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Cartoon of the Day: Beware of the Russell 2000

Takeaway: The Russell 2000 small cap bubble is down -8% from its all-time #bubble top on 7/7.

Cartoon of the Day: Beware of the Russell 2000 - Russell 2000 cartoon 09.29.2014


RHP: SHARE COUNT CLARITY CATALYST + STRONG GROUP TRENDS = LODGING BEST IDEA LONG

CALL TO ACTION

Today RHP begins the process of redeeming the convertible notes that mature this Wednesday, October 1, 2014 as well as satisfying the derivative complex set-up to offset the dilution.  As result, the lower outstanding share count vs the Street should become more transparent.  

 

We reiterate our RHP – Best Ideas Long thesis as found in our Sept 18, 2014 note "RHP: RIDING THE GROUP HORSE TO HIGHER EARNINGS".  The majority of RHP’s revenues are from the group travel segment of the lodging industry.  We expect that segment to outperform sentiment over the next few years leading to higher EBITDA and FFO which should boost this undervalued stock.

DETAILS

  • The Convertible Notes were convertible through the close of business today (September 29, 2014) pursuant to the indenture.
  • Concurrent with the offering of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to its common stock with counterparties affiliated with the initial purchasers of the Convertible Notes, for purposes of reducing the potential dilutive effect upon conversion of the Convertible Notes.
  • Today, (prior to the end of the current quarter), the Company will draw down $229 million (assuming no change since June 30, 2014) on its corporate credit facility (revolver) and hold the proceeds as “cash” as an asset on the balance sheet. 
  • On Wednesday, October 1, 2014 (Q4 2014), the Company will retire/payoff the Convertible Senior Notes with the "cash" (drawn off the revolver).
  • The equity share count should not increase materially despite the conversion due to the prior hedge transaction.

VALUATION

RHP is undervalued versus peers in our opinion.  Today, RHP trades at 11x 2015 EV/EBITDA versus the peer group average of 14x 2015.  RHP trades at a forecasted 2015 dividend yield of 5.5% versus 4.1% for peers.  Fair value for RHP is $66-68/share based on RHP reaching 13x EV/EBITDA valuation levels next year plus the current 4.7% current dividend yield (forecasted to increase significantly over the next six months).  Total return potential could exceed 40% over the next 12-18 months.

CONCLUSION

RHP is the REIT with the greatest exposure to the group segment which is where we see the most upside vis a vis Street expectation.  Thus, current earnings are likely to be exceeded and dividends raised.  RHP is undervalued versus its comp space and we see the potential for a total return of >40% over the next 12-18 months


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Shares of Bloomin’ Brands Have Enormous Potential Upside Says Hedgeye’s Howard Penney| $BLMN


Retail - Department Store Deep Dive/Black Book

Takeaway: In this Black Book, we dive into everything from Dept Store current trends (survey) to what the group will look like in the next eco cycle.

Please join us Thursday, October 9th at 11:00 am ET for our Deep Dive on Department Store Fundamentals and Stocks. Relevant tickers: JCP, M, KSS, DDS, JWN, SHLD, TGT, WMT, TJX, and GPS.

 

Key Topics Will Include:

  1. What will the Department Store Landscape look like (physically and financially) when we transition into the next economic cycle?
  2. Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic.  Who has the most risk/upside based on where we are in the economic cycle?
  3. Margin Sustainability: Who has the most defendable margins and levers to pull in the event of a sales downturn?
  4. The importance of Financial Engineering to earnings algorithms.
  5. Current Business Trends: Results from our detailed 1,000 consumer survey. This is the 4th iteration of the survey that we started back in 3Q of 2013
    • Visitation statistics
    • Dot.com and Mobile trends
    • Buy Online/Pick Up in Store – does anyone really use this? Which retailers have the competitive advantage?
    • Detailed category analysis – what retailers are top of mind in each category
    • Who wins on price, sales, selection, and quality.
  6. Real Estate Deep Dive
    • What does the competitive matrix look like across the space
    • Winners &  losers from a demographic and spending vantage point
    • Are department stores over or under-indexed to their target customer?
    • The JCP and SHLD affect – what do more store closures mean for other names in this space
  7. E-commerce – we’ll be releasing a much more in depth look at e-commerce across the retail space in a Black Book due out in the next couple of weeks – but we will preview that work with a focused look on the department store space. Most importantly which retailers have invested the capital needed to drive growth in this channel.

Call details to follow


10-Second Takeaway: New Walmart CEO Doug McMillon Makes Saturday Morning Meeting Optional | $WMT

Takeaway: Walmart's move is a sign of the times.

Walmart’s new CEO has made its iconic Saturday morning meeting optional

  • "Walmart’s Saturday morning meetings have been a long-term fixture for the company. Once a month at 7:30 on a Saturday morning, the US retail giant’s top executives gather in an auditorium at its Bentonville headquarters. The required meetings have been described (paywall) as 'part evangelical revival, part Oscars, part Broadway show.' People bring their kids, and there’s a company cheer and awards for associates, as well as a more serious rundown of sales figures."
  • "But according to a recent speech by Walmart’s SVP of change management, Celia Swanson, one of new CEO Doug McMillon’s first actions as CEO was to make those Saturday meetings optional—for the first time in the company’s history."

10-Second Takeaway: New Walmart CEO Doug McMillon Makes Saturday Morning Meeting Optional | $WMT - w1

10-Second Hedgeye Retail Takeaway

It's been some time since Sam Walton famously wrote:

 

"If you don't want to work weekends you shouldn't be in retail."

 

Over the years, Walmart's mandatory Saturday morning meeting has morphed from a deep dive on numbers into a "dog and pony" show complete with celebrity acts. In 2008, the meetings moved from weekly to monthly. Now? Optional for all...

 

It may just be a sign of the times - heck even baseball, hot dogs, apple pie, and Chevrolet have become passé. But, according to the report, McMillon has taking the onus upon himself to reinvigorate an institution that has more or less become irrelevant.


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