prev

Sneak Peek: Investing Ideas

Takeaway: A sneak peek at two stocks covered in Hedgeye's Investing Ideas this past Saturday.

Editor's note: What follow below is a brief, complimentary excerpt from this weekend's "Investing Ideas." This Hedgeye product is designed for the savvy, longer-term self directed investor looking for long-only opportunities. Click here for more information and how to subscribe to this valuable investing tool.  

 

Sneak Peek: Investing Ideas - nik1

 

NKE– We’d like to address the elephant that’s been quietly sitting in the back of the room since Nike’s analyst day on October 9th. Specifically, Nike finally outed a key initiative we’ve been talking about for two years – the ability to manufacture customized product (by color and size) at point of sale. 

 

Think about it – the model for footwear makers over the past four decades has been to design product in the US, and then to outsource to Asia – the entire process taking nine months at the earliest. 

 

Now, NKE is introducing the capability for a consumer to walk into a store and build their own shoe at a kiosk. They’ve had that capability through NikeID at their own stores for a while. But those orders still go to one of its 700 third-party plants in Asia to be processed. Now the product is being manufactured right there…on the spot.

 

So basically, a consumer could go into the store, build a shoe electronically, then go to Chick-fil-A for a bite to eat, and return an hour later and their shiny new kicks will be waiting.  This is an absolute game changer, and it’s one that no other brands have the scale to compete with. 

 

Sound expensive for Nike?

 

Ask yourself this…what retailer on the planet would not give their left arm to have one of these Nike kiosks/mini-manufacturing hubs in their stores? It’s be a big competitive advantage, and one that we think would lead the Foot Locker’s of the world to lay out the capital needed on their own balance sheet.  Nike only allocated 90 seconds to this at their meeting. It was worthy of three hours. We think that people will grossly underestimate the importance of this initiative (no one even asked any questions on it).

 

* * * * * * * 

Sneak Peek: Investing Ideas - trow 

 

TROW – T Rowe Price continues to fire on almost all cylinders after its earnings report this week that beat Street expectations on both revenues and on earnings per share. The firm did however see institutional outflows at the end of the quarter which was the only hang up in an otherwise strong release. 

 

The outflow in the third quarter was improved from last quarter’s withdrawal and is again coming for only a small select group of sovereign wealth funds in Asia that are rebalancing their asset allocation after above benchmark performance from TROW funds. TROW continues to maintain the largest percentage of fund assets in 4 and 5 star funds, the only mutual funds that historically have received any new inflow.

 

As such with these sovereign outflows to be finished soon in our view, TROW will again return to positive net inflow which will be a positive catalyst for this leading fund manager.  T Rowe has $1.6 billion in cash, forward free cash flow of $1.2 billion, and no debt which give this company leading financial stability in the group with the ability to raise its dividend again into 2014 as investors wait for net inflows to return. 

 

* * * * * * * 

 

Click here to learn more about Investing Ideas.


LINN Energy 3Q13: Spend, Baby, Spend

Takeaway.....Better-than-expected 3Q13 on the DCF side, but with a massive outspend relative to maintenance CapEx (again); 4Q13 organic production guided down; outcome of the SEC Inquiry / BRY merger remains a big question; we make the case for LINE fair value at $5.00 / unit; no change in our view, LINE / LNCO remains a top short idea. 

 

3Q13 DCF Beats, Production In Line……LINN’s 3Q13 Distributable Cash Flow (even though LINN doesn’t use the term anymore, it’s still what some people care about) came in at $173MM vs. $148MM guided.  Stronger-than-expected oil production volumes and lower cash costs drove the beat.    LINN reported volumes of 823 MMcfe/d vs. guidance of 810 – 830 MMcfe/d and 780 MMcfe/d in 2Q13 (up 5.5% QoQ).  Oil production beat the high end of the guidance range, likely due to a ramp in activity and spending in the Granite Wash and Anadarko JV over the last two quarters.  Production taxes came in $11.5MM below guidance, as ad valorem taxes, “which are based on the value of reserves and production equipment” fell “primarily due to lower assessed values on the Company’s base properties” (3Q13 10-Q).  Is that bullish?  Adjusted, Open Net Income came in at $0.12/unit and open EBITDA was $334MM 

 

4Q13 Organic Production Guided Down……LINN left its 4Q13 production guidance flat at 850 MMcfe/d (assuming no ethane rejection) from its prior guidance, despite the fact that it will have a material contribution from the newly-acquired Permian Basin assets, which was not factored into the previous guide.  The deal is expected to close “on or before October 31, 2013” (3Q13 10-Q).  LINN expects the asset to average 4,800 boe/d (63% oil) over the first 12 months, which would amount to a ~19 MMcfe/d contribution in 4Q13.  This makes the acquisition all the more interesting because it looks like it was done just to plug a hole.  LINN increased 4Q13 DCF guidance by ~$9MM, but by our math that incremental DCF is all from these acquired, high-margin oil properties.   

 

Huge CapEx Burn (Again)……LINN spent $339MM in total organic CapEx in the quarter, with only $116MM held back from distributions as “discretionary reductions for a portion of oil and natural gas development costs.”  (This was formerly known as “maintenance capital expenditures;” despite the change in terminology, nothing has changed with how this number is calculated.)  Total CapEx exceeded maintenance CapEx by $223MM in the Q, more than the $171MM distribution payment.  Over the TTM, total CapEx exceeds maintenance CapEx by ~$900MM, while production was ~+1.6% YoY on an organic basis, by our calculations.  Just shocking…

 

LINN Energy 3Q13: Spend, Baby, Spend - linn1

 

2013 CapEx Guidance is Too Low……Excluding acquisitions, YTD 2013 CapEx is $959MM (per the CF statement); the 2013 guidance remains at $1,150MM (3Q13 10-Q), implying that LINN will spend less than $200MM in CapEx in 4Q13.  We find that highly unlikely considering that CapEx was ~$340MM/quarter over the past two quarters.  FY13 CapEx is likely to be closer to $1,300MM.

 

Free Cash Flow Negative……Over the TTM, LINN has paid out $682MM in distributions on a similar amount of what was previously called DCF, all the while being sharply Free Cash Flow (FCF) negative, before acquisitions.  In 3Q13, FCF was -$84MM; over the TTM FCF was -$388MM.  For a Company that doesn’t grow organically, and pays out massive distributions, this is concerning. 

 

LINN Energy 3Q13: Spend, Baby, Spend - linn2

 

Premiums Paid Disclosure Disappears......It is disappointing that LINN has removed disclosure telling investors what the premiums paid for derivatives that settled in the period were.  It was disclosed in the 2Q13 10-Q as $43MM (~28% of DCF).  In our view, this is the amount by which LINN's DCF is overstated due to its aggressive derivatives accounting methodology, and is important information that needs to be disclosed.

 

An argument for LINE at $5.00/unit……LINN is now trading around 8.9x Adjusted EV / Open EBITDA (we annualized the 3Q13 open EBITDA number and adjusted the EV lower by the net derivative asset per the 3Q13 balance sheet).  On this measure, of the large cap E&Ps, only EQT, COG, PXD, and RRC are more expensive, and these companies have arguably the best undeveloped acreage positions and future growth potential of all NAm E&Ps.  Consider that SU, DVN, OXY, APC, and DNR all trade around 5 – 6x 3Q13e Annualized EBITDA.  What is LINN Energy?  A free cash flow negative E&P with no organic growth, no shale scale, no material non-proven value (midstream or acreage), and highly-dubious accounting practices which are currently the focus of an SEC inquiry.  For perspective, LINN at 5.0x EBITDA is a ~$5.00/unit stock.  This isn't to say it's going there (at least any time soon), but we are tired of hearing the "LINN is cheap" argument.  In our view, LINN is over-valued by at least 100%. 

    

LINN Energy 3Q13: Spend, Baby, Spend - linn4

 

Kevin Kaiser

Managing Director



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.

XLF: PLAYING DEAD FOR BERNANKE?

Takeaway: Witness how the Financials (XLF) act with Bernanke leaning on the long-end of the curve.

Can you say D-O-G? That’s how the Financials act with Bernanke leaning on the long-end of the curve.

 

The XLF was down in a market up week last week, and were down again yesterday as consensus is forced to chase slow-growth (Consumer Staples +1.2% yesterday). The Yield Spread (10year – 2year) compresses again this morning to 219 basis points wide. It's a bearish U.S. Growth signal versus bullish Europe. 

 

XLF: PLAYING DEAD FOR BERNANKE? - drake1

 

For more information on how to subscribe to Hedgeye research click here.


NCLH 3Q CONFERENCE CALL NOTES

Like CCL and RCL, NCLH expressed caution over the Caribbean environment.  2014 guidance was a tad short of what the Street was expecting.

 

 

CONF CALL 

  • 3Q capacity increased by 14.9%
  • 3 ships in Alaska for 1st time since 2009
  • Hawaii capacity increased slightly; Pride dry dock (24 luxury suites)
  • Breakaway:  guest satisfaction levels same levels as Epic introduction
  • Escape: Fall 2015; Bliss: Spring 2017
  • Environment has been more challenging than expected in the beginning of the year
  • 16 days of govt shutdown coincided with difficult booking environment; heightened close-in booking environment in 3Q
  • 3Q net ticket increased 5% and onboard yields increased 1.5% - helped by Breakaway
  • 3Q Weighted average cost of debt: under 4%
  • 4Q deployment:  55% Caribbean, 17% Europe, remaining spread between Hawaii, Panama Canal, Bermuda, and Other
  • 4Q:  dry dock for Norwegian Sky and promotional spending for Getaway
  • 2014 adjusted NCC guidance: 1-2%
  • Getaway:  7-day year-round to Caribbean (1st time in many years)
    • Feeling good about Getaway based on Breakaway results
  • Pearl- chartered ship so will reduce # of Caribbean itineraries for summer 2014
  • 2014 GUIDANCE : +60% EPS growth $2.20 (below consensus of $2.29) but comfortable with low-mid $2.20 range

Q & A

  • 1Q bookings a little behind; all other quarters ahead
    • Easter calendar effect (booking momentum into 2Q)
    • Mid-single digit price improvement
  • Pricing above mid-single digits for 2014 overall
  • Want to see Caribbean stronger, particularly in 1Q
  • 2014 net yields:  low/mid 4s 
    • 1Q/2Q:  healthy pricing environment in Caribbean
    • High promotional environment 
  • Caribbean promotional environment:  more competitive
    • Last month or so, it has been consistent
  • 2014 European deployment about 20%
    • Pricing has been positive; mid-single digit growth
    • Feeling pretty good
  • 2014:  64% hedged in fuel
  • New ship premium are 'in the double digits'- Getaway lost some premium lately since they priced very high in the beginning (our pricing survey confirms this)
    • Has premium widened?  Not really.
  • Lots of opportunities to drive firm efficiencies (e.g. Six Sigma); 500bps by 2017; invested capital growth of 14%
  • Getaway bookings:  consistent with mgmt expectations
  • Europe future capacity:  biggest in NCLH's history; am comfortable with current capacity
  • 3Q Onboard:  casino was strong; 4Q onboard is back to normal levels

Is Eric Sprott Right on Gold?

Takeaway: Monetary policy and not perceived supply and demand is the driver of the price of gold.

This note was originally published October 23, 2013 at 17:00 in Macro

Is Eric Sprott Right on Gold? - sprott

As many of you know, one of the most esteemed gold bugs of our generation is the venerable Eric Sprott of Sprott Asset Management in Toronto.  Since 2000, he has obviously been spot on in his bullish call on gold, although this year has obviously been not quite so shiny (so to speak) for the gold bulls.

 

Yesterday, Sprott wrote a note to the World Gold Council effectively questioning their projections for short term supply and demand for physical gold.  Admittedly, he actually raises some interesting points, in particular the idea that even though physical gold in ETFs has been in free fall this year, it appears unlikely to go much lower from current levels.

 

On a higher level, Sprott’s point that the available statistics on gold are misleading to the extent that they may be overstating the available supply of and thus negatively impacting the price of gold is an interesting one and worth investigating further.  In the chart below, we’ve re-created Sprott’s table that was attached in his letter to the World Gold Council.

 

Is Eric Sprott Right on Gold? - jones1

 

The table shows that demand for gold, according to Sprott, is clearly out stripping supply.  In his analysis, Sprott nets out both Chinese and Russian domestic production from the world market, which he argues never leave the country and are consumed directly internally.  He also excludes about 400 tonnes a year in technology demand, which he believes is double counted.  On the flip side, Sprott excludes what the GFMS dubs “OTC investment and stock flows”, which is a name for a plug of sorts that represents the gold traded in the OTC market.

 

In summary, based on Sprott’s analysis there will be a deficit of supply this year of more than 780 tonnes.  If he is correct, and if gold in fact trades off of supply and demand, then the sell-off in gold this year is truly because the consensus misunderstands the global supply and demand dynamics.  Or, alternatively, there are other key factors driving the price of gold, which we will touch on shortly.

 

The counterpoint to Sprott’s case is that aggregate gold demand is down based on the World Gold Council’s numbers for the year-to-date.   According to the World Gold Council, demand actually fell by 12% in Q2 2013 from Q2 1012 to 856.3 tonnes.  This is just about 20% below the 5-year average quarterly demand for gold.  Clearly, this is a very different story than Sprott’s numbers outline.  In fact, as we show in the table below, the world gold council shows an over-supply of gold in the year-to-date. 

 

Is Eric Sprott Right on Gold? - WGC Table

 

Sprott’s full year estimates vary from the World Gold Council’s annualized numbers by 1,215 tonnes in aggregate.  On a notional basis, the supply and demand difference between the two sets of estimates is $52 billion.  This is a difference that is big enough to drive a very large truck through.  So, who is right?  Well, simply, the market seems to be saying the World Gold Council has nailed this one. 

 

One point both groups agree on, which is very transparent data, is that the financial demand for gold via ETFs has fallen dramatically this year.  Through the first two quarters of the year, the gold held by ETFs has declined by 579 tonnes.

 

But given the clear opacity in global supply and demand numbers for gold, we would actually posit another thesis, which is that perceived supply and demand is not the key driver of the price of gold at all and both sets of estimates are merely noise.  In the chart below, we show one of the strongest correlations we’ve seen over the last five years, which is the gold price versus the Federal Reserve balance sheet.

 

Is Eric Sprott Right on Gold? - Gold vs Fed BS 102313

 

From 2008 – 2012, this correlation was about as tight as we’ve seen in our factoring models with a r-squared of 0.90.  The chart also shows that in 2013, this relationship broke down in emphatic fashion.  Investors began to sell gold as economic data accelerated and in effect began front running a change in policy course from loosening to tightening.

 

The largest decline in demand for gold this year has come from a decline in demand from ETFs, or the financial markets.    As the chart below highlights, the price of gold and value of gold in ETFs has increased in lockstep for the last decade and declined in lock step starting about a year ago with the initial correction in the price of gold leading the exit of physical gold from ETFs.

 

Is Eric Sprott Right on Gold? - Gold   Total ETF Holdings

 

Ultimately, the true supply and demand dynamics for gold are difficult to determine, but we would argue that on some level they should likely be ignored.  The best predictor of gold prices will continue to be the direction of monetary policy both in the United States.  Loose monetary policy and a subsequent weak dollar, will create monetary inflation and inflate both the price of gold in real terms and lead to increased demand for gold as a store of value.

 

In the long term chart below, we see this relationship play out in spades going back to 1969.   Consistently, a protracted increase in the value of the dollar has lead to a commensurate decline in the value of gold and vice versa.  Interestingly, the recent spike we have seen in the value of gold in the last ten years coincides nicely with the advent of financial demand for gold via ETFs.  But undoubtedly just as ETFs have created a multiplier on the way up, they have potential for creating a multiplier on the way down.

 

Is Eric Sprott Right on Gold? -  USD vs Gold 

 

Daryl G. Jones

Hedgeye Risk Management Director of Research

 

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next