U.S. Senator Committee on E-Cigs Lobs Harsh Criticism Yet Science Inconclusive

Yesterday a Senate Commerce, Science and Transportation Committee met to discuss e-cigarettes and lobbed harsh criticism on marketing and promotional practices. Craig Weiss (NJOY President and CEO) and Jason Healy (blu President) were the two witnesses representing e-cigarette manufacturers, and more specifically their respective companies. (A video of the hearing can be found here)


We had the opportunity to speak with Craig Weiss about NJOY and the industry on 10/31/13 (see his presentation to Hedgeye)


Key Take-Aways From the Hearing:

  • The Committee included Senators Jay Rockefeller (D-W.VA), Barbara Boxer (D-CA), Richard Blumenthal (D-CT), Amy Klobuchar (D-MN), Bill Nelson (D-FL), Dick Durbin (D-IL), and Ed Markey (D-MA)
  • The Committee is tasked with consumer protection and issued numerous examples of how e-cigarette manufacturers are marketing to youth (under 18 years of age)
  • The Committee cited using celebrity spokespersons for marketing such as Jenny McCarthy and Stephen Dorff for blu e-cigs to cartoon caricatures of bazooka bubble gum for flavors and e-juice as evidence of manufacturers creating a lure for youth to participate in the category
  • The Committee cited a recent CDC report showing that the use of electronic cigarettes by middle school and high school students doubled from 2011 to 2012 and a study from RTI International and the Florida Department of Public Health published in the Journal of Pediatrics that showed exposure to electronic cigarette advertising jumped 256% from 2011 to 2013 among adolescents aged 12 to 17
  • Both Healy and Weiss were firm that no minor should be using any nicotine containing products, but they did not agree with the Committee to stop marketing on TV, Film, Print, Online, but did agree to stop the use of caricatures and cartoons in their advertising. They both also stressed that they market only to adults (a position the Committee found highly dubious) and Healy supported the claim against marketing to minors in stating that blu’s average age of consumer is 51 years old
  • It’s no coincidence that the timing of the hearing falls shortly before the conclusion of the FDA’s comment period on its proposed regulations for e-cigarettes (July 9th)
  • The FDA’s proposed regulations of e-cigarettes (on 4/24/14) were met by the industry with excitement as they were deemed “light”: no ban on marketing, flavors, or online sales
  • We suspect that if the these proposals are passed the rule stands to benefit Big Tobacco’s deep marketing pockets (LO - blu; MO - MarkTen; RAI - Vuse) and companies with significant private investment like NJOY
  • While we would not be surprised to see the FDA curb marketing, flavors, and online sales in the future, we expect the FDA to remain grounded in a science based approach in evaluating the e-cig category
  • We see evidence of FDA’s flexibility in Mitch Zeller, the head of the FDA’s Center for Tobacco Control, who continues to say: “We have to have an open mind on the potential for these emerging technologies to benefit public health.”
  • To date we expect the FDA to conclude that the science is inconclusive, given both the newness and ever-changing aspect of the technology. This should equated to limited restrictions and therefore be supportive of the industry

Statements from the Committee were highly impassioned, with perhaps the harshest words coming from Senator Rockefeller in addressing Weiss and Healy: “I’m ashamed of you. I don’t know how you go to sleep at night. I don’t know what gets you to work in the morning except the color green of dollars. You are what is wrong with this country.”


Our preferred tobacco name remains Lorillard (LO), owner of blu e-cigarettes, which has the leading market share in the U.S.  Email or call me if you’d like to discuss our investment thesis on LO. 


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Cartoon of the Day: Steady As She Goes

The Fed cuts its US GDP growth forecast from 3% to 2.1% for 2014, and Janet Yellen sounds like the captain of a sinking ship.


Cartoon of the Day: Steady As She Goes - Fed cartoon 6.19.2014




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DRI: The Big Miss

Darden is due to report 4QF14 EPS tomorrow before the open and we’re confident that the news coming out of the quarter will be nothing short of a disaster.


With that in mind, we’d like to offer up some key thoughts:

  1. The 4QF14 consensus EPS estimate of $0.94 is $0.05 to $0.10 too high.
  2. The current FY15 consensus EPS estimate of $2.54 is $0.30 to $0.40 too high.
  3. The earnings implications are that the company will be unable to sustain its $2.20 dividend in FY15.
  4. There will be little, if any, legitimate visibility in regards to the attempted turnaround of the Olive Garden.
  5. Management will give guidance that will be too optimistic.


We suspect that very few analysts have updated the earnings power of the company to properly reflect the recent sale of Red Lobster to Golden Gate Capital for $2.1 billion ($1.6 billion net).  Additionally, we believe that analysts are currently too optimistic about current trends and what the future holds for FY15.  As we see it, changes to the Street’s models should include lower revenues, continued restaurant margin erosion, modest G&A reductions, lower interest expense and a lower share count from the use of proceeds.


As you can see in the charts below, the Street generally believes that Olive Garden is fixed and should see improved trends next quarter.  We’d note, however, that this has been the case for the last five years.  As such, it has become typical to hear something along the lines of “Don’t worry; the turnaround at Olive Garden is just one quarter away!”


We’ve repeatedly stated our view that current management headlines the bear case for DRI as they continue to destroy shareholder value.  Their actions during this past quarter simply reinforce our belief.  While there is a core group of shareholders that are working diligently to correct the issues, there is little that can be done between now and the annual meeting.


In the short-run, we have little reason to believe the stock will outperform.  Further out, we believe Darden’s cavalier attitude toward shareholders will result in wholesale changes at the company when the annual meeting comes around later this year.


DRI: The Big Miss - chart2


DRI: The Big Miss - chart1


Call with questions.


Howard Penney

Managing Director


Fred Masotta



The trend in the high frequency labor market data remains solid and a supportive factor in the static policy course reiterated by the FOMC again yesterday  - although the expectation of lower growth, higher inflation and higher rates seems internally/mandate inconsistent.   


Of course, there’s two inputs into the net Hires equation (hirings less firings) and with employment still middling at the ~200K/mo level in the face of ongoing improvement in the claims data, we continue to largely fire on one cylinder. 


We’ve profiled the positive, employment & wage inflationary dynamics percolating under the hood a number of times and with Job Openings (JOLTS) and Small Business Jobs-Hard-to-Fill making higher highs, extra-large corporations leading the employment charge, and short-term employed figures strong, the “less-slack-than-there-appears” argument will continue to bubble. 






INITIAL CLAIMS: 1.5 CYLINDERS - Employment by Size



The prevailing trend in the above factors could have supported an accelerating employment thesis and pro-growth, consumption centric positioning for the better part of the last year+, however (note: Utes outperformed the SPX by 3X yesterday and are +15% YTD vs. -0.2% for the XLY). 


Wage inflation is a lagging indicator and whether internal tightness and rising mobility (more renters, less houses underwater) can finally catalyze a transition to a 2-cylinder labor market driven by the demand side remains a waiting game. 


And as we’ve remarked previously, patience probably remains the most prudent prescription:


The frustration and impatience on the pace of the recovery that pervades media reports and pundit commentary offers an interesting juxtaposition against the almost universal acknowledgement that balance sheet crises and the back end of long-term credit cycles invariably augur protracted periods of sub-trend growth.  


Passivity doesn’t sell advertising and generally doesn’t drive AUM, but a little more patience and little less manic punditry is probably the right prescription 




NSA:  Non-seasonally adjusted initial claims, our preferred read on the underlying trend  in the labor market, posted another solid print at -10.9% YoY.  This takes the 4-wk rolling average to -10.2% YoY from -8.8% prior, and back near the best levels of year


SA:  Headline claims improved -6K to +312K WoW with rolling claims (+312K) moving back to the best levels YTD and the best levels since august 2007


In isolation, the initial claims numbers again remain supportive a good NFP print this month.  








Christian B. Drake



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