TODAY’S S&P 500 SET-UP – April 25, 2014
As we look at today's setup for the S&P 500, the range is 53 points or 2.21% downside to 1837 and 0.61% upside to 1890.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: Here are three key questions we’d ask WWW’s CEO that are all central to the debate as we see it.
As we’ve done with a host of other companies recently, here’s our ‘3 Key Questions’ that we’d ask WWW’s CEO if we had a 5-minute one-on-one. The company is reporting its 1Q14 earnings on Tuesday, April 29th, so timing is key here.
1. Revenue? Please justify your 4-6% top line guidance this year and explain why this is not the ‘year of revenue growth’. If the following narrative is wrong, please tell us why.
So, with Merrell reaccelerating under Gene McCarthy’s leadership (the guy is money), Keds on its way to becoming one of the top 5 brands in the portfolio ($110mm today on its way to $400mm), Sperry not pulling a face-plant this Spring like so many seem to be hoping for, and international finally being a driver for the new brands – at a time when Europe is undeniably strengthening for most Consumer companies, how can this year NOT be a year of significant revenue growth? Your guidance of 4-6% revenue growth seems ridiculous (see point below on your inability to give good guidance).
2. Why do you give guidance? You stink at it. Sorry to sound harsh, but the reality is that you guide down nearly every quarter, and then come back 13 weeks later and print earnings above where the consensus was in the first place. In theory, earnings growth will ultimately drive the stock price, but all too often your ‘earnings beat’ is never appreciated by the market because you’re simultaneously trying to set a low hurdle for the next quarterly report. Even your long-term guidance is flawed. You gave 5-year revenue and profit projections that suggest $3.70 in EPS. But your EPS figure is $2.90. And what about that $1bn in free cash flow you should generate over that time period? That alone should pay down nearly all your debt, and save $0.30 per share in interest expense (that’s 21% EPS accretion). Add all that up and we get to EPS that’s 45% above your guidance. So the question is why not either a) give guidance in the ballpark of what you know you can really hit or b) get out of the guidance game – one that you so rarely win.
3. Why do you allow the conversation around the WWW story to revolve around Sperry? You have a $2.7bn revenue base, and less than $500mm of that is Sperry. Yet it is impossible to find a Wall Street research note (except ours) where Sperry is not discussed in the first bullet point. We know Wall Street can be short-sighted and myopic, but seriously, you have to control the conversation. Our math suggests that there’s $80mm at risk if the boat-shoe trend in the US rolls over (which is not happening this Spring as some feared), but another $300mm opportunity outside the US as the brand finally taps markets it’s been absent from pretty much forever. Anything wrong with our logic? If not, please take ownership of this debate, because certain parties on Wall Street that love to hate you are having a field day with it.
OUR LONG TERM THESIS
This is the most global footwear company in the world (legacy WWW). It sells about 65% of its units outside the US, and has seamless and sophisticated systems (SAP) such that all distributors speak the same language. The PLG brands, which we think are better quality overall, sell only 5% overseas, and that's simply because its former owner (Collective Brands) spent capital first on Sperry, then on US Payless stores, and did not have anything left in the kitty for international distribution of PLG brands. So now WWW can scale this superior content over its existing lean/mean infrastructure. We think it will drive an incremental $2bn in revenue over 5-years and an extra 400bp of margin. In the end, we get to earnings power of about $4.20, which is 45% ahead of what management guided at its recent analyst meeting. We're the first to admit that WWW probably won't make you rich here, as it will likely take a good 3-4 years to double. But in the meantime you're paying less than 12x next year’s earnings for a 22% EPS grower -- and this company has one of the best track records of anything in consumer.
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How 'bout them buybacks? LVS: The anti-HOT. MBS finally holds well but volumes were ugly.
Confident about Macau growth:
Marina Bay Sands Singapore:
Takeaway: We’re Adding TGT to our Best Ideas list as a short. We’re hosting a call next Wednesday, April 30th to review our thesis. Details to follow.
We’re Adding Target (TGT) to our Best Ideas list as a short, and will be hosting a call next Wednesday, April 30th at 11am to review our thesis. Details to follow.
Takeaway: 83% YES; 17% NO.
#HousingSlowdown is one of Hedgeye’s Q2 Macro Themes. We have been big housing bulls over the last 18 months. But the party is ending. Asymmetry in being long has flattened. Price follows demand on a lag and demand is slowing as affordability declines, regulatory changes drag on liquidity, and institutional interest ebbs.
So in today’s poll we asked: Is the U.S. housing market slowing down?
At the time of this post, the clear majority went toward 83% voting YES; 17% responding NO.
(Voters sharply swung so much in one way, that we didn’t receive any comments on why people voted NO.)
Here’s a sampling of some of the responses we received:
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