TODAY’S S&P 500 SET-UP – August 21, 2014
As we look at today's setup for the S&P 500, the range is 39 points or 1.59% downside to 1955 and 0.38% upside to 1994.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: We're sticking with TLT.
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HAIN remains on the Hedgeye Best Ideas list as a short.
On the surface, HAIN reported a strong quarter and the stock responded nicely, trading up ~11% on the day. 4Q14 adjusted earnings from continuing operations were $0.90 compared to $0.65 in 4Q13, good for a 35% increase year-over-year. On the call, management reported a strong 7.5% organic growth rate for 4Q14 and 8.5% for FY14. Guidance for organic growth remains in the mid-single digit to high-single digit range for FY15.
The adjustments made to continuing operations are a list of recurring and non-recurring items that, in our view, lower the quality of the reported number. Notably, these adjustments are getting bigger each quarter. In 4Q14 the adjustments to net income totaled $0.15, 50% greater than the $0.10 of adjustments in 4Q13.
The current adjustments to net income of $10.3 million are principally from:
It’s amazing to see that a company can get away with adjusting earnings for growth related innovation and operating costs that are desperately needed to grow organic revenues. The company also reported $4 million of non-recurring income including a true-up of contingent consideration earn outs, unrealized currency gains and gains from the sale of shares.
On top of that, the company continues to push SG&A lower in order to drive operating margins. In 4Q14, SG&A on an “adjusted” basis (excl. amortization of acquired intangible assets) was 14.4% of net sales, a 110 bps improvement versus last year.
Therefore, despite higher commodity costs, HAIN “effectively managed operating expenses” to report a 49% increase in “adjusted” operating income to $73.9 million and a 200 bps improvement in operating margin to 12.7%. We continue to view the steady, significant reduction in SG&A as a competitive long-term disadvantage. In fact, we’d go as far as to say that the company’s margin structure is highly unsustainable and, as a result, it is currently over-earning in an increasingly competitive environment.
One of the core tenets of our short call was the lack of leverage in the business model. Despite a 200 bps improvement in operating margins, the company only reported “adjusted” EBITDA of $79.5 million or 13.6% of net sales versus 13.5% last year. It’s clear to us that the management is far away from hitting its objective of delivering long-term growth EBITDA of 15% to 18% of net sales.
The company’s inability to leverage its cost structure is clearly illustrated in the chart below.
The biggest risk to our short thesis was the strong revenue growth the organic sector is seeing. But, as you can see below, sales trends are expected to continue to slow at HAIN. In order to sustain its past level of growth, management will need to acquire more brands in FY15.
Net sales guidance for FY15 is between $2.7 billion to $2.8 billion, with approximately two-thirds of growth coming from acquisitions and one-third coming from organic sales. If this plays out, HAIN expects to deliver FY15 EPS within the guided range of $3.72 to $3.90.
While today is painful, we are sticking with our short thesis.
Call or email with questions.
Hedgeye Macro is hosting an expert call this Thursday, August 21st at 11:00 a.m. EDT to better understand the developing risks to Brazilian coffee production capacity next year and beyond. Brazil accounts for more than 1/3rd of global coffee production, and the damage from an unprecedented drought in the first three months of 2014 may have caused irreparable damage to a much larger portion of the 2015-16 crop than believed by consensus.
Our expert speaker will be Judith Ganes-Chase, founder and president of Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001.
Participant Dialing Instructions:
Toll Free Number:
Direct Dial Number:
Conference Code: 998836#
Materials: CLICK HERE
About Judith-Ganes Chase:
Judy has over 25 years of experience covering the agricultural softs space. Prior to founding Ganes Consulting in 2001, she spent most of her career as a senior softs analyst at Merrill Lynch and Shearson Lehman. Her most recent post was as the Director of News and Research at InterCommercial Markets.
Ms. Ganes-Chase is a contributing member to Elliott Associates, Gerson-Lehrman Groups Council, and Coleman Research Group. She is also a participant in the ICE (Intercontinental Exchange) research program and makes regular contributions to several industry-specific publications: Specialty Coffee Association of America, National Coffee Association, and the International Women’s Coffee Alliance (IWCA).