CAKE: DAIRY PRICES RISING

Takeaway: In our opinion, the new Farm Bill suggests dairy prices are likely to remain elevated in 2014.

We added CAKE to the Hedgeye Best Ideas list as a SHORT on 1/16/2014 at $47.51 per share.

 

 

DAIRY PRICES REMAIN ELEVATED 

 

Today, the House passed and sent to the Senate a new five-year Farm Bill that included an overhaul of dairy policy that is, on the margin, bullish for dairy prices.  The bill did not, however, include the proposed stabilization program which was intended to mandatorily curb production in periods of oversupply.  While this stabilization program would have been wildly bullish for dairy prices and our short thesis on CAKE, our 2014 estimates correctly assumed it would not pass.

 

The measures introduced are intended to limit how much future milk production can be insured and is expected to disincentive dairy farmers from producing excess milk.  Despite falling short of the most aggressive expectations, The National Milk Producers Federation is pleased with the bill and the benefit it will provide to dairy farmers.  This is largely supportive of our call for higher dairy prices in 2014.  Highlighted by the two charts below, milk and cheese prices continued to climb over the past week and are now up 16.4% and 41.0% on a year-over-year basis.

 

CAKE: DAIRY PRICES RISING - chart1

 

CAKE: DAIRY PRICES RISING - chart2

 

CAKE: DAIRY PRICES RISING - chart3

 

 

The last time dairy prices were up this much on a year-over-year basis was in the middle of 2011, when CAKE’s cost of sales growth increased substantially.  Currently, consensus estimates are for cost of sales growth of +0.15% and +0.27% in 1Q14 and 2Q14, respectively.  In our opinion, these estimates are too low and fail to take into account a sustainable rise in dairy prices.

 

Evidenced by our earnings sensitivity analysis, any upside surprise to these numbers would have a notably negative gross impact on earnings in 2014.  We expect management will be rather limited in their ability to offset rising dairy costs with price, due to the declining traffic trends the company is facing.  To this extent, we believe management will have to lower their FY14 earnings guidance and, subsequently, street estimates will be revised down.

 

CAKE: DAIRY PRICES RISING - chart4

 

CAKE: DAIRY PRICES RISING - 1 29 2014 11 26 23 AM

 

 

Feel free to call with questions.

 

 

Howard Penney

Managing Director

 

 

 


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more