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MO – A Mixed Stick

In our assessment, Altria reported a mixed Q4 in its release yesterday: weak cigarette volumes were offset by cigarette pricing and smokeless and wine results while its e-cigs remain in test markets and a calendar shift in the quarter and full year (one less Monday – a key shipping day) equated to a full week of less volume. In the quarter, this equated to EPS of $0.57 that missed consensus by a penny and sales that were down -1.26% Y/Y.

 

For reference, our preferred big tobacco play remains long Lorillard (LO) vs short Philip Morris International (PM).

 

What We Liked:

  • Strong pricing and lower SGA help to offset total volume weakness of -5.8% in the quarter
  • Smokeless segment outperformed, with revenues -0.7% Y/Y in the quarter and +5.1% Y/Y on the year – led by brand Copenhagen
  • The company reported that its e-cig offering MarkTen is performing well in its extended test market of Arizona where it's in 1,900 stores (Indiana was the first state)
  • We believe that MO’s partnership with PMI (announced in December) on e-cigs and reduced-risk tobacco products – to sell through each others distribution channels and share technology – will offer substantial growth prospects and profits for MO in particular given PMI’s legacy of international sales and distribution networks
  •  Company says its 2014 EPS results will benefit from lower interest expense, a lower effective tax rate, and a reduction in shares from the current share repurchase program

What We Didn’t Like:

  • Q4 Cigarette volumes were down -5.8% vs industry average of ~ -4% and last quarter +1.2%
  • We see Marlboro under pressure from lower-priced brands
  • CEO Barrington forecasts U.S. economy and adult consumer in a similar state in 2014 as 2013

 

For now we’ll remain on the sidelines with MO. The quantitative levels on the stock over the intermediate term TREND suggest a bearish set-up on the stock.

 

MO – A Mixed Stick - w. mo

 

Matt Hedrick

Associate


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


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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.

 


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 


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