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LO and RAI Off To The Races, Again Takeout Rumors

The tobacco rumor mill stirred up late yesterday with the London Times reporting that BAT could buy its remaining share of RAI (58%) and/or that RAI is looking to buy LO.  The Times mentioned that BAT sought out Deutsche Bank as an advisor for a possible deal; we’ll note here that these are not “new” rumors as BAT has been exploring potential deals since last year, and since mid-March of this year the rumor mill on a RAI-LO deal swirled heavily. 

 

Two weeks ago this same rumor “excitement” contributed to a +8.5% w/w move in LO’s stock price, however last week was apparently “rumor off” week and the stock was basically flat.

 

We maintain that this rumor flow continues to be a great tailwind for our Best Idea Long Call Lorillard that we presented on March 4 of this year, with a longer term price target of $80/share.

 

We maintain that a hypothetical deal (especially an imminent one) between RAI and LO 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. Underlining our Best Idea Long Call on Lorillard in early March 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 also think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling some speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal. 

 

Below we’ve outlined our TREND duration over the intermediate term (3 month); appreciation to our $80/share target would be +35% higher than today’s price.

 

LO and RAI Off To The Races, Again Takeout Rumors - lo lo new

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst



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MACAU: SOLID 2ND WEEK CONSIDERING END OF GOLDEN WEEK

No change to our full month forecast of +20% YoY growth following the release of this past week’s table revenues.  Daily table revenues (DTR) averaged HK$1,001 million this past week, up 25% YoY.  As expected, DTR softened sequentially following the end of the Golden Week holiday but was up nicely YoY.  Month to date DTR are tracking up 16%.  Fears of a significant VIP slowdown continue to be proven unfounded. 

 

In terms of market share, LVS and MPEL are tracking below recent trend, consistent with April’s results.  We believe MPEL continues to be impacted by some junket liquidity issues more than the other casino operators.  WYNN and MGM are tracking above (go peninsula!).  WYNN remains our favorite operator given the potential for market share gains, particularly in VIP.  

 

MACAU: SOLID 2ND WEEK CONSIDERING END OF GOLDEN WEEK - macau1

 

MACAU: SOLID 2ND WEEK CONSIDERING END OF GOLDEN WEEK - macau2


Fund Flows, Refreshed

Takeaway: Last week's data reveals significant deceleration in equity fund flows, capping off a week of less-than-stellar performance.

Editor's Note: This research note was originally sent to subscribers on May 8, 2014 by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan & Josh on Twitter @HedgeyeJC and @HedgeyeFIG.  

Fund Flows, Refreshed - OB IB046 1pay04 G 20100405173327  

ICI Mutual Fund Data & ETF Money Flow

 

In the most recent 5 day period, absolute money flow into both equity and fixed income mutual funds fell week-to-week, with domestic equity funds booking the biggest outflow all year. 

 

Total equity mutual fund flows had their biggest redemptions year-to-date with over $3.8 billion being yanked from stock funds with the leading culprit the U.S. domestic stock category. Of the $3.8 billion that flowed out of all equity mutual funds during the most recent 5 day period ending April 30th, $3.9 billion came out from domestic equity funds which was saved by a slight $104 million inflow from international stock funds. This outperformance from foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.5 billion per week thus far this year in addition to the $2.6 billion inflow averaged per week last year in 2013 versus domestic fund trends averaging an inflow of just $932 million thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $3.5 billion, a slight improvement from the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flow also decelerated on a w/w basis, although managing to leg out a slight inflow for the week. For the five day period ending April 30th, $931 million flowed into all fixed income funds, as opposed to last week's much stronger $2.3 billion inflow. The deterioration of bond fund inflow this week was the result of only $602 million that flowed into taxable products and $329 million that flowed into tax-free or municipal products. The inflow into taxable products this week was the 12th consecutive week of positive flow and the inflow into municipal or tax-free products was the 16th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.8 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

Exchange traded funds (ETFs) had a strong showing this week, with a notable weekly subscription for equity ETFs, which experienced an inflow of $4.0 billion. The previous week saw only $193 million inflow into stock ETFs. Bond ETFs fell slightly this week, still, the $818 million inflow was only slightly below the previous week's $1.2 billion inflow. The 2014 weekly averages are now a $920 million weekly inflow for equity ETFs and a $896 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.6 billion spread for the week ($148 million of total equity inflow versus the $1.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.8 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. ETF  information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Fund Flows, Refreshed - 1.3 large

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

Fund Flows, Refreshed - 2

 

Fund Flows, Refreshed - 3

 

Fund Flows, Refreshed - 4

 

Fund Flows, Refreshed - 5

 

Fund Flows, Refreshed - 6

 

Most Recent 12 Week Flow Within Equity & Fixed Income Exchange Traded Funds

 

Fund Flows, Refreshed - 7

 

Fund Flows, Refreshed - 8

 

Net Results

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.6 billion spread for the week ($148 million of total equity inflow versus the $1.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.8 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Fund Flows, Refreshed - 9.2 

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Monday Mashup: BOBE Replay, JACK Reports on Tuesday

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 1

Recent Notes

05/05/14  Monday Mashup: YUM, BOBE and More

05/08/14  Video: Conversation with YUM CFO Pat Grismer

05/12/14  BLMN: Still Bearish

 

*BOBE Best Ideas Call

Events This Week

05/14/14  KONA Annual General Meeting

05/14/14  DFRG Annual General Meeting

05/15/14  JACK Earnings Call 11:30am EST

05/15/14  BKW Annual General Meeting 9:00am EST

05/15/14  PBPB Annual General Meeting 9:00am EST

05/15/14  CMG Annual General Meeting

05/15/14  YUM Investor & Analyst Conference 12:30pm EST

05/16/14  MCD Investor Meeting 11:00am EST

Chart of the Day

We snagged this from our recent slide deck running through the bull case on BOBE.  The chart pretty much says it all – therein lies a major opportunity.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 2

Recent News Flow

Monday, May 5th

  • CBRL upgraded to market perform at Raymond James.
  • CMG upgraded to outperform at Raymond James with a $560 PT.
  • DIN Applebee’s unveiled four new dishes (including the New Grilled Vidalia Onion Sirloin), a refreshed beverage line and under 600 calorie lunch combos. 

Tuesday, May 6th

  • BJRI announced its newest restaurant opening in Orlando, FL.

Wednesday, May 7th

  • THI declared a $0.32 dividend payable on June 5,2014 to shareholders as of May 22, 2014.
  • CMG upgraded to buy at Longbow Research with a $641 PT.
  • PZZA upgraded to buy at Feltl and Company.
  • PNRA upgraded to buy at Bank of America Merrill Lynch with a $185 PT.

Thursday, May 8th

  • MCD reported +1.2% global comps in April.  The U.S. business was flat, despite a free coffee promotion and the launch of the Bacon Clubhouse.  APMEA (+2.9%) led the way, while Europe (+0.3) was up modestly.
  • DRI Starboard sent a letter to Darden’s Board urging them to immediately provide notice of a Special Meeting.  In the letter, Starboard called the Board’s “casual and dismissive attitude toward the Special Meeting [disturbing].”
  • SONC upgraded to outperform at Oppenheimer with a $25 PT.

Friday, May 9th

  • BWLD initiated underperform at Buckingham with a $116 PT.

U.S. Macro Consumption

The XLY (-0.6%) underperformed the SPX (-0.1%) last week.  Both casual dining and quick service stocks underperformed the broader XLY index.  The Hedgeye U.S. Consumption Model turned bullish, flashing green on 8 out of 12 metrics.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 3

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 4

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 5

XLY Quantitative Setup

From a quantitative perspective, the sector remains bearish on an intermediate-term TREND duration.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 6

Casual Dining Restaurants

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 7

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 8

Quick Service Restaurants

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Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 10

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


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