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WWAV: LONG WHITEWAVE

Yesterday, the stock traded down sharply on news that Walmart plans to sell more organic products.  WWAV is down -10% over the past month, but is still the best performing food stock YTD (+17.8%).  All told, we don’t view the WMT announcement as being disruptive to the overall WWAV story.

 

This is primarily because WWAV continues to offer significant growth opportunities in an industry where they are hard to come by.  In fact, we'd say that WhiteWave is one of the best-positioned companies we have seen in quite some time.  WWAV’s on-trend category, volume growth and earnings growth potential are best in class.  We believe they will be able to deliver high single-digit sales and low double-digit earnings growth for the next few years.

 

As a reminder, WWAV owns six key brands: Silk, Alpro, International Delight, Land O’ Lakes, Horizon Organic and the recently acquired Earthbound Farm.  Through these brands, WhiteWave participates in the health and wellness space and is active in growing categories such as organic milk, plant-based beverages, packaged organic salad and other produce, creamers and liquid coffee.

 

The WWAV business model can produce sustainable high single-digit top line growth (management has guided to sales growth of 7-8% longer-term) and 20% EPS growth for the foreseeable future.  We believe margin expansion will continue, as the company benefits from fixed cost leverage, favorable product mix and increased internal manufacturing capabilities.  As with every company we follow, higher commodity costs could present a headwind but we believe it will be less severe for WWAV than others with a lesser growth profile.

MAC & CHEESE – FROM A RIPPLE TO A BIG WAVE

WWAV is going after Annie's market and is not afraid to talk about it, which is among the reasons we are bearish on BNNY.  WWAV is pushing its Horizon brand into the center of the store, similar to what BNNY is doing with Annie’s brand through its mainline initiative.  To be fair, we don’t know exactly how the Mac & Cheese battle will play out.  What we do know, however, is that WWAV said it aspires to be “maybe bigger than Annie’s” in shelf stable products at some point and will be “fairly aggressive” in pursuing this over the next few years.

GOT SILK?

One of the biggest opportunities for WWAV is to drive Silk usage among new consumers in the category.  We believe household penetration remains low compared its longer-term potential.  Another significant opportunity lies within its U.S. soy yogurt products.  The Silk brand has underperformed the plant-based yogurt category due to an underwhelming consumer proposition.  Later in FY14, WWAV will likely bring its successful soy yogurt technology from Europe over to the U.S.  Concurrently, we expect the company to begin marketing soy yogurt much more heavily later this year and beyond.

ORGANIC MILK

The biggest tailwind to organic milk trends is higher conventional milk prices.  Industry observers believe that higher conventional milk prices will help drive consumers to organic and/or plant based alternatives.  Right now, the conventional milk market is being affected by structural issues, as increased global demand and decreased production continue to push prices higher.  We’d suggest that the conventional milk market must adjust to this “new normal” of higher prices.  This is in stark contrast to organic milk in emerging markets, as demand and, subsequently, price remains muted in comparison.  Structurally higher conventional milk prices could create a situation where consumers shift to organic milk and/or plant-based alternatives, which could become increasingly attractive on a price basis.

EARTHBOUND FARM

The recent Earthbound Farm acquisition is an extremely attractive opportunity for WWAV.  While packaged salad carries a higher risk profile relative to other segments of the company, its growth profile is profound.  Over the last five years, organic packaged salads has posted a +15% CAGR due to very high market penetration.  Nearly every grocer carries an organic packaged salad brand on its shelves, where Earthbound holds a dominant market share that is greater than 50%.

CURRENT GUIDANCE

Given that WWAV is guiding to 7-8% top line growth in organic sales, we view the current EPS guidance of $0.90-0.94 (before a $0.05 headwind from the recently announced JV with China Megniu) as conservative.  WWAV will report 1Q14 earnings on May 9th.

 

 

WWAV: LONG WHITEWAVE - WWAV   EEG

WWAV: LONG WHITEWAVE - WWAV   EV EBITDA

WWAV: LONG WHITEWAVE - WWAV   PE

WWAV: LONG WHITEWAVE - WWAV   ANR

 

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Retail Callouts (4/11): NKE, GPS, Uniqlo, VFC

Takeaway: Nike taking Nike+ to SFO. Easter doesn't explain GPS comp #'s. Uniqlo set to open in Germany.

COMPANY NEWS

 

NKE - FIRST LOOK AT THE NIKE+ FUEL LAB IN SAN FRANCISCO

(http://www.fastcompany.com/3028932/most-innovative-companies-2014/first-look-at-the-nike-fuel-lab-in-san-francisco)

 

  • "Today, Nike opens its Nike+ Fuel Lab in San Francisco, a collaborative work and testing space in the city's SOMA neighborhood designed for selected partner companies to develop products that integrate the NikeFuel system for tracking and measuring activity."
  • "The Fuel Lab grew out of last year's Nike+ Accelerator, in which 10 startups were given $20,000 and the opportunity to work in Portland for three months to develop apps and products connected to the Nike+ platform...The inaugural partners include running app RunKeeper, cycling and running tracking platform Strava, and weight loss app MyFitnessPal."

 

Retail Callouts (4/11): NKE, GPS, Uniqlo, VFC - chart24 11

 

Takeaway: NKE has only about 10% market share in the fitness tracker segment. Part of the problem is that fuel points, the key metric for the FuelBand, are meaningless outside of the Nike+ platform. In order to make the device more applicable to the general public, Nike is partnering with established fitness platforms in other core competencies to develop a more broad based product. This should help Nike+ reach a wider audience and allow Nike to gain better consumer insight from the + data mine.

 

GPS - Gap Inc. Reports March Sales Results

(http://www.gapinc.com/content/gapinc/html/media/pressrelease/2014/med_pr_GPS_Reports_March_Sales_041014.html)

 

  • "Gap Inc. today reported net sales of $1.51 billion for the five-week period ended April 5, 2014. Gap Inc.’s comparable sales for March 2014 were down 6 percent versus a 1 percent decrease last year."
  • "As the company noted last month, the Easter holiday is in April this year versus March last year. Given this shift in peak spring selling weeks, the company expected March to be negatively impacted."
  • "The company expects gross margins for the first quarter of fiscal year 2014 to be below the prior year by more than the year-over-year decline in the fourth quarter of fiscal year 2013. In addition, given ongoing expense management, the company expects first quarter fiscal year 2014 operating expenses to be flat to last year."
  • "The company reaffirmed its previous full-year earnings per share guidance range of $2.90 to $2.95 for fiscal 2014."
  • March Comparable Sales Results 
    • Gap Global: negative 7 percent versus flat last year
    • Banana Republic Global: negative 4 percent versus positive 1 percent last year
    • Old Navy Global: negative 7 percent versus negative 2 percent last year

 

Takeaway: We'd give a little more credence to the Easter shift explanation if the company was facing a +7% compare. When in reality the company was up against a +1% comp and just posted a -6% number. Easter played a part, but numbers aren't quite as good as the company's spin would otherwise suggest.

 

9983 - Uniqlo Bows in Berlin

(http://www.wwd.com/retail-news/specialty-stores/uniqlo-bows-in-berlin-7637566)

 

  • "With its first door in Germany and the largest European store to date, Uniqlo is playing it big in Berlin."
  • "Fast Retailing Co. Ltd.’s Uniqlo chain took over the corner of Tauentzien and Nurembergerstrasse on the city’s well-trafficked west side for its three-floor, 29,000-square-foot Berlin flagship. Set to open at noon on Friday, the store houses the entire Uniqlo assortment for men, women and children. Indeed, the kids’ department in Berlin is the chain’s most extensive in Europe."

 

Retail Callouts (4/11): NKE, GPS, Uniqlo, VFC - chart1 4 11

 

Takeaway: Global is the growth driver for Uniqlo. These investments in new markets are proving to be a bigger drag on the bottom line than the company expected. But, the company has been able to grow its top line and upped revenue guidance proving the viability of the concepts in its new markets.

 

OTHER NEWS

 

VFC - VF Announces the Dedication of Its New Central Distribution Center in Kunshan, China

(http://phx.corporate-ir.net/phoenix.zhtml?c=61559&p=irol-newsArticle&ID=1917576&highlight=)

 

  • "VF Corporation today announced the dedication of its new Central Distribution Center at an event held at the facility in Kunshan, China."
  • “'With the expectation that our business in China will nearly double during the next four years, this represents a significant milestone in our ability to manage long-term costs and inventories, while providing measurable increases in speed-to-market for both our customers and consumers.'”
  • "Representing an investment of more than $60 million...the Kunshan distribution center is VF’s largest infrastructure investment in China. When operating at capacity, the 85,000-square-meter facility is expected to handle 30 million units of product each year…"

 

0494 - Li & Fung Said to Work With Citigroup on Brands Unit Spinoff

(http://www.bloomberg.com/news/2014-04-11/li-fung-said-to-work-with-citigroup-on-brands-unit-spinoff-1-.html)

 

  • "Li & Fung Ltd. is working with Citigroup Inc. to spin off its brands business, valued at about $2 billion, people with knowledge of the matter said."
  • "The world’s biggest supplier of clothes and toys to retailers such as Wal-Mart Stores Inc. and Kohl’s Corp. plans to list the division on Hong Kong’s stock exchange and would also consider selling the unit, named Global Brands Group, if it gets an attractive offer, said the people. They asked not to be identified because the deliberations are private."

 

OSTK - Overstock.com Makes Management Changes

(http://investors.overstock.com/phoenix.zhtml?c=131091&p=irol-newsArticle&ID=1917592&highlight=)

 

  • "Overstock.com, Inc. announced changes in its board and management teams.  Stormy Simon will move from being co-president to president of Overstock.com, and will continue in her role as a board member. Jonathan Johnson will move from being executive vice chairman to chairman of the board of directors, replacing Patrick M. Byrne in that role. Byrne will continue in his role as CEO."

Reminder & Materials: DISSECTING POWER SYSTEMS WITH FORMER HEAD OF FINNING'S PS

Reminder & Materials: DISSECTING POWER SYSTEMS WITH FORMER HEAD OF FINNING'S PS - cat ps

 

 

SLIDES: CLICK HERE

 


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CAT's Energy & Transportation segment (formerly Power Systems) is not easy for outsiders to understand. Hedgeye's Industrials Team will host a call to get a better understating of this specialized segment Today at 11:00am EDT with industry thought leader Jeff Leigh.  

 

Jeff spent over two decades at Finning, Caterpillar's largest dealer, focused on Power Systems products and aftermarket. The focus of the call will be on reciprocating engines, Power Systems aftermarket, and key end-markets.

 

 

KEYS TOPICS WILL INCLUDE

  • Power Systems key markets and trends
  • Maintenance and life cycle of CAT reciprocating engines
  • Competitive environment and impact of Tier 4
  • Non-OEM parts
  • Dealer interaction with CAT
  • Background on market development

 

ABOUT JEFF LEIGH, P. ENG.

 

Based in Vancouver, Canada, Jeff Leigh provides advisory services relating to mobile heavy equipment and power systems, including the use of natural gas as a fuel source.

 

Jeff has over twenty five years of industry experience. This includes senior roles with Finning, a major Caterpillar dealer, in Western Canada, the UK, and Chile, where Jeff was responsible for sales, parts and service operations, strategic planning, and major projects. As well as with Westport Innovations, where Jeff led an engineering product development team working on mobile cryogenic storage solutions for LNG fueling of heavy equipment in mining, rail, energy systems, and marine applications.

 

Jeff has led the Power Systems business for Finning Canada was there responsible for major Power Systems projects including mining power stations in Australia and Papua New Guinea, remote utility and mining power stations in the Canadian north, large ship construction in Chile, and the launch of Caterpillar 3500 series gas compression engines in Alberta and BC.

 

 

Please send questions for Jeff to during or in advance of today's call.


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Bubble Bursting (Don’t Say We Didn’t Warn You)

Client Talking Points

Bubbles

Who’s been warning you about market froth and social media bubbles? Exactly. Current corrections from all-time-bubble-highs right now:  Nasdaq -7.0%, Russell -6.7%, $SPX -3.0%. We are still banging the non-consensus bubble warning drum hard and advising our customers to short highflyers like YELP and TWTR and to buy Gold, buy Utilities. Risk happens fast—be prepared. Our Asset Allocation Model remains: Cash 34%, FX 22%, Bonds 20%, Commodities 16%, Intl Stocks 8%, US Stocks 0%.

$JPM

Our Financials co-sector head Josh Steiner is one of the best in the game. His takeaway on JPM this morning > The good: A clean quarter - the first in a long, long time. The bad: They missed on top and bottom line. Total Revs down 15% year-over-year in line with their guidance but there are big pockets of weakness with FICC trading down 21%.

Asset Allocation

CASH 34% US EQUITIES 0%
INTL EQUITIES 8% COMMODITIES 16%
FIXED INCOME 20% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

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.

DRI

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.

Three for the Road

TWEET OF THE DAY

We're 6 yrs into building our credibility, 1 call at a time, and I'm not going anywhere anytime soon @KeithMcCullough

 

QUOTE OF THE DAY

"Life is really simple, but we insist on making it complicated." – Confucius

STAT OF THE DAY

Have you been pining for your very own wearable $1,500 Google Glass but weren't sure how you, a regular non-developer could get one? Tuesday will be your lucky day. Google is opening sales of Glass for one day only to any adult in the United States who wants one of the devices. Sales start at 9 a.m. ET on April 15. (CNN)

 


LEISURE LETTER (04/11/2014)

TICKERS: LVS, IGT, PENN

 

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES

Monday, April 14

Atlantic City March revenues 

 

Monday, April 22

IGT FQ2 earnings:  , Passcode: IGT

 

Monday, April 24

PENN Q1 earnings:

 

Monday, April 24

HOT Q1 earnings:  , Passcode: 12049644

 

COMPANY NEWS

LVS - (The Morning Call) Tropicana Entertainment interested in LVS's Sands Bethlehem.  In the past, LVS had indicated it wants a high bid - around $1 billion.

TAKEAWAY:  Get it done. Not critical to the portfolio and we're sick of hearing about the transaction.

 

IGT - Installing Powerbucks (new WAP product) in CZR and BYD's casinos

TAKEAWAY:  In a secular declining demand environment, differentiation is key for operators.  Exclusivity won't last, however, as IGT needs to make a few power bucks.

 

PENN - Argosy Alton (IL) began closing one of its three gambling decks four days a week in early March.

TAKEAWAY:  More evidence of the tough environment for regional casinos

 

INDUSTRY NEWS

Lights dim for Japan's pachinko parlours FT 

Pachinko has been all but abandoned by younger Japanese.  Data from a Japanese research group show that the number of players has fallen by two-thirds over the past 20 years to 11m in 2013. 

 

Converting winning pachinko balls to cash is illegal but that violation is universally ignored by police.  Now, some pachinko groups are arguing that the looming acceptance of casinos means their industry should be brought out of the shadows too, gambling element included. Lawmakers who support them have formed a cross-party group to promote the idea – a development that has worried some in the casino lobby, who think it could increase public opposition to the pro-casino bill.

TAKEAWAY:  Pachinko lobbying would complicate Japan casino legislation 

 

 

Stomach illness that hit 83 people on Crown Princess may be linked to norovirus CNN

TAKEAWAY:  Media taking notice of the numerous norovirus cases.  Bad publicity for the cruise industry. 

 

Spain receives ~40% more cruise passengers thru February Hosteltur

In February, Spanish ports received 382 vessels, representing 62 more ships YoY or a 19.4% increase.  The number of cruise passengers who arrived in the Spanish ports surged 39.62% in the first two months of 2014 to 838,117 cruise passengers.

TAKEAWAY:  Spain recovering but capacity is rising as well

 

MACRO

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.


BYD: OFFSETTING THE TRENDS

State revenues from March are still coming out and they’re ugly as expected. Beyond these numbers, BYD seems to have a few positive catalysts.

 

 

CALL TO ACTION

Up to 4 significant refinancing transactions and potentially better (than whisper) near term property level performance could lead to BYD stock outperformance in 2014.  We’re still worried about the rest of the weak March numbers coming out from the states as well as more negative earnings revisions from other analysts.  However, we would view weakness as an entry point.

 

OPERATIONS

We’ve been worried about the March performance of the regional markets for a while now and regional results are certainly coming in ugly.  While downside to Q1 consensus estimates appears likely for PENN and PNK, BYD could be fine for Q1.  Recall, Boyd didn’t provide Q1 guidance until March 5th and the sell side may not be taking into account the contribution of the apparently successful Penny Lane slot initiative and potential margin improvement.  We’re not sold that management has found religion in terms of overhauling its operations but there are still some low hanging fruit (already eaten by the competition) that could boost near term performance.

 

REFINANCINGS

Beyond Q1, our more positive view on the stock is bolstered by four significant debt refinancing transactions we expect to occur over the next four to eighteen months.  Over this time period, Boyd should be able to call and refinance $1.4 billion of debt carrying a blended interest rate of 9%.  The debt should be refinanced at significantly lower interest rates, which in turn will result in lower interest expense and ultimately positive fully taxed earnings per share accretion of $0.12 to $0.17 (assuming a blended rate of 7.5% to 7.0%).  Realistically, with NOLs of $1.1 billion, the EPS and FCF/shr accretion will be in the range of $0.19 to $0.25.  For reference, our 2015 calendar year EPS estimate is $0.42.


BYD management could begin to discuss the refinancing strategy as soon as the 1Q14 earnings call which we expect to occur in early May.  There are significant fact parallels between Boyd’s upcoming refinancings and MGM’s refinance activities during 2011 and 2012 which helped boost that stock. 

 

BYD: OFFSETTING THE TRENDS - BYD

 

INVESTORS FADING THE REIT

The REIT chatter has died down and that’s probably a good thing.  However, BYD management still faces numerous options to unlocking shareholder value through real estate transactions.  A full REIT spin is possible but not probable and may not be imminent.  As we outlined in our 03/14/14 presentation and conference call, the hurdles are significant but not insurmountable.  Management seems more open to asset sales.  For us, the highest value could be achieved through a sale to GLPIGLPI should be willing to pay a high multiple and diversify its tenant base and BYD could retain ownership of the operations.  Stay tuned here.


The activist pop also seems to have waned.  We’re only a month removed and 3% off the close (and 2 UCONN Husky basketball championships) before Elliot Capital’s position was made public.  Elliot’s ability to influence management both publicly and privately could be limited unless they obtain gaming licenses in BYD’s jurisdiction.  However, subtle pressure can work as well.

 

THE END GAME  

A full operations overhaul would be value creation option #1 in opinion.  Unfortunately, option #1 is not imminent.  However, some improvements seem to have been made and forward numbers may not be as bad as feared as a result.  Upcoming refinancings should juice EPS and FCF/shr later in the year and in 2015 and could catalyze the stock.  And who knows, maybe BYD could even play a few real estate cards.


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