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P: User Penetration Survey (N=20,000)

Takeaway: Purpose: Determine P's actual US penetration levels (excluding duplicates). Results: P could see declining users/hours as soon as 2015

NOTE SUMMARY

  1. Hedgeye Pandora User Survey: We surveyed 20,000 people in the US to determine Pandora’s user penetration and runway.  We filtered the data down to roughly 14,000 users where demographic data was available.  The most surprising takeaway is the number of P's duplicate accounts, which we estimate at over 50% of its total registered accounts.
  2. The User Growth Runway is Shorter Than We Thought: After backing out duplicate accounts, we estimate that P has penetrated 53% of the US adult internet population. More importantly, the majority of its unpenetrated TAM are adults over 45 year old, which will be tougher to penetrate and monetize.  Further, we estimate the teenage cohort is over 70% penetrated.
  3. Declining Users/Hours in the Intermediate Future?: P has historical retention issues; more so than its duplicate accounts could explain.  P's limited runway for new user growth may not be able to compensate for its churn much longer.  Declining users is a very real possibility, and may occur as early as 2015.
  4. Sell-Through is the Bigger Question: Even if users/hours decline, P can still generate revenue growth by improving sell-through rates of its ad inventory.  The question is how much of this opportunity lies with improving sell-through rates in the major ad markets vs. the minor ones.  Answering this question is the next leg of our analysis; stay tuned.

 

HEDGEYE PANDORA USER SURVEY 

We ran a single-question poll using Google Consumer Surveys: "How many Pandora Internet Radio accounts have you ever created for your own use (Unique Usernames/Log-Ins)”?.  The purpose of this question was to determine P's actual penetration levels, and the impact that users with multiple accounts had on P's registered user metrics. 

 

We surveyed 20,000 people in the US; we then filtered the data down to 13,899 responses where demographic data was available (Google inferred). We present the data both as reported (unweighted), and weighted to represent the US Internet population.

 

At face value, the results are don't appear too surprising.  But the total number of duplicate accounts is staggering.

  • Penetration skews younger, 76% of 18-34 year olds have P accounts
  • Most users only have one Pandora account (75%) 
  • The remaining 25% of users with multiple accounts are responsible for roughly 55% of P's total registered accounts.  

While the duplicate percentage may seem too high to make sense, remember that P has over 250M registered accounts, which by most external estimates is almost the same size of the entire US population accessing the internet.  

 

P: User Penetration Survey (N=20,000) - P   Survey Distribution

P: User Penetration Survey (N=20,000) - P   Survey Penetration

P: User Penetration Survey (N=20,000) - P   Survey Response   

P: User Penetration Survey (N=20,000) - P   Survey Duplicates

THE USER GROWTH RUNWAY IS SHORTER THAN WE THOUGHT

After backing out duplicates, and marrying the survey results with Census data, we estimate that Pandora is roughly 54% penetrated into the US Adult Internet Population.  While that may sound like a lot of runway, the demographics of its remaining addressable market skew much older, which will make incremental user growth more challenging.  

  • Roughly half (49%) of the total number of survey respondents that didn't have a Pandora account were over the age of 55; roughly 73% were over 45.  
  • When comparing our survey against demographic internet data from the Census, we estimate that 66% of P's remaining US TAM among adults are over 45 years old.

We haven't discussed teenagers yet, which are an inherently easier group to penetrate.  However, we estimate that P has already penetrated a considerable portion of this segment.  The table below details our analysis here.  In short, P has likely penetrated over 70% of the non-adult US internet user base. 

 

P: User Penetration Survey (N=20,000) - P   Survey Distrubtion 0

P: User Penetration Survey (N=20,000) - P   TAM analysis 

DECLINING USERS/RUNWAY IN THE INTERMEDIATE FUTURE? 

We have previously identified that P has historical retention issues, which we detail in the chart below.  Over the last 3.5 years, P has added more than 160M registered accounts, yet only grew active users by 44M, suggesting total churn of at least 116M accounts, or 72% of its gross account gains during this period.  

 

We do not have enough data to explicitly calculate its quarterly churn rate after 1Q11.  However, we estimate using a rough back-of-envelope calculation that quarterly attrition over the past 3.5 years has averaged somewhere in the mid to high-teens as a percentage of its active users.  

 

Currently, P has 76.4M active users as of 2Q14.  If we a assume mid- to high-teen churn rate, then the company would need to sustain a run-rate of gross new quarterly account adds of 11M-13M to maintain its active user base.  Even If that run-rate was possible over the long-run, and P could penetrate every internet user in the US, we estimate that P would exhaust its unpenetrated TAM within 7-10 quarters.  

 

In a more likely scenario, we expect gross new account adds to slow given the high concentration of older users within P's unpenetrated TAM, which should lead to y/y declines in user and/or listener hour growth sometime in 2015.

 

 P: User Penetration Survey (N=20,000) - P   Attrition 2Q14

SELL-THROUGH IS THE BIGGER QUESTION

We want to be extremely clear: Declining users and/or hours does not mean that revenues will decline.  Even if users/hours decline, P can still generate revenue growth by improving sell-through rates on its ad inventory, which remains below 50% of total hours according to management.  

 

The question is how much of this opportunity lies with improving sell-through rates in the major advertising markets vs. the minor ones (e.g. New York City vs. Topeka).  

 

Put another way, if users in New York City are already receiving peak ad load (sell-through rate), then losing those users would likely outweigh any benefit of improving sell-through rates in Topeka.  

 

Answering this question is the next leg of our analysis; stay tuned.  In the interim, let us know if you have any questions, or would like to discuss in more detail

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


Portfolio Rebalancing of Sorts

We've made several changes to our bench of longs and shorts on the Consumer Staples Ideas list.

 

Portfolio Rebalancing of Sorts - 1

 

Current longs are WWAV, DEO and THS

Current shorts are BNNY, K and HAIN

 

Changes to the long and short bench include:

  • Adding MO and PM to the short bench
  • Adding STZ to the long bench
  • Removing RAI from the long bench
  • Adding WFM, TFM and BDBD to the long bench
  • Adding MON to the short bench

Mixed Consumer Picture

Today Bloomberg reported that the Consumer Comfort Index climbed to a five-week high on the back of an improving labor market.  Two days ago the Conference Board reported that their sentiment gauge registered a seven-year high, saying that “Americans are finding more reasons to be upbeat about their prospects for the rest of the year as recent reports pointed to a pickup in the job market and stock prices advanced to records.”

 

There are no major changes in recent trends across the consumer staples space:

  1. U.S. packaged food sales were relatively flat in early August with salty snacks and chocolate leading the way, according to IRI data.  On the downside, cold cereal and soup continue to lead the category losers. (short K)
  2. Carbonated beverages are lagging spirits trends.
  3. M&A is driving valuations in the food and beverage space to unwarranted levels.  When will the contagion spread to the household product space? (long DEO)
  4. Private label is taking incremental share in household products.
  5. Organic continues to be a category of significant growth.  Private label also continues to make inroads into the organic space. (long WWAV, THS)

 

Portfolio Rebalancing of Sorts - 2

Portfolio Rebalancing of Sorts - 3

Portfolio Rebalancing of Sorts - 444

 

Feel free to email or call with questions. 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: No Volume

Takeaway: No volume? No worries! Right?!

Cartoon of the Day: No Volume - Trading volume cartoon 08.28.2014


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KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY

Takeaway: Housing demand remains middling as PHS & Purchase Apps continue to tell divergent stories. We still think you follow the slope in HPI.

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.

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table above represents the monthly average as opposed to the most recent weekly data point.

 

 

KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY - Compendium 082814

 

 

Today's Focus: July Pending Home Sales Index

The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of July.

 

THE DATA:  PHS increased +3.3% MoM vs a downwardly revised June print, taking the index level to 105.9 -  its best level since July of last year.  On a YoY basis, growth remained negative for a 10th consecutive month although the rate of change improved to -2.1% YoY from -7.5% prior. 

 

KNOWN UNKNOWNS:  We’ve commented on the burgeoning divergence between the MBA Purchase App series and the PHS data the last few months.  While the MBA data suggests an almost unprecedented collapse in purchase demand, the PHS data suggests more modest softness.   

 

A share shift in the origination channel due to QM implementation is a known although there’s a dearth in hard, real-time quant around the magnitude of the shift (newsflow on the topic has been accelerating of late: WSJ: Nonbank Mortgage Lenders Bounce Bank, WSJ: Mortgage Market Tightness is Standard Issue, FT: WFC Chief Warns on Mortgage Lending). 

 

The known unknown is the magnitude of impact the shift may be having on the intertemporal reliability of the MBA survey if, in fact, QM rules have shifted some purchase market share away from the originators that are surveyed by the MBA.

 

In short, the principal demand series continue to offer conflicting signals and while the PHS data have come in better than feared, the broader reality of ongoing softness in housing demand remains.    

 

BOTTOM LINE:  Demand comps get progressively easier from here through 1Q15 while HPI comps get progressively harder.  It remains our contention that 2nd derivative trends in HPI are the predominate driver of prices in the housing complex and with inventory rising, demand middling, and comps steepening, we expect housing related equities to track sideways to down alongside ongoing deceleration in home price growth.  

 

 

KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY - PHS vs Purchase Apps   Spread 2

 

KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY - PHS Index   YoY TTM

 

KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY - PHS LT

 

KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY - PHS Regional

 

KNOWN UNKNOWNS - PENDING HOME SALES RISE IN JULY - SECTOR PERF

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake


BOBE: Leaving Much to be Desired

BOBE remains on the Hedgeye Best Ideas list as a long.

 

We continue to believe there is significant upside in BOBE, but it is likely that this upside will not be realized until we see several changes at the senior level.  Despite an uninspiring quarter, we find solace in the fact that we are one step closer to this becoming a reality.  The 1QF15 earnings call was simply painful to listen to.  Management's vision for the future of this company is outdated and will not materially improve the company or generate the level of returns shareholders deserve.

 

The comments from CEO Steven Davis speak to how disconnected he is from reality -- "Bob Evans Restaurants and Bob Evans Farms Food are making meaningful progress as both businesses leverage the significant capital investment each has made over the last several years."  To put this in perspective, BOBE's EPS has declined from $2.39 to $1.68 over the past year and 1QF15 EPS just declined 83%.

 

Mr. Davis goes on to say that both of BOBE's operating segments remain challenged by macroeconomic factors such as the continuation of a competitive promotional environment and weak consumer confidence.  Two days ago, the Conference Board said that consumer confidence in the U.S. climbed to its highest level in nearly seven years in August.  To be fair, however, we do suspect that BOBE's core customer (lower-middle to middle income guests in the Midwest) remains financially challenged.

 

Bob Evans restaurants same-store sales declined 2% in 1Q15, underperforming the Knapp-Track Family Category which declined 1.6% during this time.  Mr. Davis went into great detail to explain that a closer look into their core markets suggests they are outperforming their most comparable competitors.  Nitpicking statistics is a tired practice that we don't typically value.  The truth is, you're either transforming the business to grow customer counts or you're not!

 

Management provided the following points to suggest the future is brighter for Bob Evans Restaurants:

  1. The key to achieving the expected results relies upon the successful rollout of the Broasted Chicken platform
  2. Day-part expansion
  3. Expanded holiday operating hours
  4. Normalized weather

 

While these are all big question marks, one thing is clear: management hasn't identified a differentiated strategy to drastically improve its positioning in a fast-changing restaurant landscape.  Day-part expansion will be particularly challenging.  The lunch business is weaker with lower guest satisfaction scores and the dinner business is also weak -- operations are more challenged, the staff is subpar, carry-out orders are at their highest and it’s the most competitive day-part.

 

Management has consistently proven that they have a difficult time managing a complex business; they can't even come up with an effective marketing strategy!  Improving the marketing of take-out is not the silver bullet here.  They still expect to achieve 2015 sales goals which they slashed significantly last quarter, but 2HF15 guidance looks aggressive to us.

 

As silly as it seems, management believes that the Broasted Chicken platform will be its saving grace.  Although the Broasted Chicken platform represented 11% of sales mix in the Cincinnati market it's important to remember that a significant portion of this is likely driven by initial trial.  Repeat business will be critical and we're not certain they'll get it.

 

It's difficult to get excited about this company until the new board members complete their "initiation" to every aspect of the business.  After a short honeymoon period, we'd expect to see more changes to the operating structure of the company.  There's much to be done.

 

BOBE: Leaving Much to be Desired  - 1

 

Feel free to email or call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities

Takeaway: Despite a slight rebound in equity fund flow trends last week, fixed income demand still outpaced stocks by a 2-1 ratio

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period ending August 20th, equity fund flow trends rebounded marginally with domestic stock funds breaking a 16 week running outflow. However intermediate term trends are still intact with aggregate fixed income netting $4.9 billion in net new flow in the most recent five day period, nearly a 2-1 ratio versus the $2.6 billion allocated to equities. Defensive positioning by the investment community continues with taxable bonds having inflow in 26 of the past 28 weeks. Domestic stock funds conversely have had outflow in 16 of 17 weeks and continue to be mired in the seasonally weakest part of the year. We recommend that investors avoid Janus Capital (JNS) and T Rowe Price (TROW) during this time and into 2015 based on this challenging industry data.

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 2 seasonality

 

 

Total equity mutual funds had inflow in the most recent 5 day period ending August 20th with $2.6 billion coming into all stock funds as reported by the Investment Company Institute. The composition of the inflow continued to be weighted towards International stock funds with $1.9 billion coming into foreign funds making it a perfect 33 for 33, i.e. inflows in every week of 2014 for the category. While domestic stock funds last week had a marginal $738 million subscription and snapped 16 consecutive weeks of redemption, over $40 billion has been redeemed from U.S. stock funds over the past 4 months. We don't categorize a drawdown sequence as having been broken until there are 4 consecutive weeks of inflow and thus we are still looking for weak domestic fund trends for the rest of the year, especially entering the seasonally weak fourth quarter. The running year-to-date weekly average for equity fund flow is now a $1.5 billion inflow, which is now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual funds had another positive week of production with $4.9 billion coming into the asset class. The inflow into taxable products of $4.1 billion made it 26 of 28 weeks with positive flow. Municipal or tax-free bond funds put up a $814 million inflow, making it 31 of 32 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, an 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). 

 

ETF results were broadly positive during the week with inflows into both equity funds and fixed income products. Equity ETFs put up a $8.8 billion subscription while fixed income ETFs put up a $2.7 billion inflow. The 2014 weekly averages are now a $1.5 billion weekly inflow for equity ETFs and a $995 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 positive $3.7 billion spread for the week ($11.5 billion of total equity inflow versus the $7.7 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

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. Exchange traded fund (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.   

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 1

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 2

 

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 3

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 4

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 5

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 6

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 7

 

 

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

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 8

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 9

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $3.7 billion spread for the week ($11.5 billion of total equity inflow versus the $7.7 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income.

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


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