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Putin’s Silver Spoon

Yesterday Russian President Vladimir Putin announced an agreement to loan the Ukraine $15 Billion and reduce the cost of natural gas exports by one-third. Will this quell the weeks of protests against Ukrainian President Viktor Yanukovych’s government?

 

While publically there was no talk of the Ukraine joining Putin’s custom union (for trade) – which already includes Kazakhstan and Belarus and is a contentious issue for the “Western” protesters – make no mistake that with this agreement Russia has reconfirmed its dominance over the Ukraine, and with it won a key geopolitical victory. For the Ukraine, it spells years, if not decades, before real reform (political and economic) may be realized.

 

Our Position: despite heavy foot power (protests) against President Yanukovych over the last four weeks, we do not expect dissent to topple government leadership that is orientated to the East (Russia). This view is built on several factors, including the unwillingness of the EU to fully commit to bringing the Ukraine into the EU, or conversely meet the sway of Putin to fold the Ukraine under its geographic empire. What Russia can provide in funds (both directly and through gas subsidies) we don’t foresee the EU attempting to match, and this balance of payments should reinforce existing strong levels of political corruption (beyond just the President), supported by a sizable proportion of the populous that identifies with the East. Further, unlike during the Orange Revolution, there is no clear organized opposition (merely disparate dissenters), all of which suggests to us that while protests may continue, there’s low probability that Yanukovych’s rule is toppled (especially following the deal with Russia) and a high probability that the Ukraine maintains its alliance with the Kremlin for the foreseeable future.

 

Below we note historical background, critical developments, and analysis aided by sources in the region to contextualize the protests:

  • Protests Beyond Just A Trade Agreement. While Yanukovych’s decision last month (21 NOV) to reject a trade deal with the EU (that had been in the works for a number of years) sparked the largest protest since the Orange Revolution in 2004, the dissent is rooted in opposition to years of crony capitalism, centered around a small group of oligarchs and government heads profiting from the state at the hands of the population.
  • The Orange Revolution Failed. The 2004 Orange Revolution ushered in great hope for the ideals of the West: democracy and reform in the spirit of the EU institution, but the Revolution failed.  Yulia Tymoshenko, with her camera-friendly crown of blond locks, and Viktor Yushchenko, with his discolored and uneven face after being poisoned by the opposition in 2004, were strong faces and voices of the Orange Revolution. The protests led to the defeat of Yanukovych in a forced second run-off election that ushered in Yushchenko as President and Tymoshenko as his Prime Minister in early 2005. While their leadership brought great “hope” that the country could have its Berlin Wall or Solidarity moment, their stars faded quickly (along with hope of real reform) under the weight of a corrupt state.  
  • Tables Turned. By 2010, Yanukovych won back the Presidency. By this time, Tymoshenko was surrounded by controversy and suspicion over gas contracts that she arranged with Russia in 2009: allegedly she agreed to inflated gas prices (which hurt the nation and led to shutdowns) in return for political favors and personal profit. Even Yushchenko testified against her in 2011 and Yanukovych sentenced her to a 7 year term in 2011 – a position the EU decries as “unjust” without substantiating with refuting evidence. Yanukovych’s rule since his reelection has been marked by the further consolidation of power and wealth, going so far as to take out certain leading businessmen (and oligarchs), redistributing assets and leadership positions to an inner circle of family members and a close cadre of “extended” family.
  • Economic Plight. The economy has unraveled under Yanukovych. GDP has gone from its last high of +5% at the end of 2011 to -1.3% as of Q3 2013. Pressing is an underfunded government (deficit around -8.5% of GDP) with plunging foreign reserves.  The country is estimated to have $17 Billion of debt payments due in the next two years, hence the importance of a bridge loan from Russia/EU. The government’s mismanagement of the economy has also included a lack of infrastructure spending and investment, equating to the erosion of living standards, while chasing away foreign investment on fears of sovereign default.   
  • No Opposition Leadership over Divided Kiev. Recent demonstrations illustrate that unlike the Orange Revolution, there’s no united leadership in the opposition parties. The contenders are made up of: Arseny Yatseniuk (leads the party formerly headed by Tymoshenko), Vitaly Klitschko (a boxing champion that heads the Udar “punch” party), and Oleh Tyagnibok (a right-wing nationalist).  All of them claim to have not seen the protests coming.
  • Ukraine and Kiev Remain Divided. A country with a population of 46 million, the western half of the country aligns itself politically with the West (Europe) and has the highest concentration of native Ukrainian speakers, whereas the eastern half aligns itself with the East (Russia) and primarily speaks Russian as a first language.  Kiev, the capital and largest city, is located centrally to the north, and is itself a very divided city both politically and linguistically. The recent demonstrations suggest that protesters have numbered anywhere between 100K to 600K, but the city remains divided. Reports suggest the protests have a grass roots organization “feel” that lack strong polarizing leadership and have been mostly met by non violence from the government/police, with no recorded deaths.  While the protests have been taking place, as recently as December 3rd, Yanukovych’s government survived a no-confidence vote.
  • Russian Interests. Russia is looking out for its national security interests first and foremost and using its stranglehold on natural gas as a bargaining chip. If Ukraine is under the influence of the EU, Russia is vulnerable to the south. Ukraine also represents an important natural gas transit country for flows to Europe, and a Ukraine under Russian influence helps to solidify Putin’s desires for a trading union. Given that Putin has done nothing to diversify his own economy in the last 12 years, he’s left with few options to exert his political clout beyond straight arming former Soviet satellite countries into his sphere of influence.
  • EU Interests. For the EU, the Ukraine is of less importance from a security perspective, unless it is looking to invade Russia (unlikely). Like Turkey, the Ukraine is geographically at the fringe of Europe. Given the experiences of the Eurozone ‘crisis’ and tail of slow growth alongside political indecision (there are now 28 separate parliaments and 18 Eurozone countries), we do not envisage the EU yearning to add a historically highly corrupt government to its roster.  
  • Russia Terms. To plug the country’s balance of payments deficit (for an estimated 18-24 months) Ukraine will issue $15 billion of Eurobonds which Russia will purchase from its National Wellbeing Fund containing $88.1 billion – the first tranche of $3 billion is expected as soon as year-end. In addition, the discount given to the Ukraine on natural gas, from current prices of around $400 per thousand cubic meters (tcm) to $268.50 tcm, is worth another $3 billion in subsidy. While Yanukovych did not sign off on entering Putin’s custom union (which Kazakhstan and Belarus have joined and which reeks of attempts to get the old Soviet gang back together), expect that this deal didn’t come without terms. Besides the national security piece that Russia receives, our guess is Putin will run the Ukraine’s PR campaign – he will decide if and when the Ukraine should enter his custom’s union.

Conclusion - Tipping East. The Ukraine remains a state uncomfortable with addressing its own sovereignty, preferring to be aligned. In our analysis, the Kremlin remains Yanukovych’s preferable partner over the EU given 1) Putin’s ability to quickly write a check (to cover the government’s liabilities), 2) his reelection aspirations for 2015 and ability to “win” cheaper, uninterrupted heat for the nation, 3) the cultural affinity to the East, including a significant percentage of the population that identifies with Russian rule and to some extent nostalgically yearns for a return to the Soviet days, 4) the likely harsher terms the EU and international organization could offer in exchange for loan packages, and 5) the lukewarm reception of the EU to fold the Ukraine into the EU.

 

If we look to the market for its risk assessment, as expected following yesterday’s deal Ukrainian CDS and sovereign credit yields dropped in a hurry. What’s interesting, however, comes from the second chart below that shows Ukraine’s 5YR Sovereign CDS pulled back on a historical basis (to its maximum based on Bloomberg data). Here it’s clear that while risk was being priced up into the event (1st chart), the absolute level is a moon shot from all-time highs in March 2009, a period when Western European nations had to negotiate with Russia over gas shut-down to their countries that was being pumped through the Ukraine. What this signals to us is that the EU community will only get its hands dirty in the interests of Ukraine when it stands to clearly and personally receive benefit. The “failures” of these protests for change and the muted response from the EU suggest to us that the Ukraine is far from what could be tipping point levels. Russia will remain its puppet master.

 

Putin’s Silver Spoon - 1. ukraine

 

Putin’s Silver Spoon - 2. ukraine

 

Matthew Hedrick

Associate


CCL F4Q YOUTUBE

In preparation for CCL FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

EX CARNIVAL BRAND 

  • Fleetwide booking volumes during the last 12 weeks from the end of June, covering sailings over the next three quarters, are at the same levels – about the same levels as last year. These bookings have been at higher prices versus last year.
    • For North American brands, booking volumes during this 12-week period are higher year-over-year at lower prices.
    • For EAA brands, booking volumes are lower at nicely higher prices.

CARNIVAL BRAND 

  • Booking volumes and pricing over the last 12 weeks are both lower year-over-year in the low single-digits and mid-double-digits range respectively.
  • Carnival's booking volumes have also shown recent improvement, and during the last six weeks are running higher year-over-year. As Carnival booking volumes steadily increase, we are expecting their cruise pricing to gradually improve over the longer-term.
  • Carnival Cruise Lines' brand continues to demonstrate its resilience in the market, maintaining high occupancies albeit at lower prices. The perception and consideration surveys on the Carnival brand continued to show improving trends at a faster pace than originally projected, so we are greatly encouraged by these positive signs.
  • Although, Carnival Cruise Lines' pricing is lower than we would like, with the new national advertising campaign and the increase in marketing spend this fall and winter, we do expect to see a recovery of pricing as we cycle into the second half of 2014. Recently, Carnival adopted a strategy of holding firm on pricing, even if its ships sail at slightly lower occupancies. We believe this will make Carnival's pricing recovery more achievable as we move through 2014.

4Q 2013 TRENDS

  • On a fleetwide basis, and this excludes Carnival, cumulative occupancies are lower at the same pricing levels as last year. 
    • For North American brands, excluding Carnival again, occupancies are slightly lower at slightly lower prices.
    • Carnival Cruise Lines occupancies for the fourth quarter are lower at lower prices.
    • For EAA brands, occupancies are lower year-over-year at slightly higher prices, reflecting the positive patterns we have experienced during the last 12 weeks. Costa brand occupancies and pricing for the fourth quarter are nicely higher.
  • North American brand revenue yields in the fourth quarter, excluding Carnival, are expected to be down slightly.
  • Carnival Cruise Lines yields in the fourth quarter are expected to be lower, in the double-digits range. And fourth quarter EAA pricing, revenue yields are expected to be higher year-over-year.

1H 2014 TRENDS

  • Although, pricing on bookings taken to-date for the first half of 2014 is higher, because we are running behind on occupancies, we are expecting revenue yields will follow the usual pattern of coming down as we close out the first and second quarters.
  • As a result on a fleetwide basis, for the first half of the year, we are estimating a low single-digits decrease in revenue yields, in a similar range to the lower yield we experienced in the third and fourth quarters of 2013; this expectation includes the Carnival Cruise Lines yields.
  • North American brand yields in the first half of 2014 are expected to be lower year-over-year and EAA brand yields are expected to be higher. 

2H 2014 YIELD

  • We are ramping up marketing efforts in both North America and Europe this fall and winter and are expecting that revenue yields will turn positive in the second half of the year.

1Q 2014 TRENDS

  •  On a fleet-wide basis, pricing on bookings taken to-date is higher year-over-year with lower occupancies. For North American brands, excluding Carnival, pricing is higher on lower occupancies. Carnival Cruise Lines pricing is lower on lower occupancies. For EAA brands, pricing on bookings taken to-date is flat year-over-year at lower occupancies.

2Q 2014 TRENDS

  • Second quarter of 2014 bookings taken to-date, which is still in the early stages of development, on a fleetwide basis, excluding Carnival, pricing is slightly higher year-over-year at lower occupancies.
  • North American brands, pricing is slightly higher at lower occupancies. At this stage, Carnival's pricing is also higher at lower occupancies. 
  • For EAA brands, pricing is slightly higher at lower occupancies.
  • Big increase in Caribbean supply

COSTA

  • We expect the company's performance will continue to strengthen over the remainder of this year and throughout 2014. Brand perception surveys for Costa continue to show improvement, particularly in Italy and France; its two most important markets.
  • We are forecasting continued revenue yield increases in 2014 for Costa, despite what is still a very challenging European economic environment, especially in Italy.

NA BRANDS

  • Our two premium brands, Holland America and Princess, are all expected to have a solid performance in 2014. Our Seabourn brand, although small, is performing extremely well.

COST SAVINGS

  • And then as we look at it and look at our total spend and the opportunity to leverage across the brands, I think there will be opportunities, additional opportunities, for cost savings.

% BOOKED

  • The ranges that we generally talk about are – for the next quarter, which would be the fourth quarter, would be 85% to 95% booked. The second quarter out, which is the first quarter, 50% to 70%. And then the second quarter, which is three quarters out, 30% to 50% booked. And we have indicated recently that we're at the lower end of those ranges as far as booking patterns are concerned.

 


SBUX: Removing Starbucks From Investing Ideas

Takeaway: We are removing SBUX from Investing Ideas.

Editor's note: Shares of Starbucks have risen over 12% from the date (7/18/13) Hedgeye Restaurants Analyst Howard Penney added it to Investing Ideas. The S&P 500 is up approximately 6% in that time.

 

SBUX: Removing Starbucks From Investing Ideas - sbux1

 

Following the all-star quarter from Starbucks in 4Q13, the company appears to be firing on all cylinders heading into FY14.  A strong commodity tailwind, international growth, the beginning of a recovery in the EMEA segment, and expansion into new segments of the global food and beverage industry are all long-term bullish factors moving forward. 

 

The only slight negative stemming from what was, overall, a bullish conference call last quarter was management reigning in expectations for FY14 -- especially expectations for same-store sales in the Americas.

 

Our recent store visits in the Northeast suggest that the holiday season has not been as robust as the company anticipated.  We believe the trickle-down effect on slowing same-store sales are not yet fully reflected in the current share price.  Considering earnings for 2014 are likely to be revised down slightly and valuation is close to a 3-year high, we see some downside in the stock.

 

Starbucks is a great company with a strong and feasible long-term strategy.  That being said, we expect to see the stock adjust accordingly to slower revenue growth in the early innings of 2014.


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SBUX: LOSING A LITTLE MOMENTUM?

Following SBUX’s all-star quarter in 4Q13, the company appears to be firing on all cylinders heading into FY14.  A strong commodity tailwind, international growth, the beginning of a recovery in the EMEA segment, and expansion into new segments of the global food and beverage industry are all long-term bullish factors moving forward. 

 

The only slight negative stemming from what was, overall, a bullish conference call last quarter was management reigning in expectations for FY14 -- especially expectations for same-store sales in the Americas.

 

Our recent store visits in the Northeast suggest that the holiday season has not been as robust as the company anticipated.  We believe the trickle-down effect on slowing same-store sales are not yet fully reflected in the current share price.  Considering earnings for 2014 are likely to be revised down slightly and valuation is close to a 3-year high, we see some downside in the stock.

 

Starbucks is a great company with a strong and feasible long-term strategy.  That being said, we expect to see the stock adjust accordingly to slower revenue growth in the early innings of 2014.

 

SBUX: LOSING A LITTLE MOMENTUM? - SBUX AMERICAS

 

SBUX: LOSING A LITTLE MOMENTUM? - SBUX EMEA

 

SBUX: LOSING A LITTLE MOMENTUM? - SBUX CAP

 

SBUX: LOSING A LITTLE MOMENTUM? - EEG

 

 

Howard Penney

Managing Director



THOUGHTS AHEAD OF CCL F4Q

Uncertainty reigns in the Caribbean but what will move the stock tomorrow?

 

 

 

Street already expecting lower guidance

  • Our recent pricing survey indicates continued volatility and discounting – FQ1 will be challenging
  • We expect management to provide guidance below the Street – flat yields – but that is already reflected in investor expectations
  • Indifferent on the stock heading into earnings but any price weakness could be buying opportunity since we believe conservative guidance will ultimately be achieved and potentially exceeded

As we highlighted in our cruise pricing survey conference call* yesterday, Caribbean pricing, particularly for CCL remains volatile.  Given the observed pricing volatility and pre-Wave uncertainty, we believe Carnival may issue conservative FY2014 guidance as part of its FQ4 earnings release tomorrow.  We’re expecting net yield guidance of -1% to +1%, which would suggest a midpoint of around $1.45 EPS, below consensus of $1.57. 

 

With the stock up 14% since our last positive price pivot signal from our survey in mid-October, one could surmise that the Street is optimistic about 2014 earnings.  We don’t think so.  Our conversations with investors indicate that they are already expecting lower guidance.  Certainly investors know that F1Q will be very challenging and the real juice is in Wave season, which hasn’t begun.  The newly minted CEO, Arnold Donald, will want to keep guidance beatable and since buy side expectations are already low, why not take advantage?

 

So what about the stock?  For the stock to move down significantly, we believe 2014 yield guidance would have to be negative, in our view.  On the positive side, the stock could pop on management endorsement of existing consensus or guidance only slightly below.  We’re indifferent on the stock into earnings but maintain that it could be a buying opportunity if investors react negatively.  The reasoning is simple.  We believe management’s guidance will be achieved and likely beat.

 

What kind of operating commentary will management provide?  They should emphasize that there is currently a seasonal lull before Wave season.  We think they will reiterate the long road to recovery for the embattled Carnival brand and are seeing improving signs albeit gradually.  The Caribbean continues to be fiercely competitive, particularly in the mass segment, with additional supply entering the market e.g. Norwegian Getaway (Feb 2014) and Quantum of the Seas (Dec 2014).  In addition, they should be cautiously optimistic on Europe.  Though this winter will be tough due to inclement weather, Europe is looking brighter for the summer itineraries.  Finally, we expect management to sway positively on Alaska. 

 

Here are our current projections for FQ1 and FY 2014:

 

THOUGHTS AHEAD OF CCL F4Q - ccc

 

*Note:  We hosted a conference call yesterday highlighting the results of our proprietary cruise pricing survey.  Please contact your sales contact if you’d like to hear the replay.


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