Takeaway: From a quantitative perspective, we maintain our marginally bullish stance on European equities over U.S. equities
Editor's Note: This research note was originally sent to subscribers on April 29, 2014 by Hedgeye Macro analyst Matt Hedrick.
This morning we received Eurozone confidence figures for the month of April. As the charts below show, the data took a step down versus the prior month, and matches confidence figures from the major Eurozone countries that mostly slowed and fell in the April/May period.
We think this inflection lower is but one data point, but indicative of what could play out as a slower growth environment for the remainder of 2014 as the overhangs of high unemployment rates, anti-Euro sentiment, and a sluggish global economy persist. We saw moves higher in confidence figures over the last 12-16 months reflecting improved economic and political outlook, which may now be fully priced in.
- Germany GfK Consumer Confidence 8.5 MAY (8.5 est.) vs. 8.5 prior
- Germany ZEW Economic Expectations 43.2 APR (45 est.) vs. 46.6 prior
- Germany IFO Business Expectations 107.3 APR (105.8 est.) vs. 106.4 prior
- France INSEE Consumer Confidence 85 APR (88 est.) vs. 88 prior
- Italy ISAT Economic Sentiment 88.8 APR vs. 89.5 prior.
- Italy ISAT Business Confidence 99.9 APR (99.5 est.) vs. 99.3 prior
- Italy ISAT Consumer Confidence 105.4 APR (101.2 est.) vs. 101.9 prior
From a quantitative perspective, we maintain our marginally bullish stance on European equities over U.S. equities, and signaled early this week that the German DAX broke its TREND level of support. Below we offer up its new levels (see chart below).
From a policy perspective, we continue to expect ECB President Mario Draghi and the Eurocrats to manage expectations over the medium to long term. On Monday Draghi was reported to have said to a German lawmakers that a QE program is relatively unlikely now. We’ll take the comment at face value and believe that opportunistically Draghi will continue to have QE in his back pocket, which should encourage European equities higher. We also underline that Draghi is managing his inflation target of 2.0% over the longer term, and already there are encouraging signs that inflation is percolating:
- Germany Preliminary CPI rose 1.3% in April Y/Y (1.4% est.) and 1.0% prior
We expect interest rates to remain “accommodative” = at the present rate or lower, as the bank works on schemes to better unlock lending to the real economy (especially SMEs).
On the currency front, the EUR/USD is trading in a bullish formation, above its TRADE, TREND, and TAIL levels of support, as outlined in the chart below. We expect the cross to trade higher as Eurozone QE remains on hold and as Fed Head Janet Yellen continues her dovish policy stance.
The UK economy is following our playbook: tighter monetary policy = stronger currency = stronger purchasing power, home price appreciation, and confidence. UK GDP ramped to +3.1% Y/Y in Q1 (double what we’ve forecast in the USA).
BOE Governor Mark Carney recently said that he’s optimistic about the economy’s recovery, comfortable with the current level of interest rates, and reiterated that when it does see increases in interest rates they will be gradual and limited. This week Lloyd’s Business Barometer showed a meaningful move higher, to 66 in April vs. 44 in the prior reading.
We remain bullish on the equity market (despite being essential flat YTD) and the GBP/USD.
Our bullish levels on the GBP/USD are outlined below:
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LO is up nearly 3% intraday after closing up 4% yesterday (and hitting all-time highs) – we believe rumors that RAI is interested in acquiring LO are responsible for the move, however we think a hypothetical deal (especially an imminent one) is challenged:
- Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
- Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.
RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ.
We’re not surprised to hear rumors that LO is a take-out target. Underling our Best Idea Long Call on Lorillard in early March 4th was the strength of its portfolio:
- Leading share and profitability of its core menthol business,
- Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and
- Upside growth in its blu e-cigarette business that commands leading share in the U.S.
As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal.
There’s been no comment from either LO or RAI. Even without consideration of a deal with RAI, we’ve outlined a scenario in which LO’s business propels the stock to $80/share over the longer term. That would be ~ 36% higher than today’s price.
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PNRA remains on the Hedgeye Best Ideas list as a SHORT.
Panera beat muted 1Q14 estimates, posting top line and bottom line surprises of 147 and 225 bps, respectively. Company same-store sales of +0.1% also bested the consensus estimate of -0.6%, driven by +1.7% price and +1.2% mix.
A quick glance at the headline numbers, however, could be materially misleading as the underlying numbers and trends continue to indicate a much longer turnaround than the street expects. Management guided 2Q EPS to $1.70-1.76, well below the current street estimate for $1.84 and tightened its FY14 same-store sales range to 2.0-3.5%. Despite this, they essentially maintained FY14 EPS guidance, tightening the high end of the range by $0.05 to arrive at a new target of $6.80-$7.00.
The release didn’t surprise us one bit and neither has today’s stock action. This morning’s earnings call was, in our opinion, rather painful to listen to – imagine how the bulls felt! All told, we came away from the call with greater conviction in our short thesis. In our view, management sounded unsure of itself and failed to effectively explain why its full-year guidance is not aggressive considering weak transaction trends, commodity inflation and the significant investment ahead. Notably, several analysts sounded increasingly bearish in the question and answer session which we would attribute to an increasingly cloudy outlook. As a result, we expect FY14 street estimates to be revised down over the current quarter. Until we see a meaningful acceleration in trends or a material boost from key initiatives, we continue to believe FY15 estimates are aggressive as well.
What we liked in the quarter:
- Revenues of $605.34 million beat the consensus estimate by 147 bps
- Adjusted EPS of $1.52 beat the consensus estimate by 225 bps
- Company same-store sales of +0.1% beat the consensus estimate of -0.6%
- Over 80% locked on commodity inputs in FY14
- Have slightly less than $200 million remaining under current repurchase plan
- Rapid Pick-Up will be implemented system-wide by year end
- Sandwich production times have improved materially, down 35 seconds on average
What we didn’t like in the quarter:
- Management lowered 2Q guidance but essentially held FY14 guidance flat
- Narrowed same-store sales guidance to 2.0-3.5% growth
- Transaction growth -2.8% y/y
- Operating margins -250 bps y/y
- Cost of sales +30 bps y/y led by higher paper costs and commodity inflation
- Labor expenses +40 bps y/y led by the addition of 35 hours per week to stores
- G&A and D&A +80 bps and +60 bps y/y and will ramp throughout the year due to planned investment in Panera 2.0
- Limited visibility around impact from materially higher marketing spend as the results vary on market-to-market basis
- Catering hubs will be dilutive to returns for at least the next year
- Management’s inability to clearly explain its full-year assumptions
- Management’s apparent lack of confidence
- Management’s ongoing commitment to new unit growth
- Overall uncertainty and volatility surrounding the Panera 2.0 rollout
Same-store sales trends are abysmal and we believe the street is taking a leap of faith in its 3Q and 4Q estimates.
Traffic growth will be vital in the coming quarters and we will need to see this downward trend reverse meaningfully before we begin to get less bearish.
The street currently expects operating margins to increase on a year-over-year basis by 4Q. We don’t believe this will happen and, considering the bulk of Panera 2.0 will be rolled out in FY15, think next year’s margin assumptions are aggressive as well.
Call with questions.
Takeaway: We got too cute on timing when we covered. 1Q14 upside & 2014 guidance raise weren't enough. Rising consensus estimates = precarious setup
1Q14 Review: Solid quarter, 2Q14 guidance above consensus, 2014 guidance raised in excess of 1Q14 beat
- Beat, Raise, Sell-Off (Again): We covered our short on expected 1Q14 upside. That was a mistake; street was expecting 1Q14 upside comparable to what TWTR produced in 4Q13.
It Only Gets Tougher From Here: Consensus estimates are rising, and the street expects upside on top of that. That becomes less likely in 2H14/2015 when the monetization tailwind slows.
$25 Stock?: We're expecting revenues to slow materially in 2H14, and particularly 2015 (43% vs. consensus of 61%). Based on our growth-adjusted P/S analysis, TWTR shouldn't be trading above $25
Supporting Research: See notes below for supporting detail on our short thesis. We are in the process of refreshing or slide deck.
- Revenues: $250.5M vs. consensus of $241.5. 1Q14 Ad revenue growth (y/y%) accelerated vs. 4Q13 both globally (up 125% vs. 121%, respectively) and in the US (106% vs. 97%)
- User Growth: US was up 19% y/y vs. 20% in 4Q13. Global up 25% vs. 30% in 4Q13. Int’l slowed to 27% in 1Q14 vs. 34% last quarter.
- Engagement (timeline views/user): Decelerated globally, decline moderated in the US (-2% vs. -5% in 4Q13), deteriorated internationally (-10% vs. -2%).
- Monetization (ad revenue/timeline view): Accelerated sharply globally (96% vs. 76%), mostly driven by int’l, but US improved as well (78% vs. 73%).
- Guidance: 2Q14 revenue of $270-$280 vs. consensus of $272. Raised 2014 range by $50M to $1.20B-$1.25B, ahead of the beat on 1Q guidance
BEAT, RAISE...SELL-OFF (AGAIN)
We covered our Short prior to the 1Q14 release. We believed street expectations had rebased following the sell-off on its 4Q13 release. Given the upside we saw to 1Q14 consensus estimates, and that our bearish fundamental view centers around 2H14/2015, we decided to get out of the way looking to reshort at a higher price. That was a mistake.
Despite a very solid quarter and 2014 guidance raise, the stock is down 10% today. We suspect this is tied to the smaller magnitude of the 1Q14 beat and guidance raise in relation to what TWTR produced in 4Q13.
IT ONLY GETS TOUGHER FROM HERE
TWTR is in a precarious setup. Every time TWTR beats estimates, consensus estimates move higher. However, street expectations differ from consensus: TWTR is expected to continue to beat those increasing estimates, and guide higher.
We continue to expect a dramatic slowdown in revenue growth into 2H14, and particularly 2015 (see notes below for supporting detail). Our bearish fundamental view vs. rising consensus & street expectations suggest the setup will only get worse from here.
In short, the hurdle keeps moving higher while its growth prospects get progressively worse.
TWTR is trading at a premium to its Social Media peers given heightened growth expectations. Consensus is assuming 61% revenue growth in 2015. We're expecting 43% growth as its monetization tailwind slows precipitously into 2H14 and 2015.
In turn, TWTR's 2015 growth profile is similar to what the street is assuming for YELP, which trades at 7.9x 2015 revenues vs. the 10.7x that TWTR is trading at today. That said, TWTR shouldn't be trading at any more than 8x 2015 revenues, which translates to a $25 stock; and that assumes the Social Media space can maintain its lofty P/S multiples.
See the notes below for detail on our short thesis. If you would like to see our TWTR short deck (update in progress), or have any questions, please let us know.
TWTR: Covering Short...For Now
03/10/14 11:41 AM EDT
TWTR: Staying Short, But...
02/07/14 04:55 PM EST
Hesham Shaaban, CFA
Strong growth in owned & leased segment segment drives better Q1 results
- Results: broad strength around the world based on strong top line RevPAR; owned & leased margins expanded; positive results from acquisitions/transactions; and managed & franchise fee growth
- Group +9% US managed full service, occupancy levels higher and F&B up mid-single digits. Total group production +11% in Q1 2014 while production was up MSD in Q2 2013 and HSD in Q3 and Q4 2013.
- Group revenues booked in the quarter for the year +13% = stronger 2014 pace and 2015 pace +200 bps
- Transient rate +6%
- Hyatt Regency Orlando ~$55M of EBITDA in 2014, but 1/3rd of earnings in Q1
- Hyatt San Antonio ~$25M of EBITDA in 2014 and 1/3rd booked in Q1
- Playa: Hyatt Zeba and Zolara Brands performing well
- Sale of 10 assets to RLJ, continue to manage - purchased in 2011, rebranded, and recycled
- Sold 50% JV interest in Hyatt Place Austin $7M of equity invested, received $25M of sale proceeds
- Recycled Hyatt Regency NO, Waikiki, Seattle...
- Pending: Hyatt Regency Grand Cypress Orlando for $190M expect to close in Q2, currently consolidated as owned and lease via capital lease, no change to reported EBITDA but Balance Sheet $190 cash, -$190M in debt and change in interest expense.
- Other: currently marketing 9 full-service hotels
- Return of capital: active in returning capital to shareholders during Q1 with over $85 million of Class A shares re-purchased since the beginning of the year at a weighted average price of about $52.00 per share.
- Ample liquidity and strong balance sheet which will allow Hyatt the flexibility to execute on opportunities
- Trends: Group healthy, occupancy at record levels, strong ADR growth, F&B spend increasing limited supply.
- Outside US: Most regions stabilizing including China, opened 8 hotels in Q1 and 7 were in new markets
- Q2: variability due to:
- Easter shift
- seasonality of 4 hotels in France, during Q1 France hotels were operating below trend by $15M, but in Q2 expect to earn in excess of threshold and will flow thru other income line but not expect. But base management fees of $7M during Q2.
- Isolate Easter shift: Full service managed +250 bps = $3-5M of EBITDA
- Select service vs. full service: select service underperformed because of renovations as well as poor weather in the East and Northeast regions during Q1
- Group: strength in SF, Orlando, San Antonio, and Chicago while WDC was weak, driven by Easter shift and strong production and minimal renovations impact
- Currency negative impacts from C$, Mexican Peso and South American currencies
- Asset recycling: additional hotels beyond 9 announced - remain opportunistic, no plans beyond current 9 listed assets.
- Playa Resorts: Q1 EBITDA $13M-15M for 2014, 1/3 in Q1, pleased with performance, 2 add'l hotels rebranded before year-end, early stage of investment, too early for long-term discussions
- Four French Hotels - renegotiate contact: no change to contract and structure but having discussions, so volatility to continue
- Share repurchases - increasing all 2014 repurchase are Class A shares and 10Q will reflect share counts of Class A 42.5M and Class B 112.5M
- Repurchase authorization - ongoing review, Board will address
- Capital base - used to invest in business as well as return to shareholders, and currently doing both strategies.
- Fees: How guide managed vs. franchise fees due to conversions - fees for 50% of the sold hotels moved/will move from managed to franchise and 200 bps of the increase in franchise fees during Q1 (of the 14% increase) are due to this shift in fees
- Park Hyatt New York: expect to open in Q3 2014 and will purchase 67% $250M commitment by Hyatt and will finance 50% of price and EBITDA impact negligible in 2014
- Geographic focus - brand dependent but for
- Full-service London, Miami, SF, HK, LA, Brand dependent
- Select: Urban
- Resorts: Mexico and Caribbean in NA with Playa Thailand and China
- Does the EBITDA growth of +14% in Q1 2014 imply a high single digit EBITDA growth for remainder of 2014 -- when compared to the slide during the analyst meeting where the compound annual growth rate in EBITDA for 2014-2016 was illustrated at mid-teens rate? No, should not read into that slide...nor does the slide imply any EBITDA growth rate guidance for the remainder of 2014.
- $7.5B of asset value of owned hotels - include leased and/or JV assets (investor presentation slide page 88) does not include JVs nor leased hotels, excluded by design due to valuation differences.
- Margin improvement and flow through sustainable - strong rate growth in Q1 had significant impact. Feel good but benefit costs will rise.
- Asset recycling what does the market look like for full vs. select service?
- Buying: looking for unbranded or conversion opportunities in targeted markets. Deals delayed or deferred are now coming to market, so overall volume very healthy.
- Sales side: process take 6-9 months to execute
- No select service properties currently listed for sale, view as opportunity to expand institutional ownership - i.e., recent sale to RLJ.
- Deployment back into select service - focused on urban developments
- Group strategy and room allocation between group/transient; Group 40%-45% of total, group was very strong in Q1 and extremely encouraging for pace and future, as progress expect to see more rate movement, increasing opportunity of Hyatt Regency convention network. Gov't business today <2% of business but in Q1 segment was up, so after declining occupancy and rate, finally turned higher.
- When prefer to sell vs. buy additional hotels - will be active on both sides through the cycle. From asset and earnings perspective with both buys/sells then match funded, but looking to improve quality, plenty of time remaining in the cycle.
- Any value to lightening up "owned" EBITDA as cycle progresses - mix will change over time.
- What is 2014 pace tracking vs. last quarter - increased 200 bps, similar to one year ago.
- Association business steady
- Corporate increasing and technology (hardware, software, and consulting), manufacturing, pharma, insurance, and other financial services are very strong.