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WWW: Adding to Best Ideas. 2-Yr Double.

Takeaway: FLASHBACK: We're adding WWW to our Best Ideas.

This note was originally published April 18, 2013 at 12:02 in Retail

(Editor's note: As you can see above, Hedgeye Retail Sector Head Brian McGough added WWW to Hedgeye "Best Ideas" back in April. The stock is up almost 30% since then. To subscribe to Hedgeye research click here.)

 

Conclusion: We're adding WWW to our Best Ideas list and think it's a 2-year double. We think that the prevailing bear case is weak and backward-looking, and that WWW has a little bit of everything that's needed for a long to attract new money and grind higher over a multi-year time period. Aside from having a high quality management team and a very consistent long-term track record, we think that new market share opportunity on a consolidated cost structure and asset base will accelerate organic growth, while taking incremental margins and returns higher. The ensuing cash flow will be used to de-lever, which provides a powerful kicker to propel earnings growth into the 20-30% range. Ultimately, we think that WWW has 3 to 1 upside/downside over the next 12/18 months.  

WWW: Adding to Best Ideas. 2-Yr Double. - merr2

The outline below is a summary of our investment case. We plan to release a Black Book with a deep-dive analysis over the next two weeks.

 

DETAILS 

The bear case on WWW is simple. The company started to see a slowdown in its core footwear business, so it went ahead and did a transformational acquisition by paying a steep price for Collective Brands’ PLG division potentially near the peak of the cycle for its largest and most defendable brand – Sperry. Other brands like Saucony and Keds have upside, but are not in the 'great' category like Sperry arguably is. On top of that, the stock is trading at a high teens multiple on the company’s guidance. There are two realities associated with this bear case. 1) Most of it is correct.  And 2) all of it is irrelevant.

 

First off, let’s look at the sentiment on WWW and all agree that people are more bearish on the name than we’ve even seen in the modern history of the company (ie even in the years not displayed by this chart). We’re likely seeing some covering on today’s print, but it still leaves the name in record bearish territory according to our sentiment monitor.               

 

WWW: Adding to Best Ideas. 2-Yr Double. - bri1

 

Secondly, we think that this 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 RNOA. Specifically, our math suggests that in the three years following the initial acquisition year (where there will be outsized accretion) we should see the following…

a)      The addition of over $700mm in revenue – split fairly evenly between the Performance and Lifestyle groups.

 

b)      $150mm in incremental EBIT (20% incremental margin on top of the 8.4% reported last year).

 

c)       The asset base should remain relatively flat over that time period at about $3bn. The cash cycle can, and should, come down 20-30% from 2012 levels.  There’s no reason why this business should have 115 days inventory and DSOs of over 60.

 

d)      Over that same time period, interest expense should come down by 40% as WWW uses free cash to repay debt. As a result we should see shareholder’s equity double from $644mm ($13 per share) in 2012 to $1.3bn ($27 per share) in 2016.

 

e)      Importantly, RNOA should climb from 10% up to 16%, with steady improvements each year.  Admittedly, the one catch is that this is a company that once had returns of 30%. The PLG deal changed that – likely permanently (or at least for a very long time). Nonetheless, returns have bottomed and are headed up systematically. It's very important to note that it's near impossible to find an example where a company's RNOA roadmap went up (margins improving) and to the right (turns improving) simultaneously without the stock meaningfully outperforming peers.

 

WWW: Adding to Best Ideas. 2-Yr Double. - wwwrnoa

 

In the end, we’re modeling 30%+ growth in earnings over each of the next two years, and 20%+ at a sustainable rate for at least the next three years. Our estimates are only 5% ahead of consensus this year, but by the end of our modeling time horizon (2016) we’re 25% ahead of the Street.

 

WWW: Adding to Best Ideas. 2-Yr Double. - wwwestimates

 

 

At the end of the day, this is probably one of the best managed and most consistent companies in retail. Accretion is ahead of plan, inventories are in very good shape, and though there is admittedly a permanent impediment to achieving asset turn levels WWW saw prior to the deal (acquiring as opposed to growing organically), WWW has a multi-year platform from which to grow. Add on accelerated cash flow generation and subsequent debt paydown, and we think that this story has legs (look at HBI over the past year – it’s the mother of deleraging stories. We’d put FNP in a deleregaing bucket as well – at least as it relates to expectations for proceeds from its asset sales.)  

 

The stock is hardly washed out – we get that. But the reality is that this for a high quality globally diversified portfolio that has consistent 20-30% EPS growth and improving returns we don’t think that arguing a high teens multiple is a stretch. 18x our 2014 estimate of $3.55 gets us to a $64 stock, or 36% above current levels. Take that out to 2015 and 2016 and we’re looking at $75 and $95, respectively. When we juxtapose that alongside 15x ehat we think is a worst case $2.50 in EPS power, we’re looking 3 to 1 upside/downside over the course of a 12-18 months.

 

 

WWW SIGMA: Inventories are extremely clean, which has continued bullish implications for gross margins.

WWW: Adding to Best Ideas. 2-Yr Double. - wwwsigma     

 

 

 


Morning Reads on Our Radar Screen

Keith McCullough – CEO

VIX (Fear) Spiking Higher (via Yahoo Finance)

U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall (ridiculous Bloomberg headlines continue > via Bloomberg)

U.S. Adults Fare Poorly in a Study of Skills (via NY Times)

Brazil Rio and Sao Paulo teacher protests turn violent (via BBC)

New Zealand Business Confidence Surges to 14-Year High (via Bloomberg)

Flyers Coach Peter Laviolette fired after 0-3 start (via ESPN)

 

Morning Reads on Our Radar Screen - vix2

 

Kevin Kaiser - Energy

Jim Chanos: The Fraud Detective (via Yale Alumni Magazine)

What ponds are you fishing in? (via Oddball Stocks)

 

Tom Tobin - Healthcare

Family Pleads for Baby's Heart Surgery After Insurance Denial Four-Days Before (via Dixon Patch)

Docs Skeptical of ACA Exchanges, Survey Shows (via MedPage Today)

ACA changing everyone's open enrollment (via KSDK)

 

Brian McGough – Retail

Wolverine World Wide Q3 Profit Rises, Tops Estimate; Lifts FY Adj. EPS View (via Nasdaq)

 

Josh Steiner – Financials

Little Fear on Wall St. of Default, at Moment (via DealB%k)

September 2013 Mortgage Performance Observations  (via LPS Mortgage Monitor)

 

Jonathan Casteleyn – Financials

Morgan Stanley Seen Leading Profit Gains at U.S. Banks (via Bloomberg)



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.

Armageddon (Or Not)

Client Talking Points

CHINA

Thank goodness the Chinese re-opened the stock market. The Shanghai Composite led the charge in Asian Equities overnight closing up +1.1% after another growth stabilizing report. Chinese Services PMI was 52.4 in September versus 52.8 August. Meanwhile, the rest of Asia also acted well all things considered. Thailand was up +1.3%, Indonesia up +1.2, etc. We are long China now via the FXI ETF. US stocks? They're down 10 out of the last 13 days since Bernanke opted not to taper. Asia doesn’t care.

ITALY

Question: Can government “save” its market from itself? Witness the freshly squeezed year-to-date highs for the Italian stock market this morning. The rest of European equities are trading sideways. This is the most positive divergence in global equities in the last week.

YEN

Will the Yen make another lower-high? Will the US Dollar Index hold its long-term TAIL support of $79.21? End of the world ("EOW") watchers need to know. Because if you’re looking for a US “default” to drive the US Dollar into total oblivion, we’re looking to take the other side of that. So keep these levels in proper context.

Asset Allocation

CASH 55% US EQUITIES 12%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

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

Ridiculous Bloomberg headlines continue > A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall http://bloom.bg/1fbxgxo 

@KeithMcCullough

QUOTE OF THE DAY

He knows nothing and he thinks he knows everything. That points clearly to a political career.- Sir Walter Besant

STAT OF THE DAY

The Dollar Index, which measures the U.S. currency's value against a basket of currencies, DXY, is still within striking distance of last week's 8-month low of 79.627.


Bernanke's Lure

This note was originally published at 8am on September 24, 2013 for Hedgeye subscribers.

“It has exerted its pull on the West for a thousand years.”                                                                                          

-Scott Anderson                                   

 

That’s what Scott Anderson called the “lure of the East” in a fascinating new book I just started studying about the history of the Middle East called Lawrence in Arabia (2013).

 

“That lure brought wave after wave of Christian Crusaders to the Near East over a three-hundred year span in the Middle Ages. More recently, it brought a conquering French general with pharaonic fantasies named Napoleon… Europe’s greatest archaeologists in the 1830s… hordes of Western oil barons… and con men to the shores of the Caspian Sea in the 1870s.” (pg 15)

 

While 1,000 years is a long time, the lure of central planners clipping coins and/or devaluing the currency of The People has been in motion for at least 2x that. “In 64 A.D., in a naïve attempt to deceive the populace, Nero decreased the silver content in the coins and made silver and gold coins slightly smaller” (The History of Money, pg 52). Bernanke hopes no one has read that history.

 

Back to the Global Macro Grind

 

What is it, precisely, that gave both the Roman and Ottoman Empires the audacity to plunder the purchasing power of their people? After 200 years of operating as an independent bank, what made the British Empire so soft that it felt it had to socialize (nationalize) the Bank of England in 1946? What was the US “Free-Market” Empire and why have we empowered the Fed to change it?

 

My apologies in advance for thinking this morning. If you disregard the vacuum of history in which Bernanke thinks (1930s) and  contextualize the moment that his Fed is in (within the construct of long-term history which will ultimately judge Bernanke when he is long gone), it’s getting scary again. But you already know that – and the sad thing is that some of his Fed heads do too.

 

Yesterday, Dallas Fed Head (Fisher) basically admitted two things:

  1. The current White House Administration has politicized the US Federal Reserve
  2. By not doing what they led the market to believe what they’d do (taper), the Fed is losing credibility

Check. check.

 

I think most people who aren’t paid not to “get” it understand this now. If you don’t understand the history of un-elected politicians devaluing currencies, you have some reading to do. Self-education is the best long-term path to not becoming a lemming.

 

I’m not that smart. I think most people who have seen my SAT scores get that too. But Mr. Market is a very smart cookie, and what I tend to get (on a lag) is what he (or she) is telling me to get. I don’t wake up every morning trying to bend economic gravity.

 

Bernanke thinks he can “smooth” gravity, cycles, etc. He’s telling the entire bond, currency, and stock markets they are wrong. #Wow, bro. So let’s rewind the tapes and go to the score – what have markets done since Bernanke didn’t taper?

  1. US Dollar went straight down (now bearish TREND after being bullish for the better part of the last 9-10 months)
  2. US Interest Rates went straight down (still bullish TREND, but lost the immediate-term TRADE momentum line of 2.80% 10yr)
  3. US Growth Stocks stopped going up; slow-growth Utilities stopped going down

Now isn’t that last part perfect. Great job Ben. Instead of US growth expectations accelerating, now they are slowing again.

 

This is the first 2013 US stock market “correction” that I will not buy because Bernanke has decided that the opposite of what I want is what he wants. To review, what I want is A) what was happening and B) what every American should want:

 

1.       #StrongDollar

2.       #RatesRising

3.       #GrowthAccelerating

 

To be fair, there are a lot of people who are in the business of slow-growth (Gold, Bond, MLP, etc.) investing who have a pre-determined path as to what they want (more money to manage). But that’s not what The People want.

 

You don’t have to go back 2,000 years to get this either:

  1. 1983-89 US Growth > 4% GDP with #StrongDollar (Reagan’s avg = $115.25 USD) and Down Oil ($16.53/barrel avg)
  2. 1993-99 US Growth > 4% GDP with #StrongDollar (Clinton’s avg = $97.89 USD) and Down Oil ($19.69/barrel avg)

And maybe Hillary is smart enough to get what Obama doesn’t – and maybe that’s the only way out of this mess:

  1. Obama’s average USD (US Dollar Index) is the lowest in Presidential history at $79.52
  2. Obama’s average Oil price (Brent Oil) is the highest in Presidential history at $102.01/barrel

But that’s more than a few years away and sadly, at some point, someone in this country is going to realize that empowering both Putin and Middle Eastern kings via a Down Dollar, Up Oil policy is no different than doing the same via an un-elected Federal Reserve.

 

There is no doubt in my mind that the Fed is exerting its misplaced fear-mongering pull on the President. The lure is also to get you, The People, to fear the alternative (“if rates rise, housing will collapse”) when in reality it’s the government policy itself that is luring us away from the free-market system that gave America its empire to begin with.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.59-2.80%

SPX 1681-1730

VIX 12.93-14.98

USD 80.01-80.98

Euro 1.34-1.36

Brent 107.03-109.13

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bernanke's Lure - Chart of the Day

 

Bernanke's Lure - Virtual Portfolio


Expert Call TODAY on US Pipeline Regulation, Rates, Maintenance, and MLPs (New Dial-In Code!)

Continuing our work and research on Kinder Morgan, midstream MLPs, pipeline safety, and FERC rates and regulations, we will host an expert call TODAY, October 8th, at 11am EST with Elisabeth Myers.

 

Note the NEW DIAL-IN INFORMATION:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 356924#
  • There will be no presentation or slides associated with this call

Elisabeth Myers is the founding principal of Myers Energy International.  An energy lawyer with twenty years of experience, she specializes in the regulation of oil and natural gas pipelines and represents companies before federal and state regulatory agencies with respect to rate and regulatory issues.  She has litigated before the FERC, the California Public Utilities Commission, the U.S. Courts of Appeals, and the U.S. Supreme Court.  She advises on pipeline safety compliance issues under the U.S. Department of Transportation's Pipeline and Hazardous Materials and Safety Administration regulations.  Her clients have included major oil companies; a state regulatory commission; a producer trade association in rulemakings restructuring the natural gas industry; oil refineries; farmers in the mid-west seeking interconnects with interstate pipelines; independent producers and marketers of oil, natural gas, and natural gas liquids with respect to various regulatory and related transactional issues; municipalities and municipal gas distribution systems, and chemical manufacturers. 

 

Ms. Myers also has extensive knowledge of Kinder Morgan, as she litigated against SFPP in ground-breaking rate cases before the CPUC and FERC in the mid 2000s.

 

Topics of Discussion:

  • What’s the current state of pipeline regulation in the US?  How does the regulation of oil/product lines differ from natural gas?
  • History of pipeline regulation…  Where have we come from and where might we be going?
  • Pipeline safety and compliance…  Are companies spending enough on maintaining their pipelines?  Are they spending too much just to increase the rate bases (“gold-plating”)?  Is a certain level of spend mandated or regulated?
  • The growing prevalence of MLPs…  What’s it mean for US energy infrastructure, consumers, and investors?
  • MLPs, income taxes, and regulated rates…  Are MLPs “tax-advantaged” securities?  Why does the FERC permit an income tax allowance for MLPs?
  • And more...

If you have any questions for Ms. Myers, please send them to me at .

 

Kevin Kaiser

Senior Analyst


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