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VIDEO: Attack Of The QuadrillYen

 

The third theme of our Q1 2013 Global Macro Themes call held last week was #QuadrillYen.

In our presentation, we discussed how Japan’s exports are slowing and their plan to devalue the Japanese Yen by following in the footsteps of the Federal Reserve. With the Bank of Japan targeting 2% inflation and entering an “open-ended asset purchase” program, Japanese stocks have been on the rise.

Unfortunately, policies to inflate stocks only work until they don’t and stagflation is more likely than economic growth in this case.


KMB: Bearish Bias Remains

After shorting Kimberly Clark (KMB) in our Real-Time Alerts yesterday, we covered our position this morning. Though the company was essentially in-line with expectations for its earnings, there’s a lot more pressure on KMB than investors think. Commodity prices like oil and raw pulp are moving against the company, which reinforces our bearish bias on the stock. We don’t think people should pay up for 3-4% top line growth and EBIT growth that’s largely derived from restructuring savings. 

 

We outlined earlier this week how the long PG/short KMB trade could be an idea worth considering...when the timing is right, of course.

 

KMB: Bearish Bias Remains - KMB EBIT

 

KMB: Bearish Bias Remains - pulp prices


KMB - What’s The Right Multiple for Cost Savings?

KMB reported Q4 EPS of $1.37 versus consensus of $1.36 and provided 2013 guidance - $5.50 to $5.65 versus consensus of $5.59.  Ho-hum, enough with the Old Wall earnings recap.



The good – constant currency organic sales growth was +5.0%, against a +3.0% in the lapping quarter.  The sales result was at the high end of the 3-6% range we saw in the prior three quarters.



The deterioration in earnings quality that we highlighted earlier in the week continues to manifest - $39 million of EBIT growth year over year, provided courtesy of $80 million of cost savings and a $15 million commodity tailwind  (this with the benefit of 5% top line growth).  The commodity benefit is a decline from Q3 ($55 million) and Q2 ($30 million) reflecting the fact that core commodities have begun to creep up again.

 

KMB - What’s The Right Multiple for Cost Savings? - KMB EBIT



What’s the Bull Case?

 

We get that sales were solid this quarter, and that the KCI International business continues to be an opportunity.  Also, Q4 was a robust FCF quarter ($2.01 per share in Q4, $5.54 per share for the full-year) and that the company continues to deploy its FCF to the benefit of shareholders via dividends and share repurchases.  That sort of profile certainly has an appeal to a certain group of investors.



To those investors, we ask a couple of questions:

  1. What’s the right multiple for cost savings, recognizing that all of KMB’s EBIT growth is from restructuring savings? (4-6x earnings is what we are thinking).  We recognize that there is a stability and consistency to that EBIT growth, but there is also a limited duration that should be reflected in a far lower multiple relative to EBIT growth derived from operations.
  2. What happens if sales weaken?  When things are going well at a consumer products company, sales growth should drop to the bottom line in substantial fashion.  That is clearly not the case with KMB.  If sales weaken, declining core EBIT should overwhelm the level of cost savings.
  3. Are the company’s increases in strategic marketing really strategic?  We have seen investments in strategic marketing decline sequentially throughout 2012 – is the company using that investment tactically to manage earnings, or is it truly viewed as long-term in nature? We consider the former to be a distinct possibility.

With commodities moving against the company and the multiple at 15.5x 2013, we continue to believe that people should not be paying up for 3-4% top line growth and EBIT growth that is largely derived from restructuring savings.  Our bias remains to be short.

 

KMB - What’s The Right Multiple for Cost Savings? - pulp prices

KMB - What’s The Right Multiple for Cost Savings? - crude oil

 

Call with questions.

 

 - Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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BWLD: Playing Chicken

Buffalo Wild Wings (BWLD) is under pressure as chicken wing prices move sharply higher to start the year. With the $2 per pound mark being surpassed with the possibility of further upside, we worry about risk to BWLD’s multiple. Hedgeye Restaurants Sector Head Howard Penney notes the difference in price change compared to 2012:

“In 2012, during the first 24 days of the year, chicken wing prices gained 14%.  For much of the remainder of last year, prices stayed within a range of roughly 180-190 cents per pound.  Year-to-date in 2013, wing prices are again moving higher: +7.2% YTD.  During the 3Q earnings call, management warned that the price of wings was trending to $2.07 for the first two months of the fourth quarter and stated that they expected it to exceed that level heading into the super bowl.”

 

BWLD: Playing Chicken - image004

 

The question is whether or not this expectation is baking in the possibility of McDonald’s expanding its testing of wings, currently in being sold in Chicago after a successful run in Atlanta, to its national system.  BWLD’s guidance for earnings growth of 20% seems dependent on a number of factors, one important one being some moderation in wing prices in 2H13, per remarks from CFO Mary Twinen in October.  MCD getting in on the act won’t help that happen.

 

BWLD: Playing Chicken - image003



Stay The Course

Client Talking Points

Follow Through

It’s important to stay the course once you’ve put a plan into action. Do you think Lord Nelson turned his ships around when difficulty stared him in the eye? Absolutely not. Our three Q1 2013 Macro Themes are #GrowthStabilizing, #HousingsHammer and #QuadrillYen. Japan is getting their currency devalued in favor of the Nikkei hitting astronomical levels on the upside, the housing market continues to put up solid data week after week showcasing the recovery, and growth is still stabilizing. With regards to the latter, a lot can change very quickly if crude oil is $130 a barrel and if the debt ceiling debate in late February can’t get sorted out appropriately. For now, we’ll stay the course and will continue to trade the risk and the range we’re comfortable with, whatever the stock.

Asset Allocation

CASH 52% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“@Hedgeye Cake at the office today? We wouldn't want to forget Big Alberta @HedgeyeDJ's birthday now would we#HappyBirthdayBigGuy #ToGrowth” -@BrennanDTurner

QUOTE OF THE DAY

“The only way to make a man trustworthy is to trust him.” -Henry Stimson

STAT OF THE DAY

Procter & Gamble (PG) fiscal-second-quarter earnings more than doubled to $4.06 billion or $1.39 a share.


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