Hedgeye Industrials Sector Head Jay Van Sciver is adding added Owens Corning to Investing Ideas.
We will send out a full report shortly detailing our bullish case.
Takeaway: Target's expectations for positive comps and gross margins in 2014 are simply too optimistic.
Editor's Note: Below is a brief, complimentary excerpt from Hedgeye Retail analysis. For more information on our services click here.
Target (TGT) remains one of our least favorite stocks here at Hedgeye. And wouldn't you know it? The aformentioned research supports just that premise.
Simply put, Target's expectations for positive comps and gross margins in 2014 are simply too optimistic. The company is going to need to be more price competitive to win back sagging customer loyalty. Big time.
Rest assured this will not be an easy task. Not by a long shot. We've never seen a retailer fire its customer and win them back in a few simple quarters. It just doesn't work that way.
Case in point: JCPenney. It's taken the beleaguered company basically three years to reset their customer base. And they still won't be done for another three years.
We recognize that Target's issues are not as severe as JCP. But you definitely can't underestimate these things.
Target is banking on Canada to carry its gross margins, which says it all. Bottom line here is when a retailer needs to bank on Canada to make its margins for the year, the long thesis gets pretty thin.
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The anatomy of a MCD monthly sales press release!
The following are quotes from Don Thompson are taken directly from the monthly sales press releases. Reading between the lines, the evolution of the language suggests that management still does not have a plan in place to improve same-store sales:
September – management not giving up
"We remain confident in the fundamental strength of the McDonald's System and our ability to connect with customers and deliver the menu choices, value and convenience they expect from McDonald's."
November – management not giving up
"We remain confident in the fundamental strength of the McDonald's System and our ability to drive initiatives that will deliver the greatest benefit for our customers."
December – management begins to waver, as they admit they need to make “investments”
"As consumer expectations and the marketplace continue to evolve, we are making investments in our menu, restaurants and service to strengthen our connection with customers and build our business for long-term profitable growth."
February – management is intent on improving performance
"We are intent on improving our performance by building on our customer-driven strategies and the fundamental strengths of our proven business model."
March – management is now thoughtfully evolving its approach
"We are intent on improving our business performance by thoughtfully evolving our approach to ensure that we are delivering the most compelling value, service and convenience to each of the approximately 70 million customers who choose McDonald's each day."
On a global basis, MCD had a relatively strong May-August sales period. Since then, trends have continued to deteriorate. Since the December sales press release, it has been clear that management is still looking for an answer to evolving consumer expectations. We don’t believe installing high density tables will help solve this problem.
The language in the February release says they are working hard, but there is still no actionable plan in place. After missing numbers yet again, today’s press release suggests that whatever plan they thought they had in place must be reevaluated.
The red lines in the charts below signify a company that is in a secular decline. Europe and APMEA look to be bottoming, but the secular decline in the US is dragging down global numbers.
Until we begin to see these trends improve, we remain bearish on MCD.
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
European Financial CDS - The big mover in European swaps last week was Sberbank of Russia, which widened 72 bps to 286 bps from 214 bps. Russia's largest bank has often been a good indicator on geopolitical as well as commodity pressures. Elsewhere across Europe, the Financials were much more sanguine with broad-based improvement.
Sovereign CDS – Sovereign swaps were tighter across the globe last week with the sole exception of the US, where swaps were unchanged at 30 bps. Europe put up broad-based improvement in spite of turmoil in peripheral Ukraine.
Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
Takeaway: Downside catalysts too far out to remain short after the 4Q13 disappointment. Better entry point to emerge in the next 1-2 quarters.
Rebased Expectations: TWTR's 4Q13 Earnings Release exposed holes in 2 of its 3 growth drivers (user growth and engagement); continued weakness on both these fronts may be the expectation moving forward.
User Growth: Significant Slowdown in US User growth. We suspect TWTR's US penetration is much higher than its MAU metrics suggest given that some users have joined and are no longer inactive. Runway is shorter than many expect.
Engagement: Decelerated considerably in 4Q13. Management suggested this is partly due to Twitter interface improvements, but we believe users migrating to TweetDeck is also to blame. We suspect the latter could a secular theme, which would pressure ARPU.
Monetization: the Mobile Migration may have more immediate upside than we originally thought, although we suspect some of the 4Q13 acceleration is due the holiday shopping season.
Hedgeye vs. Consensus: We see upside in the near term to consensus estimates, but we expect ARPU growth to materially slow beginning 2H14 as the mobile tailwind begins to subside. With mobile now representing over 75% of all ad revenue, the comp setup switches from mobile representing the minority to the majority of revenue moving forward.
We provide more detail on our short thesis in our most recent note below. If you would like to see additional work, or discuss in more detail, let us know.
TWTR: Staying Short, But...
02/07/14 04:55 PM EST
Hesham Shaaban, CFA
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