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FedEx Weathers Brutal Winter | $FDX

Takeaway: The latest report looks relatively uninteresting. There's nothing wrong with that.

Editor's Note: This research note was originally published March 19, 2014 by Hedgeye’s Industrials Sector Head Jay Van Sciver. For more information on Hedgeye please click here.


FedEx Weathers Brutal Winter | $FDX - fedex courier services snow small 83175


Excluding the impact of weather, FedEx (FDX) reported a solid quarter on several key metrics.  This was the toughest winter in which FDX has “ever” operated, according to CEO Fred Smith, who probably knows.


But are the profit improvement plan benefits accelerating? 


There are a number of adjustments that are needed to make the year-over-year comparison and it would be a mistake to read too much into a single troubled quarter, but FY3Q 14 looks pretty good for a challenged quarter (Express margin up about 50-70 bps on our adjustments). Not exactly acceleration, but this was not the quarter to expect it. 


As usual, we will want to see the 10-Q, particularly on what looks like weaker cash generation.  On balance, the report looks relatively uninteresting (nothing wrong with that) and we do not see anything so far that meaningfully impacts our longer-term thesis. 

Key Points

FedEx Express Margins: To make a decent year-over-year comparison on the operations at FedEx Express, one needs to make a number of adjustments. One extra operating day, with one-third to one-half of costs not varying, is a year-on-year benefit. Weather was a $70 million headwind, according to management.


We estimate that fuel surcharge timing was a slight headwind year-over-year (while a significant absolute negative in both periods) and the postal service contract was also a negative YoY, partly offset by lower pension. Business realignment charges impacted both periods, but were larger in the year ago quarter. Adjusting for those items, we get a rough 50-70 basis point improvement. That seems good enough to maintain expectations for the eventual success of the profit improvement program. Of course, the profit improvement plan goal is to deliver closer to ~5x that gain by FY16, with that progress coming more slowly.


FedEx Ground: Excluding the estimated impact of weather, FedEx Ground showed a solid margin of ~17.1%, in line with guidance.  Some may have expected the late Thanksgiving holiday to push a greater improvement in FY2Q 14, but the result is probably good enough even with the Ground operating day add in. Next year, a late Thanksgiving will also compress the e-commerce shopping season and we expect both FDX and UPS will be better prepared for high peak volumes. 


Outlook and Buyback: When asked about 2015 estimates, management highlighted the share repurchase program. The repurchase does get FDX a good part of the way to meeting consensus, when combined with the current profit improvement plan momentum. We should receive better insight into 2015 with the June release.


Given the unusual operating environment and adjustments, it is hard to extrapolate FY3Q 14 results too far. That said, it looks okay and we do not expect a particularly interesting reaction to the report. FedEx Express remains reasonably on track with respect to its profit goals in a challenging operating environment.

Connect to Hedgeye.


Takeaway: Headwinds are industry and company specific, in our opinion.

IGT confirms what a lot of people already knew - guidance was way too high. 




  • NA GGR environment:  declines are broad-based and greater than anticipated
  • Continued fragmentation in the industry, primarily in North America
  • Continued structural challenges in international marketplaces
  • Had assumed in previous 2014 guidance that Argentina restrictions would not get worse; but in fact, restrictions had been tightened recently. Only a fraction of the 2,200 units will be shipped to Argentina.
  • Cost-cuts:  Will be focused on senior executives
  • Wheel of Fortune agreement with Sony:  to protect highest performer in company history; categorized as acquisition of intellectual capital ($185MM payment)
  • Powerbucks:  provides differentiation in megaJackpot area
  • Doubledown:  will grow 20% in 2014
  • IGT Systems business also doing well
  • Expect Greece/US replacement cycle to resume at some point

Q & A

  • Consumers feeling pressure
  • Gaming ops:  more sensitivity to operating environment than its competitors
  • Feels better about March
  • Cost cuts are permanent
  • Product sales disproportionately impacted by international challenges
  • No additional repurchases in 1Q
  • FCF:  bascially proportionally impacted by top-line
  • Lower guidance:  MLP pressure and NA GGR weakness.  Product sales division is more affected than gaming ops.
  • 1st priority: investment in business e.g. Wheel of Fortune/Sony
  • 2nd priority:  share buybacks/dividends
  • View shares as favorably priced 
  • DoubleDown:  largely R&D - so protected from cost cuts
  • Visibility has not changed
  • Positioned for 2015/2016 growth
  • FX headwind:  euro/argentina/australia; will take a devaluation on Argentina
  • FQ2:  simliar trends seen through the lowered guidance for the full year
  • 2014 severance charges:  $8-9MM (excluded from guidance range of $1.00-$1.10)
  • More consolidation could happen in the industry
  • Avatar product doing very well - top end of yield #s

Stick with What’s Working

Client Talking Points


Front-month Volatility broke Hedgeye TREND support of 14.72 yesterday. That’s bullish in the very short-term for US stocks as they make their run for a breakeven Q114.  Clearly, owning #InflationAccelerating was so much more profitable.


It was a horrible quarter for Consumer Discretionary (XLY) stocks, down -3.3% year-to-date, as inflation slows real consumption growth. Stick with what’s working (Gold and Utilities are up +7.5% to +9.5%) versus consumer on the short side (same playbook as 2011).


Bullish news? Both the EuroStoxx600 and DAX have recovered their TREND lines of 326 and 9323 support in the last 24 hours. We’ll see if they hold, but it’s more bullish than the alternative.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve), and strong underlying economic fundamentals. In follow-up BOE minutes, the asset purchase program was held flat by a vote of 9-0 and the interest rate was held unchanged by a vote of 9-0. This week the UK’s Office for Budget Responsibility updated its forecasts and sees 2014 GDP at +2.7% versus forecasts of +1.8% a year ago and +2.4% in December. It also increased the 2015 growth forecast to +2.3% from +2.2% previously. The OBR sees budget deficit at -6.6% of GDP in 2013-14 from -6.8% previously forecast, and sees debt peaking at 78.7% of GDP in 2015-16, and falling to 74.2% of GDP in 2018-2019. News out this week discussed Chancellor Osborne closing in on a deal that would see the City of London become an offshore center for trading the Chinese currency. The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.

Three for the Road


A bubble that fails to make higher-highs on accelerating volume is a bubble that is popping @KeithMcCullough


"Every morning we are born again. What we do today is what matters most." – Buddha


Facebook is getting into the virtual reality business. The social networking giant is planning to buy virtual reality firm Oculus VR for $2 billion, its latest high-profile acquisition. Oculus makes the Oculus Rift headset, which covers your eyes and immerses you in a virtual environment that responds to your head movements. (CNN)

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LEISURE LETTER (03/26/2104)



Today, March 26

  • IGT negative pre-announcement call 8:30 am "IGT"
  • PENN at TAG Spring Consumer Conference
  • Melco Crown Extraordinary General Meeting
  • Melco Crown Board Meeting  

 Friday, March 28

  • Nevada gaming revenues release for February 



IGT – announced a large reduction in guidance. In response, the company initiated a cost cutting program that will reduce G&A by $30 million this year and $50 million on a run rate basis coupled with a 7% reduction in work force. 


TAKEAWAY:  Poor weather and regional results, a lack of new casinos, and continued share losses in the participation business are responsible, in our opinion.  Regional revenues are likely to be under continued pressure in March.  It's interesting that this cost cutting announcement happens a mere 48 hours after the company renews its WOF licensing agreement and pays Sony Entertainment $185 million in upfront royalties. Since, Patti Hart was named President and CEO, five years ago (to the date) IGT stock is +63% versus the S&P 500 +150%.



Las Vegas home prices – the S&P/Case-Shiller Home Price Index rose 24.9% for January while Clark County population increased 2.9% during 2013 to 2.06 million people.


TAKEAWAY:  The wealth effect should help support the recovery of the Las Vegas locals gaming market benefiting Boyd Gaming and Stations Casinos.


Eastern Massachusetts – the City of Boston requested the State of Massachusetts revisit and redo the environmental impact study for the proposed Mohegan Sun and Suffolk Downs’ casino project.


TAKEAWAY:  Gotta love MA politics.


Western Massachusetts – The Massachusetts Supreme Court in May will consider Repeal the Casino Deal’s proposed referendum to invalidate and undo Massachusetts gaming laws.


TAKEAWAY:  See above.


NJ online poker - Borgata and Party Poker NJ are offering their New Jersey patrons the opportunity to deposit funds via a prepaid card. Like other recently introduced cashiering options, the prepaid card provides players otherwise unable to make deposits and withdrawals via more traditional means – namely Visa and MasterCard – with a sorely needed back-up plan. Borgata, unlike Party, currently does not support the widely popular payment processor Skrill.


TAKEAWAY:  Borgata’s prepaid card is another frustrating and suboptimal solution to an ongoing problem.



Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 


TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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Sentiment Speaks

This note was originally published at 8am on March 12, 2014 for Hedgeye subscribers.

“Listen to many, speak to few.”

-William Shakespeare


I love to read, write, and rant. But, other than our top institutional customers and my research team, I speak to few during a typical market day. While I love my best friend (my brother Ryan), our phone conversations are usually 140 words or less.


If you read voraciously, you can listen to the #history of many. If you create the right contra-streams on Twitter, you can watch the sentiment of the crowd. If you embrace uncertainty of timing market sentiment, you’ll always be prepared to change your mind.


But macro markets don’t care about what I think about all of that. Markets are non-linear. They are structured to pulverize the largest number of people at the most inconvenient time. So listen to Mr. Macro Market’s signals very closely. He’s a front-runner of risk.


Back to the Global Macro Grind


With Japanese, Chinese, and American #GrowthSlowing (oh, and Russia crashing to -22.6% YTD), what could possibly go wrong? Rather than have some character tell you “the market is cheap”, you can listen to #history’s lesson on that:


1. When Inflation Accelerates, and

2. Real (inflation adjusted) Growth slows…


You get:


A) Multiple compression in Equities

B) Multiple expansion in Bonds


And, since:


1. #OldWall consensus is still looking for implied multiple expansion (to 17-18x EPS) for the SP500 this yr

2. #OldWall consensus is still looking for implied multiple compression (higher bond yields) for Treasuries this yr


You have yourself basically the opposite consensus to listen to that you had only 1 year ago today. While last year seems like forever ago to a consensus that missed US #GrowthAccelerating, on March 12, 2013:


1. The Dow and SP500 were at 14,450 and 1552, respectively

2. The 10yr US Treasury Yield was at 1.90% (tracking towards its all-time low of 1.7% in April)


Sentiment then wasn’t off by a little bit – it was off by a country mile.


By year-end of 2013:


1. The Dow and SP500 closed at 16,576 and 1848, respectively

2. The 10yr US Treasury Yield has its biggest % move in 50yrs (closing the yr at 3.03%)


Fast-forward to today, with the US Dollar on its YTD lows and #InflationAccelerating, the Dow Jones is actually DOWN -0.6% YTD and US 10yr Treasury Yield is DOWN -28 basis points to 2.75%. But the SP500 is up a whopping +1.0% (plus or minus whatever happens today), so let’s turn on the tube and keep talking up what was supposed to be a US Equity multiple expansion party!


If you’ve studied the #history of debtor nations devaluing their currencies in order to inflate asset prices, you’ll note that the non-government people living in those countries generally develop miserable sentiment. There’s this thing called the Misery Index (inflation + unemployment). This morning, Japan’s Misery Index hit a 33 year high.


So, let’s encourage consensus to keep cheering on a Policy to Inflate but call it by any other name. This is really the only way to envision being really right versus what you read and hear from consensus every day (consensus #OldWall estimates are still looking for both US and Global GDP to accelerate sequentially to new multi-year highs, and for inflation to be benign).


A few other mathematical realities we’ve back-tested as relevant sentiment checks are:


1. Front-month Equity Fear (VIX) versus the term structure of the VIX curve

2. The II Bull/Bear Spread


This morning front-month VIX has A) established yet another higher-low on our TREND duration and B) the term structure of implied volatility is nowhere near as fearful as it was 12-15 months ago.


On the II Bull/Bear Spread, 2013 bears were eviscerated. On today’s reading, Bulls are +3,770 basis points (55.1%) higher than the Bears (17.4%). That’s not the all-time high in terms of the Bull/Bear spread – but December 31st, 2013 was (when the Dow topped).


I’m not saying I’m nailing everything macro this year. I’m simply saying what very few want to listen to when complacency sets in – and that’s that the US stock market “is cheap, multiple expansion” bulls might get nailed in the coming months.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.58-2.80%

SPX 1844-1890

Nikkei 14449-15194

VIX 13.22-15.72

USD 79.39-79.98

Gold 1324-1359


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


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