April 22, 2014

April 22, 2014 - 1



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In preparation for IGT's F2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Total revenues $499 million
  • EBITDA $167 million
  • EPS $0.19/share


  • 2014 FY EPS Guidance:  $1.00-$1.10
  • FQ2 EPS Guidance: $0.17-0.19



Demand Environment

  • Declines have been greater than anticipated. Certainly weather has contributed to that, but likely not weather alone.
  • Seeing some signs in March that make us feel a bit better about the business.


  • Had assumed in 2014 that the restrictions would not improve.
  • In fact, the importation situation has tightened in Argentina
  • See a fraction of those units shipping into Argentina in 2014.

Cost Cuts

  • $30MM cost reduction in 2014 ($50MM annualized)


  • Nevada, New Jersey, South Dakota and Canada opportunities


  • Growing 20%


  • Will experience the same sort of growth (as DoubleDowns) 

Replacement Cycle

  • Coming into the year, replacement units were expected to grow. It looks now like they will not grow.

Product Sales

  • Product sales is probably been disproportionately impacted given the effects now that we see on the market on replacement demand, on international market demand.

Game Ops

  • Increased pressure on MJP (Megajackpots)

Stock Repurchase

  • Concluded the previously announced accelerated share repurchase in January. That actually is an impact in the quarter. But in terms of material repurchase, activity was largely concentrated in the first quarter.
  • IGT will be less aggressive on the buyback front in the short term


  • Expect to deliver earnings growth in both 2015 and 2016 at this point.


  • Facing a bit of a forex headwind.  Three major external currencies outside the euro in South Africa, in Argentina and Australia have all moved against IGT, Argentina obviously very dramatically in the year. There will be a devaluation charge in the quarter associated therewith. IGT expect those to moderate at some level.

Just Charts: Earnings Season Heats Up

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.


Just Charts: Earnings Season Heats Up  - chart1


Consumer Staples mildly underperformed the broader market last week, rising 1.5% versus the S&P500 at 1.7%. XLP is up 1.5% year-to-date vs the SPX at 0.9%; the coming week is marked by a number of earnings releases.


Earnings Calls (in EST):


Monday (4/21):  KMB (10am)


Wednesday (4/23):  PG (8:30am); RAI (9am); TUP (10am); DPS (11am)


Thursday (4/24): HSY (8:30am); MO (9am); MJN (9:30am); CCE (10am); LO (1pm)


Friday (4/25):  CL (11am)


For a seventh straight week, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.


Just Charts: Earnings Season Heats Up  - chart2


The Hedgeye U.S. Consumption Model shows a worsening outlook over recent weeks, with only 3 of the 12 metrics flashing green. 


Just Charts: Earnings Season Heats Up  - A. CONSUMPT


Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:


  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.2x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, but improved to -29.1 versus -31.9 in the prior week

Just Charts: Earnings Season Heats Up  - chart3

Just Charts: Earnings Season Heats Up  - chart4

Just Charts: Earnings Season Heats Up  - chart5


Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  SAFM 6.1%; POST 5.7%; MNST 5.5%; NUS 4.9%; KO 4.7%

Negative Divergence:  HLF -7.9%; AVP -2.9%; CCE -1.7%; SAM -1.2%; PM -0.4%



Last Week’s Research Notes


Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).


BUD – the King of chasing low-beta-slow-growth-yield is back! Confirmed now for almost a month, BUD is back above its TREND line of $105.48


Just Charts: Earnings Season Heats Up  - chart6



DEO – is not the King of Beers – still bearish TREND @Hedgeye with $129.34 resistance


Just Charts: Earnings Season Heats Up  - chart7



KO – big move on a big price/volume breakout last week; KO back above its $39.59 TREND line


Just Charts: Earnings Season Heats Up  - chart8



PEP – bullish TREND support of $83.14 confirmed last week on a big price/volume move out of earnings


Just Charts: Earnings Season Heats Up  - chart9



GIS – still bullish TREND with $50.21 TREND support


Just Charts: Earnings Season Heats Up  - chart10



MDLZ – hanging onto TREND support of $34.45 – needs to start confirming some higher-highs soon though


Just Charts: Earnings Season Heats Up  - chart11



KMB – still the best looking stock on this list YTD – low volatility ramp to higher-lows and higher-highs w/ TREND support down at $107.23


Just Charts: Earnings Season Heats Up  - chart12



PG – got slow-growth-dividend-yield chasing in that portfolio? The machines are clamoring for those style-factors now; what was TREND resistance of $80.31 is now support


Just Charts: Earnings Season Heats Up  - chart13



MO – raging low-beta bull roaring now! TREND support = $35.68


Just Charts: Earnings Season Heats Up  - chart14



PM – slow-growth-yield-chasing even gets assigned to what’s been a dog – bullish TREND now if $82.13 support holds


Just Charts: Earnings Season Heats Up  - chart15




Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Nike Gets Less Active, Fires FuelBand Team | $NKE

Takeaway: Nike is pulling the plug on its fitness hardware.

Nike Gets Less Active, Fires FuelBand Team | $NKE -  dsc6181


CNET Exclusive: Nike fires majority of FuelBand team, will stop making wearable hardware

  • "Nike is gearing up to shutter its wearable-hardware efforts, and the sportswear company this week fired the majority of the team responsible for the development of its FuelBand fitness tracker, a person familiar with the matter told CNET."
  • "The company informed members of the 70-person hardware team – part of its larger, technology-focused Digital Sport division comprised of about 200 people – of the job cuts Thursday. About 30 employees reside at Nike's Hong Kong offices, with the remainder of the team at Nike's Beaverton, Ore., headquarters."
  • "It's unclear how many current employees, if any, have been internally recruited to join other Nike divisions. Nike Digital Tech, responsible for Web software, was not affected."
  • "As CNET reported on April 10, Nike had serious discussions in the last few months –after the release of the FuelBand SE tracker last November – about exiting the wearable-hardware market. The shoemaker isn't throwing in the towel on technology. Rather, it's turning away from hardware and realigning its focus exclusively on fitness and athletic software…"

Takeaway From McGough:

Nike is officially pulling the plug on its wearable tech initiatives. The announcement isn't all that surprising given that the FuelBand and Nike + SportWatch trail the offerings currently on the market – FitBit, Jawbone, Garmin, etc. – by a wide margin. It doesn't appear that the company is throwing in the towel all together, instead shifting its focus from hardware to software.


Let's be clear about one thing, Nike's software leaves a lot to be desired; the Fuel Point metric is an arbitrary calculation that doesn't translate to other fitness devices. If Nike outsources hardware to a third party – which it appears that it will given the new software-focused Nike + Fuel offices in San Francisco – perhaps it can focus its energy where it has some expertise (i.e., digital media as opposed to digital hardware) and close the gap with its competitors.


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Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow McGough on Twitter @HedgeyeRetail

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Cartoon of the Day: Mugged

Takeaway: Coffee prices are up +77% year-to-date.

Cartoon of the Day: Mugged - coffee prices 04.21.2014


VIDEO | McCullough: How Investors Should Position Themselves Now


Hint: If you were following CEO Keith McCullough before he went on vacation last week, you might already know the answer.

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