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4Q13 EARNINGS SCORECARD: PRETTY FROM FAR

BEAT-MISS:  At the midpoint mark for 4Q13 earnings, Sales & EPS Beat-Miss spreads are expanding verses 3Q13 (53%/74%) and TTM (54%/73%) averages as 65% and 79% of SPX constituent companies have beaten Sales and Earnings estimates, respectively.   

 

Of course, the canonical means to beating estimates, particularly over the last four years, has been to progressively deflate expectations ahead of the quarter to the extent that what would have been disappointing-to-inline results ultimately gets stamped with the “Beat” label. 

 

This quarter has not been an exception as topline estimates for 4Q13 have drifted steadily lower for SPX constituents over 2H13.  

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - BM Table 013014

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - SPX Revision Spread

 

STYLE FACTOR PERFORMANCE:  Reported results vs expectations have been fairly even across style factors with the exception of High Beta & Low Short Interest equities which have performed meaningfully better vs. prevailing topline estimates than their inverses.  

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - ES SF Table 013014

 

FUNDAMENTAL PERFORMANCE TRENDS:  Mean Reversion downside from peak corporate profitability remains the most apparant, ongoing, fundamental risk for corporate equities.  Peak, of course, can getter “peak-ier” if commodity/input costs are deflating and wage inflation remains somewhere south of topline growth. 

 

Despite the positive Beat-Miss trends, operating performance has not been particularly inspiring with 49% and 53% of companies registering sequential acceleration in sales and earnings growth, respectively.  Margin performance has been similarly unimpressive with only 42% of companies reporting sequential operating margin expansion according to bloomberg data. 

 

From a sector perspective, Financials, Industrials and Healthcare have led operating performance while Consumer Discretionary, Staples, and Tech have been the relative, fundamental laggards.  

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - ES OP Table 013014

 

BETA or BEAT-MISS?  Relative to 3Q13 where Macro completely monopolized price action, "The Print" has had a moderately impactful influence on subsequent price performance thus far in 4Q.  Below we chart company Beats & Misses vs subsequent market adjusted 3-day performance.

  • Sales: 59% of companies that beat sales estimates subsequently outperformed the market to the tune of 4.5% on average.  The other 41% of companies that beat sales estimates underperformed the market over the subsequent 3-days by an average of -3.3%.  Subsequent performance for companies missing Sales estimates was similarly mixed.  
  • EPS:  Earnings performance has shown a stronger relationship with performance as 62% of companies beating EPS estimates subsequently outperformed the market by 4.1% on average while 38% went on to underperform the market by an average of -3.0%.  EPS misses have been sold heavily with 78% of companies missing EPS estimates subsequently underperformed the market by -5.4% on average.  

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - Sales BM Perf

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - EPS BM Perf

 

Enjoy Super Bowl Weekend. 

 

 

 

Christian B. Drake

c

@HedgeyeUSA

 

 

 

 

 

 


HSY – Sticking With the Sweet Tooth

We’re sticking with what works when it comes to sweets. We’ve liked HSY over the last two quarters and yesterday’s Q4 results underlined its impressive story and informs our bullish outlook over the intermediate term.

 

Q4 was favored with the timing of Halloween and the holidays falling in the quarter: revenue of $1.96B (+11.7% Y/Y) beat expectations of $1.89B, and EPS was in-line with consensus at $0.86 and grew 24% Y/Y. Adjusted gross margins grew 80bps to 43.9% in the quarter and EBIT margin of 15.8% grew 140bps versus the prior-year quarter.

 

For the year, HSY grew sales 7.6% (it has captured >7% growth over the last 4 consecutive years -- not bad for a CPG company) and in the U.S. reclaimed its Candy, Mint, Gum (CMG) category leadership moving to a 31.1% market share., with strength in Candy and Mint offsetting weakness in Gum.

 

Its international story continues to be one that’s picking up steam: the Company grew chocolate sales in China +14% to broaden its market share to 10.2% (it was the fast growing chocolate company in country) and in Mexico improved its market share by 2% to 21%. We continue to applaud HSY’s strategy to invest to grow and diversify beyond the U.S. Given the macro headwinds across the emerging market, the results are encouraging.  Going forward we expect Asian sales to be further supported by last quarter’s announcement of a $250MM cap-ex spend to build a new plant in Malaysia to supply markets in Asia and assist existing capacity in China. 

 

According to company commentary, commodity inflation should be mild in 2014 across its broader basket (dairy being the one unknown with little visability) and in-line with our macro team’s Q1 Macro Theme of #InflationAccelerating.

 

For 2014, the company reaffirmed its FY EPS guidance of 9-11% growth or $4.05 - $4.13; net sales growth of 5-7%; and gross margin expansion of 50bps.

 

From a quantitative set-up HSY is comfortably trading above its intermediate term TREND level, confirming our bullish outlook:

 

HSY – Sticking With the Sweet Tooth - w. hsy

 

Matt Hedrick

Associate


FDX: REMOVING FROM INVESTING IDEAS

Takeaway: We are removing FedEx (FDX) from Investing Ideas.

We are removing shares of FedEx after a strong run. 

 

FDX was added to Investing Ideas on 2/27/13. Shares have gained over 30% during this time compared to a roughly 19% return for the S&P 500.


FDX: REMOVING FROM INVESTING IDEAS - fdx

Industrials Sector Head Jay Van Sciver explains that we are removing FDX as a good portion of our thesis has played out and we are developing other ideas for next week that may offer better future returns. 

 

There is nothing ‘wrong’ with FDX according to Van Sciver, and we would look for re-entry points should the shares retreat.  FDX shares may continue to work well for investors, but the recent market retreat has opened up better opportunities in our sector.

 


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MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD

Takeaway: 1) Investors are debating the growth outlook. 2) #InflationAccelerating is working. 3) Hedge funds are regaining confidence in short selling

CONCLUSIONS:

 

  1. Making sense of which style factors to be over-indexed to and which to sell/short is becoming increasingly difficult to discern. For example, HIGH Consensus LT EPS Growth Expectations is outperforming the pack along with LOW Consensus LT EPS Growth Expectations. Clearly, with the US economy threatening  a trip to Quad #3 for the first time in over a year, investors are trying to figure out if they want to be completely in or completely out of the growth style factor.
  2. Another thing that is working in 2014 is our 1Q14 Macro Theme #InflationAccelerating. The spread between HIGH Consensus NTM Sales Growth Expectations and LOW Consensus NTM Sales Growth Expectations is the widest divergence among each of the individual style factor pairs. We interpret this as the market preemptively punishing those companies that won’t see enough sales growth to offset a likely increase in COGS and/or SG&A expenditures over the intermediate term.  
  3. Lastly, both HIGH and LOW Short Interest as a % of Float are among the worst performing style factors in the YTD. We interpret this as hedge funds reacting to finally seeing their shorts work (on an absolute basis) and looking for new names to short (vs. agreeing to “hide out” together in consensus short ideas amid a raging bull market).
  4. If the emerging signals highlighted above start to trend, we want to be doing the same – i.e. looking for un-shorted names that have low consensus sales growth expectations. A simple multi-tier sort our S&P 500 Style Factor Equity Screener shines a bright red light on PetSmart (PETM) and Aflac (AFL). Both are broken from an intermediate-term TREND perspective on our quantitative factoring. As such, they both warrant your full attention from a research perspective.

 

When in doubt, blame #EmergingOutflows. According to the most recent data from EFPR Global, YTD outflows from EM equity and debt funds are already at 79% and 32% of their respective 2013 outflow totals! Never mind that domestic economic growth is slowing on the margin (we’ll see if this fundamental TRADE becomes a TREND), we would agree that a race for the exits in EM assets has contributed to the jump equity volatility in the YTD (the VIX is up nearly +30% in the YTD and now bullish on our intermediate-term TREND duration).

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - VIX

 

That ramp in fear has investors broadly de-risking their portfolios at the margins. Specifically, the S&P 500 Index is down over -3% in the YTD, while US Treasury bonds have done little more than go straight up since their DEC 31st bottom. The former is now seriously threatening its TREND line of support, while the latter is demonstrably broken. If the SPX breaks our TREND line, there’s no real firm support down to our long-term TAIL line of support at 1678 (i.e. a hundred handles lower).

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - SPX

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - UST 10Y

 

From a style factor perspective, the YTD round-up is a bit more interesting. Making sense of which style factors to be over-indexed to and which to sell/short is becoming increasingly difficult to discern. For example, HIGH Consensus LT EPS Growth Expectations is outperforming the pack along with LOW Consensus LT EPS Growth Expectations. Clearly, with the US economy threatening  a trip to Quad #3 for the first time in over a year, investors are trying to figure out if they want to be completely in or completely out of the growth style factor.

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - UNITED STATES   HRM

 

Another thing that is working in 2014 is our 1Q14 Macro Theme #InflationAccelerating. The spread between HIGH Consensus NTM Sales Growth Expectations and LOW Consensus NTM Sales Growth Expectations is the widest divergence among each of the individual style factor pairs. We interpret this as the market preemptively punishing those companies that won’t see enough sales growth to offset a likely increase in COGS and/or SG&A expenditures over the intermediate term.  

 

Lastly, both HIGH and LOW Short Interest as a % of Float are among the worst performing style factors in the YTD. We interpret this as hedge funds reacting to finally seeing their shorts work (on an absolute basis) and looking for new names to short (vs. agreeing to “hide out” together in consensus short ideas amid a raging bull market).

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - Chart of the Day

 

Recall that equity hedge funds underperformed the broader market by the second most on record in 2013; the raging bull market likely forced a lot of hedge fund managers to concentrate their bearishness in a few consensus short ideas. Now it appears they may finally be branching out.

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - SPX vs. HFRX

 

If the emerging signals highlighted above start to trend, we want to be doing the same – i.e. looking for un-shorted names that have low consensus sales growth expectations. A simple multi-tier sort our S&P 500 Style Factor Equity Screener (which ranks companies by the various style factors on a percentile basis) shines a bright red light on PetSmart (PETM) and Aflac (AFL). Both are broken from an intermediate-term TREND perspective on our quantitative factoring. As such, they both warrant your full attention from a research perspective.

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - 7

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - 8

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - Style Factor Equity Screener

 

Best of luck out there,

 

DD

 

 

Darius Dale

Associate: Macro Team


FDX: Still A Long-term Long, But Removing From Best Ideas List For Now

Overview

 

For now, we are removing FDX from the Hedgeye Best Ideas list.  However, we continue to very much ‘like’ FDX from a long-term perspective.  The shares meet our investment process (cycle, industry structure, valuation), but the opportunity is better appreciated at current levels relative to when we first highlighted shares of FDX.  If the Express segment margin expands as we expect, the shares may offer further appreciation.  

 

UPS’s recent report highlighted improved volume growth for the industry, part of the expectation we put forward in our November 2012 Express & Couriers Services black book.  We continue to see the potential for further share price appreciation in coming years as the value of FedEx Express is better reflected in the market’s valuation of FDX.  While at current relative levels we are removing FDX from the list, we will certainly look for opportunities to add the shares back to it in line with our long-term thesis. 

 

The shares were the 11th best performer in the S&P 500 Industrials last year and the top performing Transport in the sector from the start of the year.  The shares have outperformed the S&P 500 by about 22% since our November 2012 


CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS

Takeaway: Don’t write-off outflows from EM funds as panic selling. In reality, the cycle has turned and most investors are just now figuring that out.

Editor's note: This unlocked research note was originally published January 30, 2014 at 11:55 in Macro. For more information on how you can subscribe to Hedgeye research click here.

If you didn’t know the global macro super-cycle has turned, now you know.

CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS - turkey 

As most recently outlined in our latest EM strategy note titled: “NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE” (1/27/14):

 

“We remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins.”

 

Contrast our view with that of Mark Mobius, chairman of the Templeton Emerging Markets Group (i.e. one of, if not the world’s largest EM fund umbrellas):

 

“People are enjoying what they see as a bull market in the U.S. As we go forward, we’re going to see a lot of overweight positions in the U.S. So, given the fact that emerging markets are still growing fast, given that they have low debt-to-gross domestic product ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”

 

We don’t write that to pick on Mr. Mobius, who has obviously had a very long and successful career managing EM assets. In fact, he probably forgets more about emerging markets on the way to lunch than I have ever learned as a quote/unquote “26-year-old-analyst” (ask @JimCramer for context).

 

Rather, we wrote that to juxtapose how our investment framework focuses on changes on the margin – particularly relative to expectations – versus the framework employed by many investors: i.e. a narrow focus on absolutes with a dash of consensus storytelling.

 

Another reason we wrote that was to show you where the quote/unquote “smart money” consensus likely still is with respect to EM assets. We know the quote/unquote “dumb money” has been pulling funds out of EM assets for 6-9M now and are doing so on an accelerated basis in the YTD. With respect to the current asset price cycle, you tell me who’s “smarter”?:

 

  • “The MSCI Emerging Markets Index of equities is off to the worst start to a year since 2008, with about $468 billion erased from stocks this year.” – Bloomberg (1/30/14)
  •  “More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.” – Bloomberg (1/30/14)
  • “The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005.” – Bloomberg (1/30/14)
  • “The WisdomTree Emerging Markets Local Debt Fund is on track for an eighth straight month of withdrawals… About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.” – Bloomberg (1/30/14)
  • “Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show.” – Bloomberg (1/30/14)
  •  “ETFs accounted for almost half the $2.5 billion outflows from emerging equities last week. So far this year, a net $4.12 billion has flowed out, amounting to three quarters of the total $5.7 billion that has fled, the fund tracker said.” – Reuters (1/27/14)

 

In the context of the sheer amount of dough plowed into EM assets over the last ~10-12 years amid Federal Reserve-style financial repression, we could see EM assets underperform by much more and for much longer than many investors currently think. This is how people get blown up buying the [perceived] bottom. Don’t buy the [perceived] bottom in EM assets – at least not until you get the green light to do so from the Fed.

 

  • “Emerging markets have attracted about $7 trillion since 2005 through a mix of direct investment in manufacturing and services, mergers and acquisitions, and investment in stocks and bonds, the Institute for International Finance estimates.” – Reuters (1/27/14)
  • “JPMorgan estimates outstanding emerging market bonds at $10 trillion compared with just $422 billion in 1993.” – Reuters (1/27/14)
  • “Assets of funds benchmarked to emerging debt indices stand at $603 billion, more than double 2007 levels, it said, and over $1.3 trillion now follows MSCI's main emerging equity index.” – Reuters (1/27/14)
  • “Assets of emerging equity ETFs tracked by EPFR Global ballooned to a peak of almost $300 billion, tripling since 2008 and up from next to nothing in 2004.” – Reuters (1/27/14)
  •  “Mutual fund data from Lipper, a ThomsonReuters service, shows that in the past 10 years net inflows into debt and equity markets was in the region of $412 billion.” – Reuters (1/27/14)

 

CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS - dale1

 

If you recall the following slide (#74) from our 4/23/13 presentation titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”, this should all sound very familiar:

 

CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS - 2

 

Net-net, investors have two choices when it comes to playing EM assets from here: 1) buckle up; or 2) pray to God that Janet Yellen backs away from the monetary tightening ledge. Moreover, the fact that so many institutional investors have to be invested” in EM assets only insulates our bearish bias if things really take a turn for the worse because we haven’t actually seen any “real” selling yet…

 

Please feel free to ping us with any feedback or questions.

 

DD

 

Darius Dale

Associate: Macro Team


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