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NEW BEST IDEA: SHORT CAKE

We are adding CAKE to our Best Ideas list as a high conviction SHORT.

 

After being the bull on CAKE for the majority of 2013, we have reversed course and turned bearish heading into the 4Q13 print and throughout 2014 for several reasons including, but not limited to:

  • The secular decline of the casual dining industry
  • The end of the road for CAKE’s margin story
  • Growing complacency on the street

Trading at a peak multiple, we see 20-30% downside to the stock in 2014 as full-year earnings estimates and expectations are revised down.

 

Click here for the full report: CAKE: BEST IDEA SHORT

 

We’ll host a quick conference call TOMORROW at 1pm EST to hit on the key points of our thesis and field questions. Please send any questions over to .

 

Call Details:

Toll Free Number:

Direct Dial Number:

Conference Code: 331331#

 

 

Howard Penney

Managing Director

 


#INFLATIONACCELERATING: ALL EYES ON BRAZIL

Takeaway: For now at least, investors should stay SHORT, underweight, or completely out of Brazil.

CONCLUSIONS:

 

  1. Looking to Brazil specifically, we continue to see inflationary pressures emanating throughout the economy, which is perfectly in-line with view we introduced as part of our AUG ’11 Brazil Black Book, which called for Brazilian CPI to remain persistently elevated over the long-term TAIL.
  2. The aforementioned sticky inflation has weighed and continues to weigh on the slope of Brazilian economic growth.
  3. Jumping ship, two potential catalysts we see heading into and through 2H14 that investors will become increasingly focused on are the 2014 World Cup (6/12 – 7/13) and the 2014 General Elections (OCT 5).
  4. The former will obviously deliver a much-needed boost to GDP (positive catalyst), but might also expose Brazil’s shoddy infrastructure, ill-preparedness to host such a large event and angry populous (riots?) to the world stage (negative catalysts). The latter might ultimately be viewed as a positive catalyst if the market starts to price in expectations for a candidate like Jose Serra emerging victorious with Pena Nieto-like promises of economic reforms.
  5. For now at least, investors should stay SHORT, underweight, or completely out of Brazil.

 

WHERE WE’VE BEEN

In a unanimous 8-0 decision yesterday afternoon, BCB hiked its benchmark SELIC Rate by another +50bps to 10.5%. This tightening measure marked the sixth consecutive meeting where BCB hiked interest rates; the SELIC rate has now been hiked +325bps from an ill-advised (but forced) record-low of 7.25% in APR ’13, making BCB the most hawkish central bank in the world over that time frame.

 

We were very critical of President Rousseff and Finance Minister Guido Mantega’s overt influence over Brazilian monetary policy then (dating back to JUL ’12) and that policy interference continues to haunt the Brazilian economy to this day. From the analytical rooftops, we boldly shouted “GET OUT OF BRAZIL IF YOU HAVEN’T ALREADY” in early FEB ’13 as a continuation of this thesis:

 

“Not much else needs to be said other than the fact that it has recently become clear to us that Brazilian policymakers refuse to address the country’s growth/inflation imbalance – which they themselves have perpetuated through currency debasement – with an adequate amount of exchange rate appreciation (we already know Dilma won’t budge on rates). As such, we no longer consider Brazilian equities or the BRL good investment opportunities on the long side with respect to the TREND duration…” (2/6/13)

 

Since then, both the Bovespa Index and the BRL are down roughly -16%; Bloomberg’s Brazil LC Sovereign Debt Index has declined -2.3% over that duration.

 

In full disclosure, we made a terrible mistake pitching Brazilian consumer exposure from early-MAY to mid-AUG of last year in an attempt to help investors find opportunities on the long side in the context of our bearish #EmergingOutflows theme; the MSCI Brazil Consumer Discretionary and Consumer Staples indices declined -17.5% and -10.7% over that time frame. Bad performance for a bad idea; we should’ve just stuck to the original script – something we have done since.

 

WHERE WE’RE GOING

Looking ahead, 1Y OIS rates are now trading at a +45bps premium to the benchmark SELIC rate after a +19bps DoD move, implying further hawkishness in the months ahead. Contrary to the general tone of sell-side commentary following yesterday’s hike, we think that is the appropriate view to adopt in the context of our #InflationAccelerating Q1 macro theme.

 

Looking to Brazil specifically, we continue to see inflationary pressures emanating throughout the economy, which is perfectly in-line with view we introduced as part of our AUG ’11 Brazil Black Book, which called for Brazilian CPI to remain persistently elevated over the long-term TAIL.

 

A bloated budget balance – which doesn’t include all of the accounting gimmickry Mantega pulls with BNDES – and an increasingly tight labor market remain headwinds for BCB’s inflation fight.

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Budget Balance

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Current Account

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Unemployment Rate

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Wages

 

Cyclically speaking, CPI accelerated on both a YoY and MoM basis in DEC; the YoY reading of +5.9% YoY remains ~140bps higher than the midpoint of BCB’s +4.5% +/- 200bps target and the MoM reading of +0.92% was the fastest sequential rate since APR ’03. Increasingly easy comps and a currency/commodity base effect (refer to slides 7-9 of our Q1 macro themes for more details) support maintaining a hawkish outlook for Brazilian CPI over the intermediate term.

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - CPI MoM

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - CPI Comps

 

In short, sticky inflation has weighed and continues to weigh on the slope of Brazilian economic growth.

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Business Confidence

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Industrial Production

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Consumer Confidence

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Retail Sales

 

WHAT MIGHT HAPPEN

Lastly, two potential catalysts we see heading into and through 2H14 that investors will become increasingly focused on are the 2014 World Cup (6/12 – 7/13) and the 2014 General Elections (OCT 5).

 

The former will obviously deliver a much-needed boost to GDP (positive catalyst), but might also expose Brazil’s shoddy infrastructure, ill-preparedness to host such a large event and angry populous (riots?) to the world stage (negative catalysts). The latter might ultimately be viewed as a positive catalyst if the market starts to price in expectations for a candidate like Jose Serra emerging victorious with Pena Nieto-like promises of economic reforms.

 

We’ll see.

 

For now at least, stay SHORT, underweight, or completely out of Brazil. If you have on existing SHORT positions, don’t add to positions unless you see lower-lows in the Bovespa Index (cycle trough: 45,044 on 7/3) and higher-highs in the USD/BRL cross (cycle peak: 2.4543 on 8/21/13).

 

Darius Dale

Associate: Macro Team


DAILY TRADING RANGES, REFRESHED

This unlocked Daily Trading Ranges note was originally published January 16, 2014 at 07:47. For more information on this Hedgeye product and how you can become a subscriber click here.

DAILY TRADING RANGES, REFRESHED - josie1

 

BULLISH TRENDS

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DAILY TRADING RANGES, REFRESHED - Slide8

 

BEARISH TRENDS

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Is $WFM a Canary in Coal Mine for $SBUX?

Takeaway: Does a negative view on WFM heed caution on SBUX?

This note was originally published January 10, 2014 at 14:21 in Restaurants

It was not too long ago that the success of Starbucks and Whole Foods Market was linked to the “higher end” consumer, particularly when compared to their counterparts McDonald’s and Walmart.  Accordingly, both SBUX and WFM have been strong performers, as the “higher end consumer” has proven to be much more resilient in a stagnant economy than others.

 

Is $WFM a Canary in Coal Mine for $SBUX? - sbux

 

With another downgrade today, the street has turned decidedly negative on WFM.  We offer no opinion on the stock at this time, but a negative outlook could suggest that “higher end” consumers are starting to feel the pinch.  If this plays out and WFM sees same-store sales growth begin to slow, we have reason to believe the same could happen at SBUX.

 

Is $WFM a Canary in Coal Mine for $SBUX? - howpen

 

The tepid jobs number reported earlier today is also concerning and, on the margin, bearish for SBUX.  We continue to believe street estimates are too high for SBUX and with 78% of analysts having a “buy” rating on the stock (versus only 50% for WFM), sentiment could be peaking.  After being one of the biggest fans of SBUX over the past 5 years, we see plenty of reason to be cautious on the stock in the early stages of 2014.

 

Editor's note: This is an excerpt from a recent report issued by Hedgeye Restaurants Analyst Howard Penney. He added SBUX to Investing Ideas on 7/18/13 and held it to 12/18/13 netting subscribers over 12% versus a 6% return for the S&P 500. Penney thinks Starbucks remains a great company with a strong and feasible long-term strategy. That said, he expects SBUX to adjust accordingly to slower revenue growth in the early innings of 2014.

 

Click here to learn how you can subscribe to Investing Ideas.

 

 

 


Kinder Morgan 4Q13 Results: “You Sell, I Buy”

KMP’s earnings and DCF per unit came in better-than-expected, but the beat was driven by higher E&P spending and production, and lower sustaining CapEx.  A low-quality beat, in our view.  KMP's Natural Gas Segment volume growth is anemic – concerning given +$1 billion of “growth” CapEx in that segment last year.  KMI was slightly disappointing with an EPS miss and no dividend increase from 3Q13; interestingly, it was KMI who was in the market buying back stock after the disappointing 2014 guidance in early December.  No KMI warrants were repurchased in the Q.   EPB was weak, as expected.  Poor EPB.

 

The conference call was short on forward guidance given the Analyst Day in two weeks, but long interesting commentary from CEO Rich Kinder, including “You sell, I buy!”

 

We’ll have more to say on the Kinder Complex on the other side of the Analyst Day (1/29/14) and the 2013 10-Ks.  No change in our negative view here.

 

KMP

  • KMP reported EPU (before certain items) of $0.77 in 4Q13 (+2.7% YoY), which was better than the $0.73 consensus estimate, and $2.42 in 2013 (+4.8% YoY).  The headline number – DCF/unit – came in at $1.44 in 4Q13 (+6.7% YoY), also better-than-expected, and $5.39 in 2013 (+6.3% YoY).  The “payout ratio” (distribution-to-earnings per unit) was 177% in 4Q13 and 220% in 2013; payout ratios continue to creep higher, supportive of our bearish view (we are not in the “earnings don’t matter” camp).  KMP’s “coverage ratio” (headline DCF-to-distribution per unit) was 1.06x in 4Q13 and 1.01x in 2013.  KMP’s E&P ops and lower sustaining CapEx drove the “beat.”  SACROC oil production jumped 9% QoQ, and realized oil/NGL prices were strong.  Sustaining CapEx was $117MM in 4Q13 (+5.4% YoY), and $327MM in 2013 (+14.7% YoY).  This growth in sustaining CapEx pales in comparison to the growth in Segment DD&A (in our opinion, a reasonable proxy), which was +29% in 4Q13 and +34% in 2013.  We believe that that’s largely a function of KMP under-reporting Copano and E&P sustaining CapEx.  Sustaining CapEx for 2013 came in $12MM below KMP’s guidance, despite the fact that Copano was not included in that guidance, which seems questionable.
  • KMP’s EOR production surprised to upside, but at what cost?  In 2013, KMP spent ~$475MM in E&P organic CapEx and at least $285MM in E&P acquisitions, for total capital expenditures of ~$760MM.  And how much of that was allocated to sustaining CapEx?  ZERO.  An analyst asked on the call yesterday if Kinder Morgan would consider divesting the E&P assets.  The answer, of course, was ‘no.’  This is the KMI gravy train, it’s not going anywhere.  KMP’s net oil production was +7% in 2013, but E&P costs incurred will be up over 100% YoY, and nearly double the ~$400MM guidance put out at the start of the year.  We look forward to the 2013 F&D results in the 10-K to see just how strong this year was for KMP’s E&P operations.
  • KMP’s CO2 segment continues to disappoint.  SW Colorado CO2 production was flat YoY despite major CapEx (at least $200MM), and the Company took down its CO2 growth guidance from an additional 800 MMcf/d by 2017 last quarter to an additional 700 MMcf/d by 2017 this quarter.  We believe that the McElmo Dome project is letting KMP down.
  • Most concerning to us in this quarter’s results is the anemic volume growth in KMP’s Natural Gas segment.  For 2013 compared to 2012, transport volumes were -2%, sales volumes were +2%, and gathering volumes were -2%.  KMP’s Natural Gas Segment growth CapEx (pro forma) is likely running ~$1.2 - $1.5 billion on an annual basis, and sustaining CapEx at only ~10% of that.  It doesn’t make sense, and it’s a major headwind for KMP.  This is the issue with KMP’s sustaining CapEx definition – KMP faces capital structure dilution as new “growth” or “expansion” projects do not generate pure incremental DCF, but at least in part replace cash flow declines from other assets.  How much capital did KMP spend on new well connections over the last year for ­down gathering volumes?  How much of that CapEx was sustaining CapEx?
  • KMP has similar issues in its Bulk Terminals business, where volumes were down 7% YoY in 2013.  Again, it’s nonsensical to have volume declines and growth CapEx.
  • KMP Products had a solid 4Q13 and 2013.  Volumes were up, even in California, and Segment EBDA increased $106MM YoY in 2013 as pipeline expansions ramped up and more than offset the adverse SFPP rate case. 
  • KMP’s 4Q13 total CapEx was ~$1 billion, about flat with 3Q13.  With KMP’s 2014 growth CapEx guidance at $3.6B, it looks like the CapEx run-rate for KMP is firmly at $1 billion per quarter, before acquisitions. 
  • Did management say on the call that sustaining CapEx would be up $100 million in 2014?  They may have let that slip…  If true, that’s likely higher than most analysts are modeling, though not surprising to us, and still not even close to where it needs to be to prevent dilution at KMP over the long-term.

KMI

  • KMI’s results were a bit soft with 4Q13 EPS of $0.33 coming in below consensus at $0.35.  The quarterly dividend held flat at $0.41, which probably gives the bulls some concern.
  • The interesting thing here is that KMI repurchased 5.2MM shares in the Q for $172MM – an average price of $33.08/share.  That means that KMI came in and aggressively bought stock in early December when the stock dropped after disappointing 2014 guidance.  This was the only time that KMI traded near $33/unit in the Q.  We were wondering what was going on with KMI at the time, now we know.
  • KMI did not repurchase any warrants in 4Q13, which could put a dent in the bull case for that particular security.
  • KMI has no plans on amending the KMP Partnership Agreement with respect to how it defines and calculates sustaining CapEx.

EPB

  • EPB reported EPU (before certain items) of $0.48/unit in 4Q13 (-23% YoY!), and $1.88/unit in 2013 (-14% YoY).  DCF/unit was $0.66/unit in 4Q13 for 1.02x distribution coverage, but the “payout ratio” jumped to 135% in 4Q13 from 98% in 4Q12.  As announced in early December, EPB has halted distribution growth, and it likely won’t be long before coverage slips below 1.00x and KMI takes more cash than it should from this MLP.
  • Sustaining CapEx was $15MM in 4Q13, down 12% YoY, even as the asset base grew in size, as evidenced by DD&A up 17% over the same period.  In 4Q13, EPB’s sustaining CapEx fell to just 28% of DD&A.  Recall that EPB’s sustaining CapEx as a % of DD&A was +60% in the years prior to the Kinder/El Paso deal.
  • Transport volumes were -3.0% YoY in 4Q13 and -4.7% YoY in 2013 – not good.

 

Kevin Kaiser

Managing Director


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