Editor's Note: Below is a complimentary research note from Hedgeye Analyst Matthew Hedrick published on March 7, 2014 at 10:25 AM. FXB is currently one of the top ten stock picks in our Investing Ideas Newsletter. For more information on how you can subscribe to Investing Ideas, click here.
The EUR/USD and GBP/USD have ramped an impressive 1.96% and 2.15%, respectively, in the last month -- the performance is consistent with our Q4 2013 Macro Theme call of #EuroBulls (presented on 10/11/2013) and our bullish outlook on the British Pound since last November.
Below we update our outlook on each currency cross:
- ECB President Mario Draghi kept rates on hold this week (as expected) and did not issue any “new” non-standard measures, adding in its 2014 outlook for GDP to expand +10bps to +1.2% (vs the previous forecast in December) and inflation to dip -10bps to 1.0%.
- Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and to keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market #EuroBulls (etf FXE).
- On the other side of the cross (USD) we expect Fed-head Janet Yellen to likely pull back on the tapering program to a more dovish position in response to our Macro call of #GrowthSlowing that should weigh on the USD to the downside.
- EUR strength reflects country/regional strength: Manufacturing and Services PMI continue to remain grounded above the 50 line (expansion). Services hit a 32-month high at 52.6 in February and Manufacturing grinded higher to 53.2.
- Confidence up: Eurozone Feb Economic Sentiment Indicator rose to 101.2 in February (exp. 100.9) vs 100.9 in January. The Services Sentiment Indicator rose to 3.2 FEB (exp. 2.5) vs 2.3 JAN.
- The deflation of inflation across the Eurozone (the current reading at 0.8% Y/Y) equates to more consumer purchasing power via lowering the consumption tax.
- Other Data: Eurozone Retail Sales rose to 1.3% JAN Y/Y (exp. -0.2%) vs -0.4% DEC and the Eurozone Unemployment Rate maintains the 12% level.
- We remain marginal European equity bulls over US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB).
- We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve).
- The Bank maintaining the base interest rate at 0.50% this week along with its asset purchase program target (QE) 375B GBP.
- UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers. In the BOE’s Quarterly Inflation Report (in February) 2014 GDP was revised higher to 3.4% from 2.8% previously forecast.
- PMIs remain one highlight: Manufacturing in February came in at 56.9 versus expectations of 56.8 and Services recorded 58.2 versus expectations of 58.0.
- CPI has also moderated in recent months, currently at 1.9% in January Y/Y – we expect this cut in the consumption tax to continue to boost business and consumer confidence and with it consumption
- The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.
Enter the World of Hedgeye.
Takeaway: Good ICSC week. UK storms hit, but Furniture Strong. Least Relevant Brands Survey. NKE robbed by ManU. URBN Inventories. H&M Wedding.
EVENTS TO WATCH
- BONT - BofA Consumer & Retail Conference: Wednesday 3/12, 9:40am
- DKS - BofA Consumer & Retail Conference: Wednesday 3/12, 10:30am
- JWN - BofA Consumer & Retail Conference: Wednesday 3/12, 10:30am
- PETM - BofA Consumer & Retail Conference: Wednesday 3/12, 1:30pm
- WSM - Earnings Call: Wednesday 3/12, 5:00pm
ICSC - Chain Store Sales Index
Last week's sequential growth in sales (which obviously varies with the calendar) actually ticked above the growth rate in each of the past two years. That's a rarity. The year/year growth rate went above 2% for only the second time this year. Ordinarily, we would not ring the victory bell for such a scant improvement in sales, but this year is the exception to almost every rule.
UK Sales Hit By Weather Too: February storms hit high-street sales
- "The monthly health of spending survey conducted by the British Retail Consortium and the consulting firm KPMG found that like-for-like sales adjusted for increases in floorspace were 1% lower in February than a year earlier."
- "Online sales rose strongly as the wet weather kept consumers at home and were 14.3% higher last month than in February 2013. The two best performing categories of in-store sales – home accessories, and flooring and furniture – reflected the recovery in the housing market."
- "A separate report from Ipsos Retail Performance found that shopper footfall was down across the country last month, with the biggest declines seen in the south-west and Wales, regions particularly hard hit by the weather. The sample of more than 4,000 non-food stores across the UK reported a decline in footfall of 5.3% against February 2013 and a month-on-month fall of 12.2%."
Takeaway: The most interesting point to us is the categories that were most resilient -- Home, Flooring and Furniture. Yes, it might be the housing market, but we think it is more a function of the categories. Simply put, if people need home accessories, weather won't stop them. If someone needs to buy a new bed, they might delay it for a week -- maybe. But they'll definitely still buy it. So many other retail categories are made up of impulse purchases. There's hardly anything impulsive about home furnishings. That's one of the many factors that gives us confidence in the near term trajectory at Restoration Hardware.
URBN - 4Q14 Earnings
The URBN print might not have been ugly (tho wasn't pretty) but the biggest callout for us was its inventory position. The company's inventory/sales spread was the worst it's been in seven quarters. Of course, they say that they're comfortable with the age and condition of the inventory. But we have NEVER ever seen a negative swing in a company's SIGMA trajectory (quadrant 3: Inventories up, margins down) without seeing a future hit to margins.
DKS - 4Q13 Earnings
Weather was definitely a boon for the top line in the quarter. The company had guided for a (1%) - (2%) comp on an unshifted basis and ended up posting a 6.3%. We won’t take anything away from them - they delivered in an environment where nearly every other retailer failed. But, we seriously question the company's 3-4% comp guidance for '14.
NKE - Manchester United seal world-record £600million Nike sponsorship deal
- "Manchester United are set to announce a world-record kit deal worth more than £600million."
- "The faltering Premier League champions will make a major statement that proves they are still the biggest name in world football by renewing an arrangement with shirt manufacturers Nike."
- "It will bank United more than £60million-a-year over the course of a decade-long agreement."
- "That is almost double the current best kit manufacturing deal, which sees Real Madrid earn £31million from their arrangement with adidas. United currently have a deal with Nike worth £23.5million-a-season - less than Real, Arsenal, Barcelona and Liverpool."
Takeaway: We rarely rail on Nike for how much it spends on endorsement deals. The reality is that the company has proven to be a good steward of capital over time, with sponsorships as well as general corporate capex. But taking ManU from £23.5mm per year to nearly 3x at £60mm?? That borders on egregious -- actually, it crosses the border. Paying £23.5 when the team was dominant, to paying £60mm when it struggles to beat Man City makes no sense to us. Let's hope Nike has something up it's sleeve on this one. Because it looks like it just got robbed.
HMB - H&M Debuts First Wedding Dress And It Costs Less Than $100
- "The mass retailer will be selling its first wedding gown for just $99...both in stores and online later this month, according to a rep for the brand."
- "This will be the first H&M wedding dress sold in a regular collection, although a wedding gown did appear in the Viktor & Rolf one-time collection back in 2006."
Takeaway: This company is so good. While they'll hardly threaten Vera Wang's business, the reality is that there are a lot of women who will buy a wedding dress at H&M in a heartbeat. Aside from the fact that H&M has built up so much credibility as a fashion leader, not everyone has the resources or the willingness to spend $1,211 on a wedding gown (that was the average price spent last year).
SPWH - Outdoor goods retailer Sportsman's Warehouse files for a $201 million IPO
- "Sportsman's Warehouse Holdings, an outdoor sporting goods retailer with 47 locations across the US, filed on Friday with the SEC to raise up to $201 million in an initial public offering. The Midvale, UT-based company, which was founded in 1986 and booked $656 million in sales for the 12 months ended November 2, 2013, plans to list on the NASDAQ under the symbol SPWH. Sportsman's Warehouse Holdings initially filed confidentially on December 11, 2013."
Takeaway: Not sure who is advising this company strategically, but sounds to us like yet another retailer that falls in the 'should not be public' basket.
SHLD, APP - Sears, Kmart, American Apparel Among Least Engaged Brands
- "Kmart finished third from the bottom and Sears sixth from the bottom in this year’s distillation of the lowest-ranked brands. The bottom 10 also included American Apparel Inc. in the seventh slot and Coty Cosmetics at number eight."
- "Blackberry finished lowest among the 555 brands studied by Brand Keys with a ranking of 52 percent, meaning respondents rated it as satisfying just more than half of the attributes consumers look for in an ideal brand in its category."
- A total of 32,000 consumers between the ages of 18 and 65 were polled for the 2014 index, with 70 percent of them questioned by phone, 25 percent in face-to-face interviews and 5 percent online.
Takeaway: This is a really interesting study. We can't speak for the methodology, but 32,000 consumers is a tough sample to screw up. If there's any single takeaway it's that K-Mart, Sears, and American Apparel all showed up -- and JC Penney did not.
BONT - The Bon-Ton Stores, Inc. Announces Brendan L. Hoffman's Term as President and Chief Executive Officer Will End in 2015
- "The Bon-Ton Stores, Inc. today announced that Brendan L. Hoffman, President and Chief Executive Officer, has notified the Company's Board of Directors that he will not renew his employment agreement with the Company at its expiration on February 7, 2015. Therefore, Mr. Hoffman's term as President and Chief Executive Officer will end, and he will also resign as a director of the Company, onFebruary 7, 2015."
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Client Talking Points
Argentina, Brazil and Chile equities were all down another -1.2% to -1.6% yesterday, taking the MSCI Emerging Markets Latin America Index to -10% year-to-date. Meanwhile, food and energy inflation rages higher in the face of these countries seeing Keynesian currency declines. No, this is not good news for companies like Procter & Gamble, Coca-Cola, etc.
Gold loves the stagflation trend that’s manifesting. It always has. It’s up another +0.5% to +12% year-to-date this morning (versus the Dow which is down -0.4% YTD) after holding support on what was barely a correction. Needless to say, #InflationAccelerating remains Hedeye’s Top Q114 Macro Theme.
The UST 10-year yield of 2.79% hasn’t budged in the last 24 hours. This remains one of the most important live quotes on my risk management screen. Now it just needs to verify lower-highs beneath Hedeye’s 2.81% TREND line to confirm our U.S. #GrowthSlowing theme. We're watching this closely.
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Top Long Ideas
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
Three for the Road
QUOTE OF THE DAY
"To produce we must be able to make endless mistakes." - Lesley Garner
STAT OF THE DAY
Colorado made about $2 million in marijuana taxes in January, state revenue officials reported Monday in the world’s first accounting of the recreational pot business. The tax total reported by the state Revenue Department indicates that $14.02 million worth of recreational pot was sold. The state collected about $2.01 million in taxes. (Washington Post)
BYD, CCL, PENN
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
- REGENT cruise lines 4Q 2013 conference call:
- CZR 4Q 2013 conference call: 5 pm (36895079)
- STN 4Q 2013 conference call: 4:30 pm
Monday-Thursday, March 10-13
- 2014 Cruise Shipping Miami Conference
Wednesday, March 12
- SGMS F4Q 2013 conference call: 5:00 pm (pw: 36357318)
- MTN FY2Q 2014 conference call: 4:30 pm
Friday, March 14
- Hyatt Investor Day
BYD - Activist investor Elliott Management and EICA disclosed a 7% and 5% in BYD, respectively.
Takeaway: We welcome activist involvment in BYD as operating change needs to be made. Margins and win per position have lagged the competition. With the right operating team in place, we estimate BYD could enhance EBITDA by $110 to $150 million, or $8 to $10 of equity value.
CCL - Another sickness outbreak on 'cursed' cruise ship Oriana Southern Daily Echo
P&O Oriana has suffered yet more problems after norovirus broke out for the second time in a week. The ship is due to dock in Southampton on Thursday. So far 4 of 1,740 passengers returning from on its Northern Cape winter cruise have been struck by the highly contagious bug. On March 2, the liner was delayed by 12 hours leaving Southampton on March 2 after 57 previous passengers went down with Norovirus and the ship had a broken propeller.
Takeaway: Terrible luck for P&O Cruises UK (CCL brand)
PENN –will break ground on Plainville casino on Friday
Takeaway: PENN moving quickly to open what should be a high ROI property, even with a 49% gaming tax rate
No more than 6 gaming licensees post-2020 Macau Business Daily
Secretary Tam says there “should be no increase” in the number of gaming concessionaires – six at present – allowed in the city’s gaming market following the expiry of the current permits in 2020 and 2022.
Takeaway: An obvious positive for current Macau operators
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
With EBITDA margins trailing the competition by an average of 500bps, some shareholder pressure should not be a surprise. But will the new Activist be successful?
We’ve long thought that BYD was ripe for activist shareholder involvement. In fact, we’ve had discussions with such activists but the major push back has been major insider ownership - around 40%. BYD is an operational underperformer and should either put the right management team in place or sell the company to a better operator. Will Bill Boyd acquiesce or even sell? That remains to be seen but he is in control.
The reality is that BYD underperforms its competition both at the company level in terms of EBITDA margin as well in each of its markets. BYD’s property EBITDA margin trails the average competitor in most of the company’s markets by 200-800bps. Moreover, gaming revenue per position also falls short of the competition by up to 10%.
With the right operating team in place, we estimate BYD could enhance EBITDA by $110 million to $150 million, or $8 to $10 of equity value. BYD closed at $11.80 yesterday and while the stock will no doubt be up in the morning, considerable upside will still remain if operational changes are made and even more through the sale of the company. We’re pretty sure GLPI would take a look.
For an activist looking for BYD to pursue its own REIT split, we would view that as unlikely. BYD's debt levels are too high and significant NOLs remain. BYD is likely 3 years away from even considering that option
The following charts show BYD’s underperformance. Note that the data used for this analysis covers 2013/2013. Given the PNK acquisition of ASCA and the PENN/GLPI split, it seemed more comparable and easier to present. We believe the margin differential hasn’t changed much.
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