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Takeaway: We are removing Hologic Inc (HOLX) from our Investing Ideas list today.

We are removing Hologic Inc (HOLX) from our Investing Ideas list today.  




Hedgeye Healthcare Sector Head Tom Tobin says, "We overstayed our welcome on HOLX, but with the toolkit we have, we're likely to be back, just at a lower price from here."


Some Good Trends, But Mostly Just Confusing

  • We anticipated a tailwind from patient volumes in the quarter, share gains, and a stable headwind from interval testing sequentially from fiscal Q313. Share gains are clearly coming at a higher cost (lower pricing) than we anticipated.  Additionally, we have thought HPV testing would increase under the Cervical Cancer Screening Guidelines, which is either not happening, or being offset by price concessions to lab providers like DGX.  
  • In Breast Health, the positive commentary on 3D matches our analysis of new facilities with the technology, but again, pricing pressure in the legacy business is offsetting all of the gains. 
  • With problems in the base business worse than we expected, the opportunity from the ACA has become more important, and given problems with the roll-out, not a bet we're willing to take here.

Guidance & Valuation Interesting Lower

Walking through the FY14 guidance and accounting for share repurchases and de-leveraging, and a share price above $19 looks expensive at above 9X EV/EBITDA.  The new CEO may indeed be setting a reasonable and low bar to beat over the coming quarters, but we'd prefer not to stick around to find out.



[video] Keith's Macro Notebook 11/12: USD, ASIA, MBSBubble

Trapped In The Next Bubble

Takeaway: The next bubble to pop is the one no one can get out of.

The 2008 Oil Bubble... the 2011 Gold and Foreign Currency Bubbles... Housing Bubble... Food Bubble in 2012... stock market bubbles...


Just how many bubbles can Ben Bernanke foment under his watch?


The next one to pop is the one no one can get out of...Mortgage Backed Securities. And that’s why this Andrew Huszar's Wall Street Journal op-ed "Confessions of a Quantitative Easer" article is so timely.


Finally... Someone explaining the truth of Too-Big-To-Fail bond positions.


Trapped In The Next Bubble - Fed MBS


Editor's note: This is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can become a subscriber please click here

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 80.37%
  • SHORT SIGNALS 78.32%


This note was originally published November 08, 2013 at 12:13 in Macro

So, there are basically two kinds of economists/pundits. Those that acknowledge and accept the unpredictability of both the monthly BLS employment data and the market’s reaction to it and liars.




The fact that the October employment data would be hostage to a host of distortions –higher sampling error, seasonality in education hiring,  and government shutdown impacts on gross hiring, hours worked, the headline and U-6 unemployment rates - has been pretty well advertised (BLS). 


Given moderate estimates (+120K) and the expectation for negative impacts from the government shutdown, the balance of risk heading into the release was to the upside as a weaker number could be explained away by the aforementioned distortions while a higher number (in spite of the negative drags) would drive renewed policy uncertainty.   


Optically, the October Employment figures were solid.  But since the prevailing lens with which the market is filtering the payroll data is less a fundamental one than one with an eye towards the implications for prospective Fed policy adjustment, its perhaps best to take a brief cerebral sojourn and interpret today’s release through the eyes of a Fed head. 


That interpretation would probably read something like this:   


The labor market data is good, but not great – with that “goodness” up for debate given the distortive effects of the shutdown.  The unemployment rate remains above target, Labor Participation remains at trough levels (although it’s partly a secular/demographic driven), inflation is still well below target and wage inflation remains subdued.   Fiscal policy will remain an uncertainty/headwind through at least February of next year, credit market liquidity is in decline, and housing/credit activity has slowed subsequent to the expedited back up in rates that followed our last hint at incremental hawkishness. 


If past is precedent, such an interpretation = no policy change without further confirming evidence.   


THE DATA:  Steady with an extra side of caveat…. 


STEADY GROWTH:  As we highlighted alongside the September release – while the absolute NFP numbers have been trending lower since 1Q13, on a rate of change basis, the YoY growth and 2Y growth rates have been relatively stable over that same period – a dynamic largely stemming from the existent seasonal distortion in the data. 


This dynamic held in September has employment growth held steady while absolute net job gains declined sequentially.  October again looks similar with the 2Y growth rate holding right in line with trend.  We continue to expect seasonality to drive strengthening headline improvement in the employment data over the next 6 months with peak positive impact occurring in March


A TALE OF TWO SURVEY’S: The largest oddity in today’s release was the massive divergence between the household survey (which drives the Unemployment Rate), which showed net job loss of -732K, and the headline strength in the Establishment survey (which drives the NFP figure) which showed a net gain +204K with a positive two month net revision to Aug/Sept of +60K. 


Further, while the Establishment Survey showed accelerating improvement and job gains across all industries except wholesale Trade, the Household survey reflected decelerating payroll growth across all age cohorts, a 720K decline in the total labor force and another new low in labor participation.   


What do you do with that?  Practically, we’ll probably just have to wait for next month’s data to get a “cleaner”, confirmatory read on Trend.   


SHUTDOWN IMPACT:  The impact of the government shutdown appears to have shown up primarily in the temporary layoff tally which increased by +435K on the month.   


Elsewhere, U-6 Unemployment ticked up to 13.8% from 13.6%, part-time employment continued to decline, state and local government employment growth continued to accelerate, and hourly earnings growth and ave hours were essentially flat sequentially. 


Takeaway:  Alongside the continued strength in the initial jobless claims data, the BLS employment figures reflect ongoing, albeit moderate, improvement in the domestic labor market.  The odds of today’s data shifting the course of policy action in the immediate term seems unlikely.  We continue to navigate heightened policy uncertainty, and the resultant market volatility, with our lowest gross and net exposures of the year.   






Personal income increased 0.5% MoM in September, outpacing spending growth of +0.2% while the savings rate increased to its highest level since December of 2012 ahead of the government shutdown. 


From an intermediate term perspective, the trend improvement in personal income growth remains encouraging for forward consumption.  Personal Income & personal disposable income growth are both rising, Per Capita DPI is accelerating and the household savings rate is moving higher.  


Notably, the positive improvement in income is occurring despite the discrete drag from government  where budget cuts are driving the largest decline in government employment growth in decades and negative income growth for approximately 17% of the workforce. 


If negative growth in government employment bases and government sourced personal income growth goes positive alongside some measure of budget resolution (i.e. sequestration alternative), consumption growth could see meaningful support in 2014.     


SOME ECONOMIC ACCELERATION, BUT... - Income   Spending 110813 


Christian B. Drake




Signs point to more Interaction.  iGT?



Very few new casinos to sell to, stagnating replacement demand, pressure on gaming ops yields – what’s a slot company to do?  We may start referring to IGT as iGT.  While it’s clear that more company focus will be on Interactive, our suspicion is that IGT could be looking at a significant ramp in investment.  That could have mixed reviews from investors depending on the path management chooses. 


Significant additional capital investment into Interactive could be seen as desperate, probably wouldn’t be accretive for awhile, and could signal to investors more trouble ahead for the core business.  However, an Interactive spin-off even if combined with an acquisition would probably be received favorably by investors.


“I saw the sign” – Ace of Base


So why do we believe something may be in the works?  Mostly, it comes from IGT’s own words:

  • CEO Patti Hart’s background and early comments suggest brick and mortar casinos won’t be IGT’s focus going forward
  • Company guidance for 2014 was sketchy and vague:  “GAAP earnings per share from continuing operations for fiscal year 2014 will include acquisition-related expenses, primarily related to DoubleDown, the amount of which is not determinable at this time.  The company may also recognize other items that are not currently determinable, but may be significant. For this reason, the company is unable to provide estimates for full-year GAAP earnings per share from continuing operations at this time.”
  • Expanding the role of the CFO to run the Interactive business indicates it is very important to IGT:  “Robert Melendres has been running that business for us on a global basis. He's done a great job of integrating IGT content into the DoubleDown environment. But we're entering a new chapter of taking this business from the run rate it is to a significantly greater run rate. And we're moving…from exercising the assets we acquired and the assets we already owned, which was our game content library, and into more of a strategic phase and a phase where we'll be redirecting investments from other part of our business into DoubleDown to continue to accelerate the growth.” – Patti Hart, CEO
  • “My view was that John [CFO] has earned the right to do that, and that financial oversight is something that I think is going to be critical in the coming years.  John today also manages our strategic planning and corporate development, and I wanted to have that more closely aligned.” - Hart

On the math, the investment and focus shift makes sense.  As can be seen in the next two charts, IGT’s core business is under pressure and should be through 2015.  Slot sales are likely to be down in 2014 and then again in 2015 while ASPs are now declining.  The 2nd chart details the important metrics driving the gaming ops business.  Yields continued to fall while IGT also lost unit share.  There aren’t many positive trends in IGT’s core business.






While it is certainly arguable whether IGT overpaid for DoubleDown, there is little doubt that Interactive has and should outperform the core business.  




What are IGT’s options with Interactive:

  • Materially increase the level of investment into Interactive – Patti already said on the earnings call that they will be redirecting capital spend from other parts of their business, presumably gaming operations. There was a taste of that in F4Q with elevated SG&A, partly driven by higher advertising expenditures.
  • Acquisition of a social gaming company.  Who’s out there:
    • Zynga (ZNGA) - $3b market cap
    • GLU Mobile (GLUU) $225m cap
    • MeetMe Inc (MEET) - $71m cap
    • CZR Interactive
    • Private companies:  Rovio, Wooga, King, Tetris Online, Halfquest, GSN, Happy Elements
  • Spin off to unlock value - IGT could spin off the Interactive and establish an agreement around content – give the new company an exclusive deal on their content library in exchange for a fee to IGT.  We’ve seen quite a few splits in gaming/lodging:  spin-off of CZR Interactive, the PENN transaction, the MAR timeshare spinoff, and lodging mgmt and real estate splits. 
  • IGT could also combine two of the above approaches such as buying Zynga and spinning its own interactive assets into an existing trading company


Takeaway: Please join us today at 11am. Call details below.

Please join us on our call titledCan McDonald’s Get The Coffee Consumer in 2014? today, November 12th at 11:00am EDT.


During the call, we will reveal the results of our proprietary Retail Coffee Consumer Survey.  Though the call is directly related to McDonald’s, the survey includes other top coffee retailers, such as Starbucks, Dunkin’ Donuts, Krispy Kreme, Tim Hortons and Peet’s.


Our research tells us that McDonald's (MCD) will make an aggressive push to sell more coffee in 2014.  We believe that capturing incremental market share in the coffee category will be one of management’s pillars for growth in 2014 and expect this to be a main topic at the analyst meeting on November 14, 2013.




  • How strong is the McCafé brand?
  • Who are the core McCafé consumers?
  • How will an aggressive McCafe campaign impact other parts of the business?
  • What happened the last time McDonald's went after the coffee consumer?
  • Who are the other key players in the coffee category segment and how will they be affected?


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 934362#
  • Materials: CLICK HERE (slides will download one hour prior to the start of the call)




Howard Penney

Managing Director

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