RAI – 3Q13 Results In-line; E-Cig VUSE Excitement

RAI reported Q3 top and bottom line results in-line with consensus, and slightly revised downward its FY EPS guidance to $3.17 to $3.27 (versus last quarter’s estimate of $3.15-$3.30). The stock is trading down over one percent on what we view as a stronger quarter sequentially, with total cigarette volume declines moderating at -4.3% (versus -6% last quarter), solid smokeless results, and increased excitement around the launch of its e-cigarette VUSE (more below).  Our quantitative set-up suggests the stock is a buy below $50.


RAI – 3Q13 Results In-line; E-Cig VUSE Excitement - z. RAI


Total retail share slipped 50bps to 26%, offset by higher pricing year-over-year and strong performance from smokeless offerings: it saw a +0.7% share increase to +17.8% from Camel and Pall Mall, the company’s growth brands that account for almost 70% of total share volume.  Camel SNUS, which enjoys dominate market share (~80%), grew +0.4 points and increased pricing from its moist-snuff brand Grizzly gained +1.6% share points in the quarter.


We do expect cigarette volume pressure through year-end. The company said volumes should decline closer to -4% (vs previous guidance of -4 to -5%) for the year, but did not predict any less consumption based on the impact from the government shutdown. We’re bullish on the migration to smokeless tobacco and e-cigs to offset declining cigarette volume over the medium term.  



On e-cigs: If you don’t think e-cigs matter to big tobacco – think again!  On the earnings call, the progress on VUSE, the company’s first e-cig that was launched in July in the test market of Colorado, was the first brand that management reviewed. CEO Delen said that VUSE is getting a great reception with leading market position in the state (we’d expect so given the strong couponing). He noted strong repeat purchasing and that its replacement cartridge was the largest selling SKU, and believes that VUSE can attain cigarette-like margins over the medium term. Further information on its plans around a national roll-out were indicated to come at next month’s Investor Day meeting.


Delen indicated that he has no further information on when the FDA may come out with a ruling on e-cigs (expected October timeline) and/or if the government shutdown will delay the announcement. He did note that RAI engaged with the FDA on VUSE, and the meeting was heavily attended by the FDA.


Given that Colorado is a test market, it’s hard to extrapolate the costs for a nationwide roll-out – certainly it’s a competitive category and RAI is playing slightly behind the 8-ball.  We look forward to monitoring VUSE’s performance.   



Results: On the quarter, EPS was in line with consensus at $0.86, up 8.9% year-over-year.  Revenue also met analysts’ estimates at $2.14B, up 0.9% year-over-year. On the year, RAI revised its EPS guidance to $3.17 to $3.27 versus last quarter’s estimate of $3.15-$3.30.

Smartwatch Wars: Escalation

Takeaway: Adidas shows it means business.

Editor's note: Interesting development on Hedgeye Retail Sector Head Brian McGough's radar screen. For more information on McGough's research click here.


Smartwatch Wars: Escalation - adid1


From the Wall Street Journal

  • "The Adidas watch will retail for $399 when it becomes available on Nov. 1. It includes GPS tracking technology, wrist-based heart monitoring, a Bluetooth-enabled music player, and use of Adidas’ live coaching service, miCoach."
  • "Mr. Gaudio said the watch was developed for runners who don’t like the idea of bringing along their phone on runs, and who use that time to disconnect. Two key features of the watch are, in fact, components it doesn’t have: Unlike gadgets offered by Samsung and Nike which work in conjunction with smartphones, the miCoach Smart Run functions as a standalone product. Further, its heart rate monitoring is conducted on the wrist, eliminating the need for a traditional separate chest strap."

Takeaway: Nike currently has its Nike+ Sportswatch that it built 2-years ago in conjunction with TomTom. It has GPS, tracks cadence, laps, splits and has a solid alarm. All of that said, this Adidas watch appears to blow it out of the water. That said, Nike's sells for $169, and Adidas is $399.  On a relative value basis, Nike still might come out ahead.  Either way, expect NKE to up the ante on its product to beat Adidas -- and it will likely do so at the same sub $200 price.






Neptune Group Ltd will pay HK$241 million (US$31 million) for 5% of privately owned Joyful Celebrate Global Ltd.  Joyful Celebrate promotes the Galaxy Neptune Guangdong VIP Club at Galaxy Casino SA’s casino-hotel in Cotai.  The Galaxy Neptune Guangdong VIP Club has at least 16 VIP tables with a rolling chip turnover of about HK$7.5 billion a month. Neptune is guaranteed 0.3% of the rolling turnover from the room.



Paradise Group , one of South Korea's largest casino operators, and Japanese gaming company Sega Sammy plan to invest $1.7 billion to build a luxury resort to tap a surge in Chinese gamblers flocking to the country.  The pair said in a statement on Tuesday they will build a foreigners-only casino in Incheon, in the northwest of the country near the capital Seoul and a short flight away from wealthy gamblers in China and Japan.



A Tokyo court has dismissed a defamation lawsuit filed by Japanese billionaire Kazuo Okada against Wynn Resorts and some of its top executives, saying the case should not be handled by a Japanese tribunal.

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October 22, 2013

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Bennie and the Jobs

Client Talking Points


Someone always knows something. The way Oil, Gold, and Silver are acting (Bernanke Dollar Devaluation carry trades of the century), this jobs print could be a beat. West Texas Intermediate snapped our Hedgeye TAIL risk line of $101.37 – that’s fresh. Silver is down -1.1% ahead of this morning's print. More to be revealed.


Despite what Ben Bernanke just tried doing to it, the U.S. Dollar still held its long-term TAIL line of $79.21 support. That line is of paramount importance. It matters more than any other macro line in my multi-factor model. So this jobs report does too. The 10-year US Treasury Yield TREND support is a close second behind the dollar. It's at 2.57%.


Question: Why do emerging markets love Bernanke Burning the Buck? Simple. It gives them their currency back. A stronger Real is taking consumer inflation down sequentially in Brazil. The Bovespa likes that until it doesn’t. Witness the breakout yesterday over 54,515 TREND. The U.S. Dollar needs to be pressured further for that to hold.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 


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.


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


Someone always knows something - we'll see if Mr Macro Market has this jobs preview right @KeithMcCullough


"The Federal Reserve is not currently forecasting a recession." -Ben Bernanke on January 10, 2008


Since the Federal Reserve was created, the U.S. dollar has declined in value by more than 95 percent and the U.S. national debt has gotten more than 5000 times larger.


2013 should be ok but watch out for 2014



RCL reports Q3 on Thursday and we expect a Q3 beat but no change to FY 2013 guidance.  But it's not 2013 we are worried about.  The key question is how much guidance will management provide on FY 2014.  Carnival surprised investors by prematurely providing disappointing revenue yield guidance for 1H 2014 in its F3Q earnings release.  Last October, RCL, without providing numbers, expressed optimism on 2013 booked load factors and average per diems. While it is in management's nature to spin positively, we believe 2014 commentary will be cautious, particularly for the 1st half.  Our recent Cruise Price Survey (published yesterday) certainly indicated that caution is warranted.


3Q and 2013

In late August, Celebrity Millennium cut short its summer season by canceling four Alaska cruises and going into dry dock for four days after multiple propulsion problems.  We think the Celebrity Millennium problems impacted 3Q yields by 0.4% and EPS by four cents.  Including the Celebrity Millennium problems, for 3Q, we forecast 1.8% net yields (constant currency), at the high end of company guidance (+1.0% to +2.0%), and $1.69 EPS (within RCL guidance of $1.60-$1.70). Weak Alaska and China/Japan performance would be offset by strong results from Europe. Onboard and other yields should continue to outperform ticket yields.  


As for 2013, including the impact from Celebrity Millennium, we expect EPS of $2.32 and net yields (constant currency) of 2.5%. 



As we noted in "SHIPS OF STOOLS NO LONGER? (WITH CHARTS)," 2014 pricing may not be as robust as analysts expect.  In particular, Alaska and Europe have been lagging.  Digging in further for Alaska, we're seeing a 50% price discount for the troubled Celebrity Millennium brand for summer Alaska trips, which is dragging down pricing for the rest of the Celebrity fleet as well as the Royal Caribbean brand.  As an aside, Princess (a CCL brand) is usually regarded as the major competitor to Celebrity in the Alaska premium market and based on our survey, their prices have seen substantial gains recently for summer 2014.  In addition, Europe is troubling for RCL as pricing is off by double-digits across the fleet. We're particularly worried about the deteriorating Pullmantur brand, which is struggling in both the Caribbean and Europe markets.  


RCL's cost guidance should be interesting.  In its previous conference call, RCL said it was targeting flat net cruise costs ex fuel for 2014.  Given a very competitive promotional environment in the Caribbean, that would be a worthy feat.  It would be the lowest cost metric growth since 2010.


For 2014, we're projecting 1.7% net yield growth (constant currency) and $2.88 in EPS, below Street estimate of 2.5%-3.0% (constant currency) yields and $3.07 EPS, respectively. 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%