VIDEO: Paying Dividends


Corporations are enjoying record high levels of cash, low amounts of debt and financial flexibility in the current economy. The question is: can companies continue to keep paying out sweet dividends? Hedgeye Director of Research Daryl Jones thinks dividends will increase over time and lays out his case starting at 0:45 in the above video. Names Jones likes include Darden Restaurants (DRI) and Proctor and Gamble (PG).

FTSE: Bullish On The Margin

This week's PMI reports for the UK and Germany weren't as bad as people thought they'd be and in turn, the market was pleased enough to continue buying up UK equities. The FTSE 100 index is in bullish formation now across all three durations: TRADE, TREND and TAIL. Even if it's just a story of funds shifting capital into UK equities, it's impressive enough to garner our attention nonetheless. 


FTSE: Bullish On The Margin - FTSE100

Holler At The Dollar

We've said it before and we'll say it again: get the dollar right and you get a lot of other things right. With the US Dollar being up seven of the last eight weeks, two things happen that correlate decently with the currency: stocks are heading higher and commodities are getting crushed. On a 60-day basis the correlation between the US Dollar Index and the SP500 is now +0.81; bullish is as bullish does.


Holler At The Dollar - dollarholler

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SPY: Watch Your Levels

The S&P 500 (SPY) hit a new all-time high intraday today of 1572 after yesterday's attempt, which saw the index testing our TRADE line of support at 1556 by the close on light volume. Chasing the broader macro market and buying high and selling low just doesn't work. We'll keep an eye on the S&P 500 as well as the US dollar; a strong dollar drives down commodity inflation and boosts the S&P 500. All the more reason to stay the course and remain bullish on the market.


SPY: Watch Your Levels - SPXRUSSEL


We also bought the Russell 2000 (IWM) yesterday when the index and S&P 500 both held their TRADE lines of support. Sticking to our process is a must.


With only one sell-side analyst, according to Bloomberg, advising clients to sell BJ’s Restaurants’ stock at this price, and the eye-catching underperformance versus the S&P 500, it is tempting to get on board with BJRI.  At this point, we intend on waiting until after the 1Q13 print on 4/26, at the earliest.


Reasonable Expectations


One of the major reasons why BJRI is tempting on the long side is that expectations seem reasonable.  In fact, at $1.25, we are ahead of the Street’s FY13 EPS estimate of $1.22.  That said, our confidence in our estimate is not as firm as we would like and we are not overly confident that the market will take “beats” versus consensus as a reason to bid up the stock significantly.  We are waiting on the 1Q print and any sign that returns are sequentially accelerating.  We expect returns to improve throughout the year, but not soon enough that we would rush to buy the stock.



Returns, Returns, Returns


Return on Incremental Invested Capital has been key to the share price of this, and many other restaurant companies.  Empirically, this has proven to be especially true of growth stocks.  Until we become confident that management is seeing stable returns on incremental invested capital, we’ll be advising our clients to be patient.   


BUY BJRI AHEAD OF EPS? - bjri roiic stock price





Same-restaurant sales growth has been erratic over the past year, missing expectations in two quarters during 2012.  The company’s Gap-to-Knapp has come in drastically over the last few years and this has pressured returns.  In 1Q, we will be waiting to see a strong recovery in traffic trends, sequentially, on a two-year average basis, to gain the necessary confidence to get behind this name.  If traffic trends don’t recover, it will be difficult for the investment community to consider this a growth stock and we expect the multiple will remain in the 8-10x EV/EBITDA range.


BUY BJRI AHEAD OF EPS? - bjri srs compo



Howard Penney

Managing Director


Rory Green

Senior Analyst



Pinnacle Foods – What Do Pickles and Pancakes Tell Us About Consumer Staples?

Pinnacle Foods has traded from an IPO price of $20 per share to over $24 in under a week.  What does that tell us?


Priced Right


The deal was priced “right” – at a discount to the group in terms of EV/EBITDA – that gap has now narrowed, with PF trading at 10.6x EV/EBITDA (our estimate of EBITDA of $450 million).  The packaged food average is 11.4x and the large cap packaged food average is 10.7x.  Based on the company’s growth profile (or lack thereof) we think it should trade closer to the large cap number, but we also recognize that reasoned views of valuation are largely meaningless in staples these days.


Scarcity Value


Though we mentioned it in our prior note, we apparently underestimated the scarcity value of a relatively high yielding asset in the small–mid cap space.  We have spoken with more than a couple of people that have capital that needs to be deployed and are faced with limited alternatives in the sector.  This probably also serves as at least a partial explanation for MKC’s performance in the wake of, at best, a mediocre quarter and guide.

Yield is a Driver


With today’s move above $24 per share, the yield with the proposed dividend is now below 3.00% (2.96%) versus the yield at the IPO price of 3.60%.  For reference, SJM (2.10%), MKC (1.86%), CHD (1.73%), ENR (1.61%) and HRL (1.65%) are the relevant peer group in terms of yield, suggesting further upside to the extent that the performance of PF is related to a paucity of yield in that cap segment of staples.


High Debt/EBITDA Has Outperformed


Companies with higher debt/EBITDA ratios have outperformed in the staples sector since the beginning of February, and PF is at the higher end of the staples range with a debt/EBITDA ratio of 4.2x.  The market seems to have embraced deleveraging stories (or lower “quality” assets).


Pinnacle Foods – What Do Pickles and Pancakes Tell Us About Consumer Staples? - Debt to EBITDA


What Have We Learned?

  1. Don’t fight money flows
  2. Yield still matters
  3. Valuation matters, but only when there is a discount (warranted or otherwise) to be exploited
  4. Crap is still beating quality

To be honest, we kind of knew all those things, but we appreciate the proof of concept.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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