TODAY’S S&P 500 SET-UP – September 16, 2014
As we look at today's setup for the S&P 500, the range is 18 points or 0.36% downside to 1977 and 0.55% upside to 1995.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: If you’re worried about revenue growth in 3Q – don’t be. It should accelerate significantly.
There’s a lot of moving parts around RH right now, but none more important to the near-term story than the cadence of revenue growth – something that has accounted for 90% of our conversations with investors since the print. We don’t think that anyone thinks we’ll see a repeat of the 2Q sales hiccup, but there’s definite skepticism over company guidance for an uptick in 3Q sales growth. We’re extremely confident in a meaningful sequential step up in growth. Here’s why…
First off, let’s look at the company’s deferred revenue. This line item has been an exceptional indicator of growth in the upcoming quarter. Due to product ordering patterns and revenue recognition accounting, each quarter RH will defer a given amount of revenue, which then accrues to the next quarter. Everyone knows this, it was an issue last year as sales shifted from one quarter to the next. We already went through the analysis of why the change in revenue happened in our note on Sept 10, but our point here is that we’re headed into 3Q with what we’ll call Accrued Revenue growth of 35%. There’s not a one-to-one relationship between deferred/accrued revenue and sales growth, but it’s pretty darn close – and it’s spot-on directionally (as outlined in the chart below).
There’s one time where deferred revenue was not a good indicator, and that was in 1Q13. That was when RH was experiencing delivery issues and did not have enough inventory to meet demand. But those constraints are no longer. Since 1Q13, the company has increased DC square footage by 40%. Importantly, inventory is up 35% (vs. accrued revenue of 35%) and company guidance of 20-23%. We’re slightly above that (24%) and are very confident in our model.
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Takeaway: With slight variations, our proprietary cruise pricing survey has proven to be an accurate forecaster of gross yields.
A backtest of our cruise pricing database for RCL and CCL shows consistency in predicting actual gross ticket yield for both Carnival and Royal. Directionally and in identifying pricing pivots, the model has performed spot on. The only criticism can be that the model tends to slightly overestimate CCL ticket yields while slightly underestimating for RCL. The differential from our model could result from geographical mix and occupancy trends. Regardless, the results support the efficacy of our pricing survey.
We track YoY and sequential pricing for ~13,500 ship itineraries spanning across 8 geographic regions for CCL, RCL and NCLH. Prices are compiled twice monthly during Wave Season.
For CCL and RCL, we ran a backtest covering the time period from October 2012 to August 2014, wherein we aggregated the pricing change for all the itineraries in a particular region and weighted them according to an operator’s deployment mix. For example, for Carnival’s F2Q 2014, the Caribbean accounts for ~37% of total fleet-wide capacity for F2Q. The 37% weighing is split between the price changes for the Carnival brand, Princess, and Holland America for Eastern and Western Caribbean itineraries.
We then compared the YoY change in the operator-reported gross ticket yields with our capacity-weighted price YoY change beginning with Q2 2013.
As the charts below show, our survey is very accurate in measuring ticket yields although the model tends to be biased in different directions for RCL and CCL. There could be two reasons for this bias: 1) RCL had a greater presence in Asia-Pacific than CCL had in 2013-2014, and also experienced stellar results in this newer market. Asia-Pacific accounts for the smallest portion of our survey and YoY volatility in Asia pricing can be very high as ships frequently move from one market to another. 2) Since we do not track occupancy, RCL may be showing more improvement in occupancy YoY than CCL. But since most ships sail close to full occupancy, this should be less of a driver going forward.
FQ1 appears to be an anomaly. For RCL, the differential may have been due to a weaker than expected yield performance from the Caribbean and some voyage cancellations in FQ1. For CCL, a greater impact from better ticket prices for the Carnival brand in FQ1 could have nudged yields higher than we estimated.
Based on the latest pricing trends, we believe CCL will post better than expected gross ticket yields while RCL will meet raised investor ticket yield expectations for FQ3. We will have a cruise pricing update later this week.
Takeaway: Keep moving out there – risk does.
"With the Russell 2000 down for the 2nd straight week to -0.3% for 2014 YTD, that’s why I still like staying net short (for long onlys its called underweight) one of the most obvious bubbles in America right now – small cap stocks that trade at 50x trailing earnings, with no liquidity," wrote Hedgeye CEO Keith McCullough in today's Morning Newsletter. "In other #bubble news, at 30x revenues and $220B in market cap, you’ll have plenty of liquidity in AliBubble (BABA) this week!"
Takeaway: Steiner says the bullish thesis on COF looks strong into year end.
Hedgeye Financial sector head Josh Steiner says COF’s August results, released this morning, are a dose of steroids for his already strong bullish case for the stock.
While the delinquency rate edged up a mere one basis point (1/100th of a percent) over the average for the last seven years, loan growth for August, as measured month-over-month, came in at three times the seven-year average.
Steiner says credit quality appears to be holding stable, which means investors should view the latest spike in consumer borrowing in light of the latest bullish Consumer Confidence figures: people are borrowing more because they are earning more – or expect to – not because they are running out of options.
Steiner says the bullish thesis on COF looks strong into year end.
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