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May 30, 2014

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BULLISH TRENDS

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BEARISH TRENDS

 

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LEISURE LETTER (05/30/2014)

Tickers: H, RCL

EVENTS TO WATCH

  • Monday June 2: Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 
  • Monday June 2 - Tuesday June 3: Midwest Gaming Summit, Rosemount, IL
  • Tuesday June 3 - Thursday June 5: REITWeek, New York, NY
  • Wednesday June 4 - Thursday June 5: Russian Gaming Week 2014
  • Thursday June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Tuesday June 10 - Thursday June 12: Bally Systems User Conference
    Mohegan Sun

COMPANY NEWS

Genting Singapore - Genting Bhd has said the group’s 51.9%-owned Genting Singapore Plc will partner unnamed “Japanese institutions” to bid for an integrated casino resort in Japan.

TAKEAWAY: The only question now is how small of a local minority partner interest can the foreign companies get away with.

  

Insider Selling:

H – Insider H. Charles Floyd sold 34,996 shares on Tuesday, May 27th at an average price of $59.11. Following the completion of the sale, Mr. Floyd directly owns 156,615 shares.

 

RCL – CEO Michael W. Bayley sold 19,206 shares Tuesday, May 27th at an average price of $54.08. Following the sale, the chief executive officer now directly owns 53,489 shares.

TAKEAWAY: Continued insider selling in hotel stocks despite strong trends. Gaming insiders remain generally on the buy side.

INDUSTRY NEWS

DPJ nods casino bill talks: but only for lower house (GGR Asia)

Japan’s main opposition party, the Democratic Party of Japan (DPJ), has reached an agreement with the governing Liberal Democratic Party of Japan (LDP) to discuss during the current session of the Diet the issue of legalising casino resorts.  The discussion will only be at Cabinet Committee level in the lower house of Japan’s parliament – known as the House of Representatives.  Mike Tanji, executive advisor for Tokyo-based Gaming Capital Management Inc, said, “Even if that happens, because of the time constraint, the passage of the bill in the Diet – including through the upper house – will likely take place at the Extraordinary Session this fall.”  Tanji added that a reported split in the Japan Restoration Party, which had given 100% backing to an IR bill was unlikely in itself to damage the prospects for the statute.

TAKEAWAY: Now hype will build for Fall 2014

 

Dragon Boat Festival Delays - (Macau Daily Times) The Sports Development Board (ID) has decided to shorten the Asian Dragon Boat Championships program, and to postpone some races until June 7 and 8, as a mark of mourning for Ma Man-kei. ID president José Tavares has also said that the International Invitational Standard Dragon Boat Races will be cancelled.  

TAKEAWAY:  No impact on GGR

 

Macau Casino Development (GGR Asia) “After 2016 or 2017, there will be a seven to eight-year period without new properties,” Secretary Francis Tam said. That would allow for some economic consolidation and for society to adapt to the new stage of development.

TAKEAWAY: Not an unreasonable statement given the lack of undeveloped land and huge capacity increases in 2015-2017.

 

Macau Tourism - The Easter long-weekend in April brought the total number of visitors on package tours to 957,000 for the month, +23% YoY

TAKEAWAY: A positive data point for the Mass segment.

MACRO

Chinese 'mini' stimulus (Bloomberg) 

China's often-discussed "mini" stimulus is beginning to become sizable.  Central government measures announced at the beginning of April including faster railway spending and tax breaks have multiplied. 

Takeaway: How many minis does it take to make a major?


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


BNNY: Still A Short, But On A Leash

While we are keeping BNNY on the Hedgeye Best Idea list as a short, it will be on a tight leash.  Annie’s is a strong brand and we believe it will make a nice acquisition for a bigger food company someday.

 

Annie’s reported a disastrous quarter last night and we still don’t believe the company is on solid financial footing.  While the balance sheet and cash flows are strong, the company continues to struggle to manage its high growth business.

 

Last night, BNNY missed on sales and margins, but was able to lessen the blow by aggressively cutting SG&A.  To be clear, a growth company aggressively cutting SG&A is a sign of weakness, not strength, and we believe management lacks the infrastructure needed to grow the business.  As expected, guidance for FY15 was well below Street expectations on both the top and bottom lines.

 

There are numerous ongoing issues the company faces:

  1. It has been unable to deal with the significant inflation in organic wheat.
  2. In an attempt to foster top line growth, management has forced innovation by entering new categories leading to significant inventory obsolescence and lower product mix.
  3. Management has not invested in the human capital needed to manage the business.
  4. Increased trade spending in a competitive retail environment.
  5. Insufficient internal controls.
  6. Increased competition.

 

Management guided to sales growth of 18-20% (including the impact of the Joplin plant acquisition) versus the Street’s 18%.  However, we’d argue that the Street had not reflected the acquisition in their numbers, so management actually guided down expectations.  Part of the slowing top line (3-4%) is coming from a planned system-wide inventory reduction from UNFI in 1Q15.  Excluding the impact of non-core contract manufacturing revenues related to the Joplin acquisition, adjusted net sales of Annie’s branded products are expected to grow in the range of 14-16% in FY15.  In FY14, consumption of Annie’s grew 21% and 20% in 4Q14.

 

BNNY continues to have zero leverage in its business model.  In FY15, gross margin is expected to be “comparable” to FY14, while SG&A is expected to be up in part due to higher stock-based compensation and normalizing incentive compensation expense.  Given how little visibility management has, the lack of internal controls, and the investment needed to manage the business, we’d surmise that current FY15 guidance is highly suspect.

 

BNNY: Still A Short, But On A Leash - 11

 

BNNY: Still A Short, But On A Leash - 22

 

BNNY: Still A Short, But On A Leash - 33

 

Call with any questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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BNNY: Still A Short, But On A Leash

While we are keeping BNNY on the Hedgeye Best Idea list as a short, it will be on a tight leash.  Annie’s is a strong brand and we believe it will make a nice acquisition for a bigger food company someday.


Annie’s reported a disastrous quarter last night and we still don’t believe the company is on solid financial footing.  While the balance sheet and cash flows are strong, the company continues to struggle to manage its high growth business.

 

Last night, BNNY missed on sales and margins, but was able to lessen the blow by aggressively cutting SG&A.  To be clear, a growth company aggressively cutting SG&A is a sign of weakness, not strength, and we believe management lacks the infrastructure needed to grow the business.  As expected, guidance for FY15 was well below Street expectations on both the top and bottom lines.

 

There are numerous ongoing issues the company faces:

  1. It has been unable to deal with the significant inflation in organic wheat.
  2. In an attempt to foster top line growth, management has forced innovation by entering new categories leading to significant inventory obsolescence and lower product mix.
  3. Management has not invested in the human capital needed to manage the business.
  4. Increased trade spending in a competitive retail environment.
  5. Insufficient internal controls.
  6. Increased competition.

 

Management guided to sales growth of 18-20% (including the impact of the Joplin plant acquisition) versus the Street’s 18%.  However, we’d argue that the Street had not reflected the acquisition in their numbers, so management actually guided down expectations.  Part of the slowing top line (3-4%) is coming from a planned system-wide inventory reduction from UNFI in 1Q15.  Excluding the impact of non-core contract manufacturing revenues related to the Joplin acquisition, adjusted net sales of Annie’s branded products are expected to grow in the range of 14-16% in FY15.  In FY14, consumption of Annie’s grew 21% and 20% in 4Q14.

 

BNNY continues to have zero leverage in its business model.  In FY15, gross margin is expected to be “comparable” to FY14, while SG&A is expected to be up in part due to higher stock-based compensation and normalizing incentive compensation expense.  Given how little visibility management has, the lack of internal controls, and the investment needed to manage the business, we’d surmise that current FY15 guidance is highly suspect.

 

BNNY: Still A Short, But On A Leash - 11

 

BNNY: Still A Short, But On A Leash - 22

 

BNNY: Still A Short, But On A Leash - 33

 

Call with any questions.

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Polarizing

This note was originally published at 8am on May 16, 2014 for Hedgeye subscribers.

“Only the wisest and stupidest of men never change.”

  -Confucius

 

I’ve been on vacation for most of the last two weeks.  My first child is projected to be born on June 1st , so I figured it was best to take vacation now.   This was based on the sage advice from some of the more seasoned fathers at Hedgeye.

 

I’m not always good at unplugging on vacation, but this time I did a decent job. As I was getting caught up last night, the most interesting article I read was from Business Insider.  It seems while I was gone they anointed Hedgeye the most polarizing firm in finance! 

 

Polarizing - polarizing

 

I have to admit, even though Business Insider’s journalistic standards aren’t the highest, I thought that was kind of cool.   When we started the firm more than six years ago, our sole intention was to shake things up.  And it seems we have done so.  So far, at least, mission accomplished.

 

Back to the Global Macro Grind...

 

So, the big question now that I’m back in the proverbial saddle is: what did I miss? Based on the return of the SPY, I’d say not too much.  When I left for vacation on May 5th, the S&P 500 closed at 1,884.2. Yesterday it closed at 1870.85.  For those that don’t have their HP-12C handy, that is a negative return of roughly -0.7%.  Nothing to write home about to be sure. 

 

Thankfully, my colleagues were keeping busy despite the lackluster performance in U.S. equities.  Over the last two weeks on the idea side, we added two longs to our Best Idea list: Bob Evans Farms (BOBE) and Och-Ziff (OZM).  Both ideas, though certainly very different, are very compelling.

 

Bob Evans Farms, as many of you may know, is a smallish cap restaurant company.   Although our Restaurant Sector Head, the sage Howard Penney, has been more cautious than not on his sector, BOBE is one company he likes on the long side.  

 

According to Howard the thesis is as follows:

 

  • STODGY, OLD COMPANY: As you know, we are big supporters of change at DRI and feel that BOBE is in a very similar situation. BOBE is a stodgy, old company that has flown under the radar for far too long. It has a history of mismanagement evidenced by flawed strategic rationale, excessively bloated cost structures and severe underperformance relative to peers. Its poor operating performance presents a tremendous opportunity.
  • UNLOCKING SIGNIFICANT SHAREHOLDER VALUE: We believe Sandell has identified significant, largely feasible, opportunities to enhance shareholder value. In our view, the opportunities are endless. More particularly, we see tremendous upside value in separating the foods business from the restaurant business, transitioning to an asset light model to capitalize on its vast real estate holdings, and attacking the middle of the P&L.
  • THE OTHER SIDE OF THE TRADE: We have a ton of respect for Sandell and the work they’ve done. In fact, we believe that, over time, they have uncovered far more than they originally set out to. As a result, there is now an opportunity for them to capture bountiful, low hanging fruit that will immediately impact the company for the better. We believe in Sandell’s resolve and while the street is seemingly betting against them, we’ll gladly take the other side of the trade.

 

I’m not going to steal all of Howard’s thunder, but if you’d like more details, please email sales@hedgeye.com.  Incidentally, another of Howard’s top ideas, Darden (DRI) announced this morning that they are selling one of their divisions, Red Lobster, to Golden Gate Capital for $2.1 billion.  Oh snap!

 

More broadly though, and other than a few alpha generating idea, those of us that vacationed for the first half of May didn’t miss a whole lot from return perspective.  In the Chart of the Day below, I’ve highlighted our daily U.S. quant screen and for the month-to-date the worst performing SP500 sector is the Utilities, which is down 2.78%.  Meanwhile, the best performing sector is Materials, which is up +0.13%. 

 

On some level, that is actually new.  Specifically, in May the worst performing sector is actually the best performing sector on the year.  Currently, Utilities are up an impressive 10.6% for the year-to-date.  Who would’ve thunk it?

 

Switching gears, on the global macro front this morning , the United Nations released a 37-page report on the human rights situation in the eastern Ukraine.  On a serious note, that is actually not news, but does exemplify the ineffectiveness of the U.N. and its ability to deal with Vladimir Putin and the gong show in the Ukraine.   But, at negative -13.4% on the year, the Russian stock market seems to be dealing with him appropriately. 

 

Meanwhile, on the bond front, the bears seemingly just won’t give up.  According to Bloomberg, the ProShares Ultra 20+ Year Treasury ETF (TBT) has seen inflows of 21.6% this year.   This comes despite the ETF falling almost 21.6%.  In addition, there are 1.12MM short contracts of treasury futures on the Chicago Board of Trade, which compares to the five year average of 713K. Further, a recent survey of economists expects the 10-year yields to rise 75 basis points by year end.  Didn’t know what consensus in Treasury land was, now you know! 

 

And as our nemesis John Maynard Keynes famously said:

 

“Markets can remain irrational longer than you can remain solvent.”

 

Indeed.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.49%-2.61%

SPX 1861-1882

RUT 1086-1112

VIX 12.14-14.52

USD 79.11-80.26

Gold 1281-1315 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

 

Polarizing - DQ 051514


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 30, 2014


As we look at today's setup for the S&P 500, the range is 31 points or 1.30% downside to 1895 and 0.31% upside to 1926.                                                 

                                                                              

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • YIELD CURVE: 2.10 from 2.09
  • VIX closed at 11.57 1 day percent change of -0.94%

 

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 8:30am: Personal Income, Apr., est. 0.3% (prior 0.5%)
  • 8:30am: Personal Spending, Apr., est. 0.2% (prior 0.9%)
  • 8:30am: Fed’s Pianalto speaks on 2nd day of conference entitled, “Inflation, Monetary Policy and the Public”
  • 9am: ISM Milwaukee, May, est. 52 (prior 47.26)
  • 9:45am: Chicago PMI, May, est. 61 (prior 63)
  • 9:55am: U. Mich. Confidence, May final, est. 82.5 (prior 81.8)
  • 12:30pm: Loretta Mester, who takes office as Cleveland Fed president on June 1, speaks at conference
  • 1pm: Baker Hughes rig count
  • 2pm: Fed’s Lacker speaks at Stanford
  • 5pm: Fed’s Williams, Plosser speak at Stanford

 

GOVERNMENT:

    • President Obama attends hurricane preparedness mtg at FEMA
    • House in session; Senate meets in pro forma session
    • U.S., South Korea, Japan defense heads meet during Asian Security Summit in Singapore
    • House Democrats’ campaign chairman calls on Shinseki to resign
    • U.S. ELECTION WRAP: Shinseki Election Politics; Democrats’ Ads

 

WHAT TO WATCH:

  • Citigroup Mexico probe focuses on changes to loans before fraud
  • Apple must face e-book price-fixing trial before appealing
  • U.S. said to seek >$10b settlement from BNP Paribas
  • CA Technologies accused of $100m U.S. contract fraud
  • Microsoft, Salesforce unveil cloud-computing partnership
  • Google moves to comply with EU ruling on right to be forgotten
  • Manhattan condo prices fall as buyers push back in cooler mkt
  • High-frequency perks said focus of CFTC review cited by Virtu
  • GM seeks N.Y. court for recall suits as more deaths are claimed
  • Musk says SpaceX reusable capsule could ferry astronauts by 2016
  • Siemens to remove 11,600 positions as company reduces costs
  • France may impose brandless cigarette packaging: Figaro
  • U.S. Jobs, ECB, BOE, Obama in Europe: Wk Ahead May 31-June 7

 

EARNINGS:

    • Ann Inc. (ANN) 7:31am, $0.31
    • Big Lots (BIG) 6am, $0.44

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Iron Ore Heads for Record Losing Run as Forrest Sees Risk of $80
  • WTI Set for Monthly Gain as Cushing Supplies Drop; Brent Steady
  • Food Replacing Oil as China M&A Commodity of Choice: Commodities
  • India Gold Import Curbs Said to Continue at Least Until Budget
  • Lead and Zinc Fall as Trading Slows Down Before Chinese Holiday
  • Wheat Heads for Biggest Monthly Loss Since 2011 on U.S. Outlook
  • Robusta Coffee Drops as Liffe Stockpiles Climb; Cocoa Advances
  • Steel Rebar in Shanghai Ends at Record Low After Iron Ore Drops
  • China’s Pork Prices Seen Declining as Farmers Buy More Piglets
  • Lonmin Seen Weakest in Holdout Against 18-Week Platinum Strike
  • Diesel Profit Dropping as Indonesia Ban Shutters Mines: Energy
  • CFTC Should Reconsider Gensler Overseas Advisory, Wetjen Says
  • Libyan Oil Output Slumps Yet Further, With No Sign of Recovery
  • Gold Set for Monthly Drop as U.S. to Ukraine Curbs Haven Demand

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 40

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


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