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EHTH: Subsidies=Attrition

Takeaway: "If you're lower income right now, you can only go to a government-run exchange," - Gary Lauer, EHTH CEO

EHTH's CEO was on CNBC today (link) discussing the status of the Government Health Insurance Exchanges.  An interesting takeaway was the above quote, which is somewhat surprising since EHTH is a web-approved broker; meaning it is authorized to sell subsidized plans in the 36 states where the federal government is running the exchange.


The issue is functionality.  EHTH and other web-approved brokers can't interface with the federal exchange due to technical issues; therefore it can't sell subsidized plans.


As we laid out in our Best Ideas EHTH Short Call today, subsidy-eligible individuals represent a major attrition risk for EHTH.  In the table below, we quantify the size of the subsidy-eligible population among existing Individual & Family Plan (IFP) members using Census data.  We estimate that at least 45% of existing IFP members are eligible for subsidies.  If EHTH can't sell subsidized plans to its existing members, it will lose many of those members to the exchanges.


EHTH: Subsidies=Attrition  - EHTH   Subsidy Population 4


This is just one of the issues facing EHTH's IFP segment in 2014.  We go into greater detail during our Best Ideas Call.  If you would like access to the replay, please let us know.



Hesham Shaaban, CFA


[video] Why the Surge In Gold Is Just Beginning

RAI—Balancing Profitability and Market Share On Weak Cig Volume

Neutral Outlook on RAI

Reynolds American reported Q4 EPS of $0.77 that missed consensus of $0.81 and revenues of $2.04B that came in slightly below the Street at $2.07B. It announced a dividend increase of 6.3% and FY 2014 EPS guidance $3.30-$3.45. The stock is trading down over -2% intraday.


In the quarter sales were down -1.9% versus the previous-year quarter and EPS up +1.3%. The company was able to take pricing across cigarettes and moist-snuff to make up for cigarette volume declines that outpaced the industry average.  


Cigarette volume was down a full -7.0% in the quarter (versus the industry average of -4.0%) and fell -6.2% for the full year (vs the industry average of -4.2%); the company cited the decline was due to a slow macro environment and migration to non-combustible tobacco. This volume result compares to the company’s guidance last quarter that its FY volumes would track closer to -4%.


Strong brand results came from Camel that grew Q4 market share by 0.4 pp to 9.0%; Camel SNUS that continues to hold about 80% of the category; and Pall Mall that grew market share 0.2 pp to 9.1%. American Snuff’s Grizzly brand also continued to show strong performance, increasing operating income 17.0% on the quarter and 12.1% on the year and boosting its Q4 operating margin 2.5% to 58.9%; and Santa Fe’s performance grew operating income 12.3% in the quarter and 17.9% on the year.


The company expects cigarette volume to moderate in 2014 to around -3.5%, and it’s unclear if e-cigs will be driving the improvement in cigarette volume loss.  We expect 2014 to be a big year of investment for the company behind its e-cig VUSE as it plans to roll-out nationally (more below) and for it to heavily discount and promote the product to compete with MO’s e-cig offering and play catch-up to LO’s Blu, among the Big Tobacco players.  Recent category weakness remains a concern, which was partially confirmed by a much more cautious outlook on the category from CEO Daan Delen today.


We’re currently neutral on the stock. Our preferred play is long Lorillard (LO) and short Philip Morris (PM).



On E-Cigs

E-cigs were once again a focal point of the call: the company began the call discussing its e-cig business under the brand VUSE and the majority of analysts’ questions in the Q&A were about e-cigs.


RAI launched its made-in-America e-cig in its first test market of Colorado in July 2013 and recently expanded to its second market in Utah. The company maintained its plan to have national distribution by mid-year, however took a more critical and cautious tone on the e-cig category, suggesting that expansion will depend on growth in the category. CEO Delen said that for now while trialing is high for the category, repeat purchasing and adopting is very lower, and had no concrete answer for why the e-cig category has recently slowed.  He said consumer trends were based on current products that did not meet smokers’ expectations, and that VUSE is poised to buck that trend.


VUSE’s results in CO: Category volume has tripled since its launch with mix driven by 80% cartridges (razorblade) vs 20% disposables. The company believes that higher long-term margins can be achieved by cartridges.


On a national rollout: The company is confident with its strategy citing its industry-leading trademark and distribution network, the self-imposed restrictions it has in place (including no self service with its products placed on the back bar so it can assure age verified sales).

  • As we look to a national rollout, we’d expect heavy discounting and promotion to encourage trialing (similar story with Altria’s e-cig MarkTen under a similar timeline) to suggest selling at a loss or at best breakeven for this year (alongside the potential for heavy price competition). 

On the recent growth pick-up in the tank or open-ended system: Delen confirmed the growth pick-up and said it will be interesting to see what happens from a regulatory point of view, noting that in an open-ended system people can put any types of liquids in, whereas VUSE is a closed system that shuts down if the consumer tries to tamper with it/add liquid.


On M&A to expand its e-cig business: CEO Delen deflected the question and suggested that he is confident VUSE is a differentiated and experienced brand that can compete in the marketplace. [Note: the recent M&A activity has included MO’s acquisition of Green smoke for $110M on February 3, 2014; LO’s acquisition of SKYCIG for £30M in October 2013; and LO’s original purchase of Blu in April 2012 for $135M].


Call or email with questions,


Matt Hedrick

Early Look

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Gold Loves the Mother of All Doves

Takeaway: Dollar Down + Rates Down = Heaven for Gold.

Is it time for Janet "Mother of All Doves" Yellen to abandon the Fed's dual mandate and just target rates? The Dollar definitely thinks so. It's down again this week after losing -0.8% of its value last week. Meanwhile, commodity #InflationAcclerating continues to front-run the probability of a devaluation.


Gold Loves the Mother of All Doves - doll9


Sure, it might be good for a low-volume pop in stocks. But it's horrible news for US consumption growth.


Here's a simple formula: Dollar Down + Rates Down = Heaven for Gold.


That’s why we are bullish on Gold (see our full research note recapping why from yesterday). What was once TREND resistance of $1272 in our model for Gold is now support. 


We will keep adding to the "Gold-Bond" asset allocation move if Yellen targets rates.


Gold Loves the Mother of All Doves - drake 


Incidentally, do you know who else got away with targeting rates? #Japan. 2013’s Hedgeye TREND support for the 10-year US Treasury yield is now resistance at 2.80%.


Maybe she wants a 0.6% JGB-style 10-year?

Join the Hedgeye Revolution.

Tory Burch Makes Move Into Men's

Takeaway: We wouldn't want to have to compete against Tory Burch.

COH - Tory Burch Said Planning Move Into Men's

  • "Burch has lured Jeffrey Uhl away from Coach Inc., where he was a key member of the team that grew the brand’s men’s business to sales that are currently approaching $700 million. Once on board at Burch, Uhl is said to be taking on both women’s and men’s accessories. He is expected to start in a few weeks."
  • "A spokeswoman for Burch declined comment Monday, as did Uhl. But sources said Burch could launch men’s accessories as soon as next year."

Tory Burch Makes Move Into Men's - toryburch


Key Takeaway from Hedgeye Retail Analyst Brian McGough 

Let me start off by saying that Tory Burch is the real deal in retail. She is the female equivalent of Ralph Lauren. Now, Coach's (COH) Jeffrey Uhl may have become expendable when Keith Warren was brought in from Louis Vuitton. But shaking up leadership in a key growth category at a time when COH needs a good story doesn't look good to outside eyes. The reality here is that Men's has become a key point of emphasis for a number of upscale companies like Coach. This latest news of Tory Burch joining the fold makes it that much more competitive. Bottom line? We wouldn't want to have to compete against Tory Burch…she gets it. The upscale Men's space just got a lot more heated. 

Join the Hedgeye Revolution.

BNNY – Stock Hammered on Input Cost Inflation. Buy it?

BNNY is getting tattooed after releasing its fiscal Q3 2014 results last night after the close. It reported Q3 EPS of $0.17 that missed consensus estimates by a penny and lowered its full year EPS guidance to $0.92 to $0.93 versus prior guidance of $0.97 to $1.01, citing higher input cost inflation ahead.


In what was otherwise a strong top-line with adjusted net sales in the quarter up 21.7% (Meals grew 34%; Snacks 15%; Dressing flat), with positive sell-through from previous areas of concern in frozen entrees and pizza, the company’s commentary suggests that it simply did not appropriately hedge/account for commodity cost inflation in the quarter (wheat in particular calling pricing an anomaly) – and begs the question how well it is covered for the coming quarters.


We continue to like the favorable consumer trends for natural and organic foods and BNNY’s portfolio of offerings (though frozen concerns do remain). We’re well aware that without prudent management of COGS in what we see as an inflationary macro environment in 2014, profitability will be challenged (HAIN reported similar headwinds). BNNY remains a rich stock (FY 2014 P/E at 40.9x), with no debt on its balance sheet that is expected to be cash flow positive next quarter, is investing in plant and people, and is now past this quarter that is expected to be its most difficult comp of the year.


The stock remains broken from a quantitative perspective across the intermediate term TREND duration, implying a bearish outlook. However we’d consider opportunistically trading the stock on the long side if our levels confirm it's oversold. 


BNNY – Stock Hammered on Input Cost Inflation. Buy it? - v. bnny chart


What We Liked:

  • Adj. net Sales of $46.1MM up +21.7% Y/Y (excludes pizza recall)
  • Adj. diluted EPS of $0.17 vs $0.15 last year, up +13.3% Y/Y
  • Favorable trends in natural and organic foods
  • Strengthening in mac & cheese and consumer acceptance of cups
  • Frozen – pizza performing well and working to improve trialing thru merchandizing events
    • Entrees remain mostly in Target
    • Pizza full rolled out in Whole Foods, expanding foot print to other channels
  • Snacks – fruit snacks trends strong. Crackers and Grams sales all grew 20%+
  • Consumers saying want more Snacks offerings. Offering Cookies, Crackers and Snack mix  in small packaging, positive for mainstream distribution
  • Expanding distribution of granola bar, including gluten free bars
  • Cheese costs covered for 1H of next year
  • Expect EPS growth of 20% for Q4

What We Didn’t Like in the Quarter:

  • Management lowers guidance for adjusted diluted EPS to $0.92 to $0.93, reflecting higher anticipated cost pressure in the fourth quarter
  • Input costs tracking higher in Q4 due to wheat crops remaining tight. Impacting pricing in the short term
  • Wheat inflation 18% in Q3, more modest in Q4


Matt Hedrick

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