for Longest Rally in Four Months on U.S. Weather
  • Copper Rises in London as PMI Report in China Signals Growth
  • Goldman’s Currie Says Gold Is ‘Slam Dunk’ Sell After Shutdown
  • Rebar Gains on Stock Market Rally as China Returns From Holiday
  • Crude Supplies Increase for Third Week in Survey: Energy Markets
  • Asia’s Chocolate Craving Paces Global Demand: Chart of the Day
  • Battery-Stored Solar Sparks Utilities Backlash: Climate & Carbon
  • Iron Ore Demand Expands 7.5%, Keeps Market in Deficit: Bull Case
  • Olam Sees Smaller Arabica Coffee Surplus as Robusta Supply Gains
  • Vale Sees Iron-Ore Market Oversupplied From 2015 on New Capacity

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

 

 

 

 

 

 

 

 

 

 

 

 



McCullough: Why We're Seeing Red

Takeaway: Watch the relationship between US Equity performance and US Equity volatility (VIX) from here.

This remains the first U.S. stock market correction of 2013 that I haven’t been buying on red. Friday was only the third up day for US equities in the last 12 (when Bernanke wrongly decided to Burn The Buck by not tapering). Today isn't looking much better.

 

It's simple: Down Dollar + Rates Down = US Stocks Down - that’s precisely what we are seeing again today, and what I told our clients earlier this morning in our Morning Newsletter. From a US growth expectations perspective, that’s not good.

 

Wall Street was caught off-sides again this morning – too long = wrong. Watch the relationship between US Equity performance and US Equity volatility (VIX) from here. I’m already net short in our RealTimeAlerts signaling product, but I’d get really net short on a VIX breakout over 18.98.

 

McCullough: Why We're Seeing Red - dale


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YUM: ONE MORE QUARTER

Takeaway: China may still be an issue, but we expect sales in the region to turn positive in October and ignite a long stretch of outperformance.

YUM continues to be our favorite LONG in the big cap QSR landscape and, despite facing significant volatility since December 2012, it’s long-term growth story remains intact.


The company will report 3Q13 earnings after the close tomorrow while simultaneously releasing same-store sales for the month of September.

 

As a reminder, Yum! Brands reported a -10% decline in same-store sales, versus an estimate of -7.7%, in August for the China Division.  The August same-store sales results included a decline of -12% at KFC and an increase of +5% at Pizza Hut.  Looking ahead to September, consensus expects a -5.7% decline in China same-store sales.  Importantly, we believe the company will report positive same-store sales for both brands in the month of October and expect this trend to continue throughout the remainder of 4Q13 and into 2014.

 

YUM: ONE MORE QUARTER - finakl

 

 

As the reality of an improving top-line becomes common knowledge, we believe the stock will outperform its peer group.  As sales begin to improve, the next real driver of sentiment moving forward will be the slope of the line in the margins of the China Division.  All told, China margins actually held up better than expected in 1H13, as significant declines in traffic and mix were partially offset by lower food costs and improved labor productivity.

 

We expect to see margins in the remainder of 2H13 and 2014 to improve concurrently with an improvement in same-store sales.  Management has previously acknowledged that they need mid-single digit same-store sales growth in China in order to fully offset inflation, and we believe a continued internal focus on margin management will likely lead to better than expected earnings in 4Q13 and 2014.

 

Since peaking at 22.6% in 1Q10 on a TTM basis, restaurant level margins in China are estimated to have declined by 770 bps in 3Q13.  In our view, YUM will have one more ugly quarter.  The trends in the China division may again, be difficult for some investors to swallow – restaurant level margins are expected to be down 310 bps in 3Q13 versus a decline of 500 bps in 2Q13.  But, there is a light at the end of the tunnel.  By 4Q13, restaurant level margins and operating margins will begin to improve on a year-over-year basis in China.  Essentially, once we get past 3Q13 results, we expect YUM’s China Division will begin to improve significantly.

 

YUM: ONE MORE QUARTER - china rlm

YUM: ONE MORE QUARTER - yum operating margins

 

 

For 3Q13, we expect YUM to report numbers in the YRI and U.S. Divisions in-line with expectations, with the possibility that they could be slightly better.

 

Sentiment on YUM is still fairly negative.  Illustrated in the chart below, 39.3% of analysts rate YUM a Buy, 57.1% rate YUM a Hold, and 3.6% rate YUM a Sell.  Short interest in the stock is rather muted at 1.75% of the float. 

 

YUM: ONE MORE QUARTER - YUM short interest

YUM: ONE MORE QUARTER - anr

 

 

At a 10.9x EV/EBITDA, YUM is trading at a significant discount to its QSR peer group at 12x EV/EBITDA.  We believe this valuation is reasonable – for now.

 

YUM: ONE MORE QUARTER - ev ebitda

 

 

 

Howard Penney

Managing Director

 


ENR – Is the Bottom In?

Our answer: no.

 

On September 12th, we wrote a note stating that ENR was “Cheap for a Reason”. The crux of our thesis was that the macro and company-specific setup was not suggestive of upside in the stock price. At this level, we remain bearish on the name as the fundamental and quantitative outlook suggest that consensus price targets may need to come down over the near-to-intermediate term.

 

This stock could be a longer-term winner for investors, given the plethora of positive attributes in the company’s profile but we see material downside in the stock (as far as $80, from a quantitative perspective) over the next three to four quarters.

 


Summary Bullets:

  • ENR’s wet shave business (37% of revenue) is exposed to declining U.S. industry trends
  • Organic revenue growth remains anemic at best
  • ENR holders may be on the wrong side of a “heads-I-win-tails-you-lose” macro outlook

 

ENR – Is the Bottom In? - enr levels

 

 

Fundamental Outlook: We remain bearish on Energizer’s fundamental outlook as competitive pressures and industry declines impact some of the company’s most important businesses. During the most recent earnings call, on July 31st, management argued that the company was maintaining its share of the razors and blade category due to the successful launch of Hydro Disposables.

 

Whether or not that claim is accurate, the overall razors and blade category has continued to decline into 3Q and we expect negative top-line growth in that segment for ENR once again.

 

 

The household products segment remains challenging for Energizer as a combination of historically high promotional activity and a declining category impair the company’s ability to drive sales. The losses of two U.S. retailers will impact numbers by roughly 6% starting in 4Q and continuing for three quarters of FY14 at the same rate.

 

Despite earnings growth in the mid-single-digit range, we are reluctant to get behind the stock until the company’s organic growth outlook improves, or the stock becomes cheaper.

 

 

Organic Revenue Growth: Consistent organic growth, or the lack thereof, in Energizer’s business is a primary concern. Over the past 10 years, the company has driven revenue growth primarily through acquisitions. While the company can drive revenue through that strategy, we see organic growth as being central to creating shareholder value as the complexity of the company continues to increase. The most recent acquisition of J&J’s feminine hygiene brands has not been met with enthusiasm by the market with the share price declining -12% since the announcement versus the S&P 500 down 42 bps and HPPC peers average of up 23 bps.


Note that the +3.7% organic sales growth in Household Products was due “primarily to increased shipments versus soft prior year comparisons and higher promotional activities in the U.S., and distribution gains in Asia.” In the fourth quarter, HP global sales will decline by more than 10% due to market share losses, promotional and shipment timing, and storm-related volume in the prior year quarter, according to management.

 

ENR – Is the Bottom In? - ENR organic growth

 

 

ENR – Is the Bottom In? - enr sales and acui

 

 

Macro: This is a difficult point to prove but we think some readers may find it interesting.

  1. The expectations of interest rates rising makes buying a company (or division of a company) more expensive as buyers rush to complete deals
  2. The prospect of higher rates is likely to be a negative for ENR as the company’s dividend yield (an increasingly important part of the bull case) becomes less attractive on a relative basis.
  3. If, contrary to our Macro Team’s view, employment data deteriorates from here and the Federal Reserve maintains low rates on the basis of a weak labor economy, that would also be negative for ENR and consumption more broadly.

 

 

Other Factors: We see Energizer as a company that has many risks weighing on the value of its equity. Besides the slow growth of its major divisions, we see some other risks as being noteworthy:

  1. Sentiment has shot to the upside over the last six months and we see peak or close-to-peak sentiment as bearish. The stock currently has 9 Buy ratings, 6 hold ratings, and 0 sell ratings. As of the most recent data, 4.75% of the float is sold short
  2. Intangible Assets being such a high percentage of Total Assets is a latent risk that could be a factor for ENR and, potentially, the broader HPPC sector if impairment charges are incurred going forward

 

ENR – Is the Bottom In? - enr sentiment

 

ENR – Is the Bottom In? - intangible tangible assets

 

 

Rory Green

Senior Analyst


Juicy ... Sold!

FIFTH & PACIFIC COMPANIES, INC. ANNOUNCES AGREEMENT TO SELL THE INTELLECTUAL PROPERTY OF JUICY COUTURE TO AUTHENTIC BRANDS GROUP FOR $195 MILLION IN CASH

 

Juicy ... Sold! - juicy

  • “[FNP] today announced that it has entered into a definitive agreement to sell the intellectual property of the Juicy Couture brand. Consummation of this transaction is subject to customary closing conditions and is expected to occur in November.”
  • “William L. McComb, Chief Executive Officer of Fifth & Pacific Companies, Inc., said: ‘We announced that we have signed an agreement to sell the intellectual property of the Juicy Couture brand to Authentic Brands Group (ABG) for $195 million, payable in cash. With this sale, we have also entered into a short-term licensing agreement with Authentic Brands Group that allows us to transition the business in an orderly fashion through the first half of 2014, with a $10 million guaranteed minimum royalty payable to Authentic Brands Group. In the coming weeks and months, we anticipate that Authentic Brands Group will announce licensees and affiliates that will work to take over elements of the operating business, including many of the company's talented associates, retail stores, wholesale, international, and certain components of the ecommerce site. We plan to work closely with these entities to ensure a smooth and orderly transition that is seamless to consumers and our business partners.’”

Takeaway: What’s interesting is that the sale is for ‘intellectual property.’ This sticks FNP with the leases – which it would have to terminate as a cost – as well as the employees (who are likely out of a job). Our model originally called for $250mm in proceeds. But after the deal fell through three weeks ago (for Juicy, Lucky, and the JOEZ deal – all in the same week), our expectations came down to a degree.

Assuming that – worst case – they net $150mm, it still allows them to pay off a third of their debt – and that’s before they sell Lucky, which should net $400mm or better.

 

(Editor's note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. For more information on how you can subscribe to Hedgeye research click here.)


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