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Continue to Tread Carefully in Consumer Staples | $XLP

Takeaway: The sector is loaded with a premium valuation (P/E of 19.6x).

Continue to Tread Carefully in Consumer Staples | $XLP - brazil

 

Consumer Staples was flat week-over-week versus the broader market (SPX) up 1.2%. XLP is up 3.0% year-to-date versus the SPX at 2.8%. 

 

Our Consumer Staples team continues 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 19.6x).
  • Less sector Yield Chasing as Fed continues its tapering program.
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 34.1 versus 34.9 in the prior week.

Continue to Tread Carefully in Consumer Staples | $XLP - 4

 

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Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 27, 2014 by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Hedgeye's Consumer Staples sector @HedgeyeStaples.

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Protein Focus! M&A Activity Heating Up in the Food Business

The Hedgeye Restaurants team posted a note earlier today on the impact of M&A deals between Hillshire Brands' (HSH), Pilgrim's Pride (PPC), and Pinnacle Foods (PF), which we've included below as it relates to the food industry.

 

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BOBE: M&A Activity Heating Up in the Food Business

 

Following Hillshire Brands’ (HSH) recent agreement to acquire Pinnacle Foods (PF) for about $4.3 billion, Pilgrim’s Pride (PPC) announced its proposal this morning to acquire HSH for $45.00 in cash.  The transaction, which is valued at $6.4 billion, places a 25% premium on the volume weighted average price of HSH shares over the 10 trading days following the announcement of the PF transaction.  In the deal, PPC would pay 12.5x TTM EBITDA for HSH.  According to the release, the proposal has the “unanimous support” of both Pilgrim’s and JBS SA’s Board of Directors.  PPC will finance the acquisition with a mix of existing cash and new debt financing.

 

Merging with HSH will allow PPC to expand its business in branded foods, an area that only makes up 20% of PPC’s current sales.  According to the release, the goal of the transaction is to create “a leading branded, protein-focused company with strong, consistent earnings and complementary competencies.”  HSH’s current brand portfolio consists of leading brands in core categories, including Jimmy Dean, Hillshire Farm, Ball Park, State Fair, Aidells and others.

 

This deal was of particular interest to us because it highlights the surging demand for packaged and prepared foods companies.  This ties directly into our Long BOBE Best Idea thesis, which calls for the spinoff or sale of BEF Foods that activist Sandell Asset Management first suggested.

 

In the case of BOBE, we see tremendous upside value in separating the foods business from the restaurant business and believe the company could spinoff BEF Foods at a substantial premium to its current value.

 

The food processing business is linked to the founding of the company and, to be clear, we fully appreciate the desire to maintain tradition within a business.  With that being said, we believe this connection is severely limiting the potential of the company.  Other than the historic connection between BEF Foods and Bob Evans Restaurants, there are very few, if any, synergies between the businesses.  We believe each business would benefit greatly from laser-focused, uncompromised operating strategies.  A separation would allow BOBE to focus on efficiently running its restaurants, while enabling BEF Foods to increase sales in the foodservice industry and further diversify its customer base.  As a separate entity, we believe BEF Foods would have an enormous runway for growth.

 

We maintain that such a transaction, in conjunction with significant SG&A cuts at BOBE, would result in substantial shareholder value creation for shareholders.

 

Protein Focus! M&A Activity Heating Up in the Food Business - bobe

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst



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BOBE: M&A Activity Heating Up in the Food Business

Following Hillshire Brands’ (HSH) recent agreement to acquire Pinnacle Foods (PF) for about $4.3 billion, Pilgrim’s Pride (PPC) announced its proposal this morning to acquire HSH for $45.00 in cash.  The transaction, which is valued at $6.4 billion, places a 25% premium on the volume weighted average price of HSH shares over the 10 trading days following the announcement of the PF transaction.  In the deal, PPC would pay 12.5x TTM EBITDA for HSH.  According to the release, the proposal has the “unanimous support” of both Pilgrim’s and JBS SA’s Board of Directors.  PPC will finance the acquisition with a mix of existing cash and new debt financing.

 

Merging with HSH will allow PPC to expand its business in branded foods, an area that only makes up 20% of PPC’s current sales.  According to the release, the goal of the transaction is to create “a leading branded, protein-focused company with strong, consistent earnings and complementary competencies.”  HSH’s current brand portfolio consists of leading brands in core categories, including Jimmy Dean, Hillshire Farm, Ball Park, State Fair, Aidells and others.

 

This deal was of particular interest to us because it highlights the surging demand for packaged and prepared foods companies.  This ties directly into our Long BOBE Best Idea thesis, which calls for the spinoff or sale of BEF Foods that activist Sandell Asset Management first suggested.

 

In the case of BOBE, we see tremendous upside value in separating the foods business from the restaurant business and believe the company could spinoff BEF Foods at a substantial premium to its current value.

 

The food processing business is linked to the founding of the company and, to be clear, we fully appreciate the desire to maintain tradition within a business.  With that being said, we believe this connection is severely limiting the potential of the company.  Other than the historic connection between BEF Foods and Bob Evans Restaurants, there are very few, if any, synergies between the businesses.  We believe each business would benefit greatly from laser-focused, uncompromised operating strategies.  A separation would allow BOBE to focus on efficiently running its restaurants, while enabling BEF Foods to increase sales in the foodservice industry and further diversify its customer base.  As a separate entity, we believe BEF Foods would have an enormous runway for growth.

 

We maintain that such a transaction, in conjunction with significant SG&A cuts at BOBE, would result in substantial shareholder value creation for shareholders.

 

We strongly encourage you to review our Best Idea Presentation, in which we run through the bull case on BOBE.

 

BOBE: M&A Activity Heating Up in the Food Business - chart1

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR

Takeaway: The market still keys off Case Shiller even though it's months behind Corelogic and walks you off the cliff at inflection points.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Compendium 052714

 

Today's Focus: March S&P/Case-Shiller Home Price Report (& FHFA)

S&P released its monthly S&P/Case-Shiller home price report for March earlier this morning. It's important to remember that S&P/Case-Shiller is a rolling 3-month average repeat sales index, meaning that you're actually seeing the Jan/Feb/Mar timeframe represented equally in this data point. So, in essence, you're looking at February data.

 

By contrast, we've already seen April data from Corelogic. If you were to analyze Corelogic on a rolling 3-month basis and synchronize it with Case-Shiller you'd find a near perfect correlation. What this means is that Case-Shiller is a very lagging indicator, but it remains important if only because the market still takes its cues from the Case Shiller series (despite the shortcoming).  

 

In a nutshell, here's what Case Shiller had to say about home prices:

 

The non-seasonally adjusted Case-Shiller HPI slowed -50bps sequentially on YoY basis (+12.4% y/y in March vs +12.9% y/y in Feb) and continues to track Pending home sales nicely on an 18 month lag.  

 

Broken down by constituent cities, the upside pull in prices from the San Fran + Los Angeles heavyweights over the past year remains apparent (2nd chart below).  Of course, the drag goes both ways, and price growth is currently decelerating across LA, San Fran, and Las Vegas - and the comps get increasingly harder from here. 

 

Separately, we also received the FHFA home price data this morning. FHFA is the regulator that oversees Fannie Mae and Freddie Mac and it uses Fannie/Freddie data on conforming loans to compile a more middle-of-the-road home price index. The FHFA data showed the same trend of decelerating growth on a year-over-year basis. Specifically, FHFA showed March home prices were higher by 6.5% y/y vs +6.9% y/y in February.

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller vs Pending Home Sales 18Mo Lag

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - 20 City Scatterplot Index Weight vs TTM price growth

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller NSA YoY TTM

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller NSA Index Level LT

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - FHFA NSA YoY

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller NSA MoM TTM 

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

Joshua Steiner, CFA

 

Christian B. Drake


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