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Under Armour: EXPENSIVE

Takeaway: UA may face a tough margin stretch ahead. Great company, but we can find other stocks with better growth at a lower price.

This note was originally published October 24, 2013 at 12:03 in Retail

Under Armour: EXPENSIVE - ua1

Under Armour (UA) might have a couple tough margin quarters ahead of it.  The good news is that its finally making progress outside the United States.

 

UA is a great company that is coming into its own, but it may face a couple of tough margin quarters ahead. UA is one of the most expensive names in consumer, and we can find other stocks with higher quality growth at a lower price.

 

Given how hated UA's stock is (see our sentiment monitor in Exhibit 1) we suspected that material revenue beat followed by a better print on the EPS line would be enough to give this stock a shot in the arm.

 

Under Armour: EXPENSIVE - brian1

 

But then we flipped over to the balance sheet and a 59% boost in inventories (despite only a 25.7% boost in sales), and juxtaposed that against the -33bp erosion in Gross Margins in the quarter. Any way we slice the onion, bloated inventories and weakening gross margins hardly inspires confidence in any financial model.  In fact it is almost always a precursor to additional gross margin weakness.

 

WHEN A BRANDS LINE SWINGS DOWN AND FLIRTS WITH THE LOWER RIGHT QUADRANT, IT'S NEVER GOOD

Under Armour: EXPENSIVE - UAsigma

Also, footwear sales were up 28% in the quarter. Don't get us wrong -- that's a great number for most brands. This isn't most brands -- it's UnderArmour. A few years ago when the footwear product used to -- well…stink -- we'd expect sub par growth. But the brand has finally figured out its identity and has put out product that consumers actually want to wear -- -both men and women. But does this add up to 28% growth? We'd think something greater -- perhaps even 2x (at least if it wants to maintain a 48x forward multiple.)

 

Under Armour: EXPENSIVE - UAPE

Let's put that multiple into perspective for a minute… UA is expensive -- period. But some of the best stocks in the market are expensive (and some of the worst stocks are cheap). We're not a fan of PE/Growth multiples. But when looked at alongside other high growth peers it certainly puts things into perspective we can get a good sense as to relative value.  SO let's do that…lets compare UA against a who's who of high-flying consumer growth names. We're talking everything from TSLA, CMG, AMZN, UA, NFLX, KORS, NKE, WWW, RL, FNP, FNP and RH.  Unfortunately for UA, it tips the scale along with TSLA, AMZN and NFLIX at 2.0x PEG.  As an aside, our favorite name is RH -- the cheapest name on the page.

 

 

There were definitely some things we liked this quarter, and those focused on the areas where UA has been damaged goods in the past -- The biggest of those is International where It just opened up a huge Brands experience store in Shanghai, which is a great idea no matter how you slice it.  For the first time in…well, ever…it looks like UA can get 10% of its sales outside of these United States. That would be a big valuation kicker for US, because there's a fair sized contingent that thinks UA is forever rooted in the US. We disagree, by the way. Secondly, womens continues to outpace the company's overall growth rate, and now accounts for about 30% of total revenues. To put that into perspective, Nike announced last week that it's targeting its women's business to account for 24% of revenues by 2018. UA, already has a well established women's product, and if womens were to account for nearly half of the business in the years to come as company management indicated that could be a serious growth opportunity.


European Banking Monitor: Further Improvement

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps widened modestly in Europe last week, rising by an average 4 bps (median: +2 bps).  

 

European Banking Monitor: Further Improvement - z. banks

 

Sovereign CDS – Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps. 

 

European Banking Monitor: Further Improvement - z. sov 1

 

European Banking Monitor: Further Improvement - z. sov2

 

European Banking Monitor: Further Improvement - z. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Further Improvement - z. euribor


MACAU HEADED FOR 30%+ GROWTH

While slower than recent weeks due to seasonality, Macau put up another strong week, up 23% YoY.  Our October GGR growth forecast remains at +30-32%.  We continue to hear positive anecdotal evidence of a strong Mass month with consistently high casino traffic.

 

In terms of market share, the Asian companies continue to dominate this month.  SJM and Galaxy are posting share well above their recent trend.  LVS’s share has improved but remains below trend.  We’re pretty sure the LVS properties held low in the first half of the month.  While Wynn’s share looks low – also likely hold-related – we think that property is becoming more aggressive on the Mass side and should see Mass share gains going forward (possibly at the expense of MGM).

 

MACAU HEADED FOR 30%+ GROWTH - macau1

 

MACAU HEADED FOR 30%+ GROWTH - macau2


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MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA

Takeaway: China's interbank lending rate rose 109 bps W/W to 409 bps. Sovereign and institutional swaps widened, reversing their recent trend.

Risk Monitor / Key Takeaways:

A few of the notable callouts on the risk front this morning include China's interbank lending rate, Shifon, rising 109 bps W/W to 409 bps and a broad-based reversal in CDS at both the institutional and sovereign level.

 

* Chinese interbank rates rose 109 basis points last week, ending the week at 4.09% versus last week’s print of 3.00%. 

 

* Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps. 

 

* High Yield rates fell 7.4 bps last week, ending the week at 5.92% versus 5.99% the prior week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 2 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 15

 

1. U.S. Financial CDS -  In the US, swaps widened for 16 out of 27 financial institutions. The average and median increase were both 3 bps. On a M/M basis, however, swaps remain tighter by 7-8 bps. The large cap banks all worsened on the week with JPM, BAC and C all widening by 6 bps. WFC, GS and MS, however, all tightened by 1 bp.

 

Tightened the most WoW: AXP, COF, PRU

Widened the most WoW: C, UNM, ALL

Tightened the most WoW: AXP, COF, CB

Widened the most/ tightened the least MoM: MBI, GNW, GNW

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 1

 

2. European Financial CDS - Swaps widened modestly in Europe last week, rising by an average 4 bps (median: +2 bps).  

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 2

 

3. Asian Financial CDS - Chinese banks widened last week following the blow-out in the interbank lending rate. Indian banks, meanwhile, went the other way, tightening by 13-22 bps. Japanese Financials were largely unchanged on the week.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 17

 

4. Sovereign CDS – Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps. 

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 18

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 3

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 7.4 bps last week, ending the week at 5.92% versus 5.99% the prior week.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.0 points last week, ending at 1818.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 6

 

7. TED Spread Monitor – The TED spread fell 1.2 basis points last week, ending the week at 20.4 bps this week versus last week’s print of 21.56 bps.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.8%, ending the week at 283 versus 288 the prior week. As compared with the prior month, commodity prices have decreased -1.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 109 basis points last week, ending the week at 4.09% versus last week’s print of 3.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 85 bps versus 89 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 11

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 19 yuan/ton, to 3480 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 221 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 2.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


#GrowthSlowing Signals

Client Talking Points

VIX

This happens infrequently, so pay attention. With the Financials (XLF) down -0.2% and Russell 2000 lagging at +0.3% last week (versus the slower growth Dow +1.1% and Utilities +2.0%), the VIX was actually UP +0.4% on the week, making a higher low. Not good.

GOLD

The long-term love affair with Ben Bernanke has been epic. Since the no-taper decision, it's been Dollar Down, Gold Up. Gold was up +2.7% last week. It officially moves out of crash mode for the year-to-date at -19.8%. I'm still waiting for my levels to confirm before buying it. Stay tuned.

UST 10YR

If you ask the bond market, Ben Bernanke is going to pander to the Bond Bull Lobby (check out 2.52% on the 10-Year this morning, below @Hedgeye TREND resistance of 2.60%, not a good US growth signal). Slow-growth styles loved this development last week. Utilities, MLPs and REITS all were up around 2% across their subsector ETFs. Isn’t this great?

Asset Allocation

CASH 62% US EQUITIES 6%
INTL EQUITIES 16% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
DAX

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

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.

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

I'd need to see 10yr Yield close (and hold above) 2.61% to get back on the bear Treasuries train @KeithMcCullough

QUOTE OF THE DAY

"Better to go to bed supperless then wake up in debt." -Ben Franklin

STAT OF THE DAY

American Purchasing Power (U.S. Dollar) down -3.4% in the last three months to now negative -0.7% year-to-date. Euro +0.8% last week versus USD, now +4.0% year-to-date.


David and Goliath

This note was originally published at 8am on October 14, 2013 for Hedgeye subscribers.

“Even when you have three strikes, you’re still not out.  There is always something else you can do.”

-Tony La Russa

 

This weekend I read Malcolm Gladwell's most recent book, "David and Goliath - Underdogs, Misfits and the Art of Battling Giants." Now many of my academic friends are critical of Gladwell suggesting he cherry picks studies, but I sort of take his books for what they are: a compendium of interesting studies. Ultimately, it is up to the reader to accept or not accept his conclusions.  

 

As the title denotes, his most recent book is about perceived underdogs overcoming serious odds. He discusses why certain learning disorders may actually improve the chances of success of individuals (causes them to focus more intently), discusses the long term impact of California's three strikes laws (not positive for communities), analyzes how unconventional tactics in basketball can lead to outsized success (more full court pressing!), and a number of other interesting topics. 

 

One of the topics I found most interesting was the long run analysis of success in military conflicts.  As Gladwell writes, suppose you were to look at the conflicts that happened between very large countries and much smaller countries over the past 200 years.  In fact, let’s assume the size difference was 10x. How often would you assume the larger country wins?

 

Logically, and intuitively, it would seem likely that with that type of size advantage the larger country would dominate and likely win the conflicts close to 100% of the time. The reality is much different as the weaker countries have won almost 29% of the time. 

 

Even more insightful is the fact that the weaker side wins 64% of the time when employing unconventional, or guerrilla attacks.  Put another way, if the United States were to go to war with my home country of Canada (about 1/10 the population of the United States), you should put your money on Canada to win if the Canadians employed guerrilla tactics

 

Back to the global macro grind ...

 

We've had our own David and Goliath battle this year at Hedgeye as our Senior Energy Analyst Kevin Kaiser has taken on a couple of billionaire CEOs by making short calls on Linn Energy and the Kinder Morgan companies. As always, even though we believe our research supports a revaluation lower of both companies, time and Mr. Market will determine whether this call, versus the views of the energy Goliaths, is the right one. (Ping us at sales@hedgeye.com if you’d like to learn more about subscribing to the energy vertical.)

 

More practically, in investing, a bet against Goliath is often a bet against consensus.  Internally we run a number of screens to assess whether we are with or against consensus on any of our Best Ideas. As an example, is if company has 30 ratings from Wall Street and 29 of them are Buys that is likely more supportive of a short thesis, and conversely make us question whether we have differentiated enough insight to justify it as a stock to own.  Thinking unconventionally in investing is just as important as it is in warfare. 

 

The conventional thought according to the global macro pundits this morning is that some form of U.S. default is imminent.  This chatter has reached such an extreme that this morning Bloomberg was actually comparing the U.S. to the last major nation to completely stop paying back its debt – Nazi Germany.  Certainly, we have a good degree of respect for Bloomberg (in fact we all use their terminals), but a comparison like that seems erroneous, at best. 

 

In the Chart of the Day, we once again look at credit default swaps for 5-year U.S government debt.  Not only are CDS not at the same heightened levels of 2011 when they peaked at near 65 basis points, they are actually well off recently levels and currently trading at 34 basis points.  Given all of the fear mongering this weekend and headlines of discord in Washington D.C. perhaps they will spike again, but, certainly there is literally no chance that the U.S. government turns her back on the U.S. government debt obligations according to this market tell.

 

That all said, just because the probability of debt default is unlikely doesn’t mean you should be aggressively long of risk assets.  We trimmed the exposure in our real-time alerts products late last week going from a 3:1 long/ short ratio to 1:1.  Now most money managers can’t move this fast for reasons of scale, but the fact remains this is a market that will reward those who trade around positions. 

 

This is especially relevant broadly to the hedge fund industry this year.  According to Cambiar Investors LLC, shares that have been the most shorted are up 38% since the start of the year.  This is almost double the return of the SP500 in the same period.  Furthermore, according to the HFRI Equity Hedge Fund Index, hedge funds are up only 9.2% in the year-to-date. So far anyway, this has been a tough year for hedge funds to earn their 2 and 20.

 

In part it has been challenging for hedge funds and other active managers to out-perform because the variance between sectors has been abnormally low.  In our Q4 themes deck we show this graphically and the data indicated that this year is the second lowest year going back to 1990 for variance between sector returns at 0.50%.  The lowest was 2006 at 0.27%.  The historical mean since 1990 is 2.25%. So if there is one asset allocation bet you might want to consider, it is to #GetActive as sector variance is likely to only increase from these abnormally low levels.

 

Good luck out there today and feel free to ping us if you want to discuss how this week might play out from a catalyst perspective down in the nation’s capital.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.61-2.71%

SPX 1683-1708

ShangHai Comp 2191-2247

VIX 15.19-18.98

USD 80.11-80.69

Brent 110.04-111.99

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

David and Goliath - U.S. CDS

 

David and Goliath - z. vp 10 14


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