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VIDEO | #TweetKeith: You Asked, I Answered

 

 

Hedgeye CEO Keith McCullough answers the top three questions from his Twitter followers including whether investors should be worried about a brewing market bubble.


Q2 2014 Macro Themes Conference Call - What's Next for the U.S. Consumer?

Q2 2014 Macro Themes Conference Call - What's Next for the U.S. Consumer? - HE MT 2Q14

 

Hedgeye's Macro Team will be hosting our highly-anticipated Quarterly Macro Themes conference call on Tuesday, April 8th at 1:00pm EDT. Led by CEO Keith McCullough, the presentation will detail the three most important macro trends we have identified for the quarter and related investment opportunities.

 

Q2 2014 MACRO THEMES OVERVIEW

  • #ConsumerSlowing: The cyclical increase in consumer spending growth from the 2009 lows is under pressure. Rising food prices and a stagnating USD continue to squeeze average Americans on the margin. Given the potential for further USD depreciation and a continuation of global commodity inflation as a real macro risk, we think U.S. consumption growth will slow as it bumps up against difficult compares heading into 2Q and beyond.
  • #StructuralInflation: Following up on our cyclical #InflationAccelerating theme, we are focusing now on structural inflationary pressures embedded in the U.S. economy. Much like in Japan, zero percent interest rate policy has fueled a broad-based portfolio re-balancing away from financing economic growth to reach for additional yield in slow-growth assets. This is fueling systemic underinvestment in both human and physical capital. However (unlike in Japan), the USD's long-term downward trend adds an additional layer of inflationary pressure due to an increased reliance on imported goods and services amid capacity constraints abroad.
  • #HousingsSlowdown:  We have been big housing bulls over the last 18 months. But the party is ending. Asymmetry in being long has flattened.   Price follows demand on a lag and demand is slowing as affordability declines, regulatory changes drag on liquidity, and institutional interest ebbs.  We will walk through our updated view on the Supply/Demand/Price dynamics prevailing in the housing market and our forward outlook for prices. 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 212497#
  • Materials: CLICK HERE (the slides will be available approximately one hour prior to the start call)

 

Ping  for more information.


CRUISE PRICING SURVEY: DICEY Q2

The large capacity increase in Q2 for the Caribbean is clearly impacting pricing

 

 

OVERALL SURVEY SENTIMENT

  • RCL:  Neutral
  • NCLH:  Negative
  • CCL:  Not applicable

 

CALL TO ACTION

RCL continues to be a mixed bag with strong pricing power in Europe but weakness in the Caribbean.  NCLH’s high exposure to the Caribbean will pressure company yields particularly in 1H 2014.

 

SUMMARY

Our most recent pricing survey focused on RCL and NCLH, since CCL just reported earnings last week.  While overly conservative in our opinion, CCL’s guidance was certainly disappointing.  RCL's pricing power resides in Europe and pricing in the region strengthened even further in March.  However, RCL is not immune to the weakness in Caribbean pricing, particularly for FQ2.  For NCLH, its FQ2 Caribbean pricing continued to slip in March. We estimate NCLH has approximately 83% and 46% exposure to the Caribbean in FQ1 and FQ2, respectively.

 

RCL

  • Caribbean
    • Glaring tumble in FQ2 pricing as seen in Chart 1
      1. Celebrity pricing fell off a cliff for FQ2.  Thankfully, it only accounts for 9% of RCL’s Caribbean itineraries.
      2. For the RC brand, pricing for late April/early May itineraries was hit hard across the fleet.
    • Starting with June, pricing in the Caribbean looks pretty healthy
    • Quantum pricing for Nov/Dec remain unchanged
    • Anthem pricing for 2015 remain unchanged
    • Pullmantur pricing steady

Chart 1

CRUISE PRICING SURVEY: DICEY Q2 - 1

  • Europe
    • Chart 2 shows strong YoY pricing for all quarters.  In Chart 3, on a sequential basis, there was a price drop in FQ2 but that is more than offset by gains in FQ3 and FQ4.
      • RC brand – pricing up high double-digits for F2Q and high single/low double digits YoY for F3Q-F4Q 
      • Celebrity pricing making strides.  Sequential positive momentum continued at the end of March.
      • Azamara pricing was mixed
      • Pullmantur pricing showed good growth considering very easy comps
  • Alaska
    • Both RC brand and Celebrity improved slightly on sequential pricing.  YoY, pricing remains down modestly.

Chart 2

CRUISE PRICING SURVEY: DICEY Q2 - 2

 

Chart 3

CRUISE PRICING SURVEY: DICEY Q2 - 3

 

 

NCLH

Chart 4 shows overall, NCL pricing fell slightly at the end of March. 

  • Caribbean
    • Discounting didn’t stop as March progressed.  We’re particularly worried about FQ2. 
    • Getaway’s 2Q pricing maintains a healthy premium over its existing fleet but it’s misleading because its comp brands (Sun, Pearl, Sky, Epic) pricing fell again, -8% on average since early March and -27% since February guidance while Getaway pricing declined 18% since February.  Getaway premiums for 4Q was steady around 28%.  Compared with Epic, its 6% higher.
    • Breakaway 3Q premium remain in the low single digits for F3Q and +26% for 4Q.
  • Alaska
    • Pricing was relatively stable.  YoY, pricing remains modestly lower.
    • NCLH has 10% and 19% exposure to Alaska in FQ2 and FQ3.
  • Europe pricing looks outstanding for the summer
  • Hawaii summer pricing took a hit in FQ2

Chart 4

CRUISE PRICING SURVEY: DICEY Q2 - 4

 

STOCK VS SURVEY

 

CCL 

Survey has been mostly bullish for Carnival since the major pivot from the 10/14/13 survey.

 

CRUISE PRICING SURVEY: DICEY Q2 - 5

 

RCL

Survey has suggested mixed signals for RCL in the past 6 months

 

CRUISE PRICING SURVEY: DICEY Q2 - 6

 

NCLH

Survey has been bearish on NCLH since the 02/12/14 survey

 

 

CRUISE PRICING SURVEY: DICEY Q2 - 7


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ROUND NUMBERS & RETRACEMENTS: MARCH EMPLOYMENT

We’re grinding on wrapping up our 2Q14 Macro themes presentation (call next Tuesday) so we’ll keep the March Employment review tight here.  Some notable callouts along with a visual summary below:

 

  • Decent Absolute, Bad Growth: Both the NFP and Private payroll figures missed the round +200K estimate.  While the absolute numbers (& the revisions) were decent, growth (2Y ave) in NFP and private payrolls posted their lowest rates since November 2012 and August 2011, respectively. 
  • No Policy Shift:  Okay absolute + better sequentially = no change on the current policy path in the immediate term.  Next FOMC meeting announcement is April 30th.  
  • Retracement:  We have added exactly 8.9M private payrolls since the Feb 2010 trough in NFP employment.  We officially eclipsed the prior Jan 2008 peak in total private employment for the first time this month
  • Wage Growth Slowing:  Ave hourly private sector earnings decelerated -10bps sequentially to +2.1% YoY.  Similarly, hourly earnings growth for non-supervisory and production employees decelerated -20bps sequentially on both a 1Y and 2Y basis.  A slowdown in wages does not augur strength for forward consumption growth (nominal PCE growth is running +3.0% as of Feb), particularly with savings rates near historic lows and wealth effect ebbing. 
  • Weather:  BLS reported 148K out of work due to bad weather in March.  This is up from the +117K reported in March of last year but exactly equal to the 10Y average of 148K.  Weather distortion was real but its rearview.
  • Seasonality:  1Q14 diverged negatively from the strong prior seasonal trends of the last 4 years.  Seasonality will shift to a modest headwind from here. 
  • State & Local Gov’t:  A 7th consecutive month of positive growth for collective state/local government employment.  Positive employment growth and higher spending at the federal level should continue to support aggregate gov’t sourced income growth in 2014 (~17% of total). 
  • Employment by Age:  All age cohorts (20-64YOA) showed accelerating employment growth in March.  For 1Q14, growth in total CPS employment is up 1.4% YoY – accelerating 80bps sequentially.  

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - Summary Table Emp march

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - Nominal Earnings

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - Employment Bad Weather March

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - NFP Seaonality

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - Employment by Age March

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - Unemployment Rate March

 

ROUND NUMBERS & RETRACEMENTS:  MARCH EMPLOYMENT - State   Local Gov t March

 

 

Christian B. Drake

@HedgeyeUSA


YELP: Death of a Business Model

Takeaway: We're adding YELP Short to our Best Ideas List. Summary Below, More detail to follow on our Best Ideas Call

THESIS SUMMARY

  1. Absurd Attrition Rate; Will Only Get Worse: YELP’s “repeat rate” is misleading.  YELP is losing almost 20% of its customers on a quarterly basis, potentially in excess of 90% annually.  Recent customer User Interface enhancements & macroeconomic headwinds are likely to exasperate the issue.

  2. TAM is a Fraction of What’s AdvertisedEstimates vary for YELP’s total addressable US market, ranging from 23M-27M….In reality, its closer to 170K. 
  3. 2014 Consensus Lofty/2015 Unattainable: Consensus revenues imply an acceleration in new account growth on a per-market basis and/or improving attrition rates through 2015, we're expecting the opposite.  Details below.  
  4. $30 Stock?: YELP trades at a premium to FB & LNKD on a 2014 P/S basis given lofty consensus growth expectations. Once growth expectations collapse, the stock will too.

 

ABSURD ATTRITION RATE

YELP provides a quarterly metric called its customer repeat rate, which it defines as the percentage of its current customers that has advertised with YELP in the LTM.  That rate has hovered in the low 70% range since the company went public, with the remaining 30% being new customers.  What isn’t disclosed is how many of its customers that it is losing on a quarterly basis, but we have broken this down.

 

The math is simple.  Multiplying YELP’s active customers by its repeat rate will yield its recurring customers.  If that number is lower than its ending customer count from the prior quarter (i.e. the number of customer that have advertised in the LTM), then it lost customers. 

 

On a quarterly basis, YELP loses almost 20% of its customers.  However, management has stated that most of its customer contracts have 12-month terms (vs. 3 & 6-month contacts with higher CPMs).  If that is the case, YELP’s attrition rate is considerably higher, potentially in excess of 90% annually depending on the contract mix.  Put another way, the active customer base that YELP reported in 4Q13 is comprised almost entirely of new accounts signed in 2013: YELP added a total of 63K accounts in 2013; it ended 4Q13 with 67K in total.

 

YELP: Death of a Business Model - YELP   Customer Breakdown

WHY IS ATTRITION SO HIGH?

The main reason is a mismatch between the sources of YELP’s advertising revenue and how people use its website.  Revenues are relatively distributed across 6 categories, but our proprietary survey suggests visitor use Yelp almost exclusively for restaurants.

 

YELP: Death of a Business Model - YELP   Ad Revenue vs. Usage Patterns 2

 

In turn what happens is that restaurants do not see a material uptick in traffic to their pages (because they are already getting the traffic), while the remaining categories don’t see a material lift in traffic-related revenues unless they charge a high enough ASP for their services to justify the advertising cost for limited traffic (e.g. Interior Designer). 

 

To illustrate, we delved into the BCG survey that YELP highlights on its official blog, which suggests that companies that advertise on YELP see increasing revenues ($23K on average vs. businesses without a YELP presence).  However, the incremental benefit varies by business type.

 

What’s more important is the incremental revenue an advertising business receives relative to those that have claimed their YELP page, but do not advertise. We have broken down the BCG survey in the table below to highlight this concept.  

 

YELP: Death of a Business Model - YELP   BCG Analysis

 

What’s interesting about the survey results is that it reinforces the our view that restaurants do not see enough of a yield to justify the ad spend; and once again, this analysis is based on the BCG survey that YELP highlights on its official blog.  While most of the remaining categories appear to offer a meaningful ROI, we suspect these results are not typical of most businesses on YELP.  If they are, why is YELP’s attrition rate so high?

WHY ATTRITION WILL GET WORSE

There are two main drivers that we expect will lead to accelerating attrition: 1) YELP may be shooting itself in the foot with its new Revenue Estimator Tool, 2) Macroeconomic Headwinds will make it tougher for businesses to absorb advertising expenses.

  1. YELP’s Revenue Estimator Tool: Late in 1Q13 (3/25/13), YELP introduced a new tool for its businesses that estimates YELP-derived revenues based on the amount of estimated traffic YELP drives to the business.  While a nice feature, we suspect the tool may incite greater attrition since it will likely highlight the limited advertising ROI for these businesses.  The other risk is that the tool could grossly overestimate Yelp’s benefits to these businesses, which would reduce confidence in the disclosed revenue benefits (e.g. YELP calculates estimated business revenue on total leads, even though these leads are not mutually exclusive events).  As contracts come up for renewal, we suspect the revenue tool will only exasperate YELP’s attrition issue since it will make limited advertising ROI more tangible to its customers.
  2. Macroeconomic headwinds: The setup is getting worse.  Retail sales growth appear to be dropping sharply in 1Q14, and more importantly, input costs (i.e. commodities) are rising considerably YTD.  Collectively, small business margins will see increased pressure given reduced economies of scale; particularly for restaurants.  Some businesses may be forced to curb costs where they can; others will be taking a harder look at their P/L.  In either case, it will be that much harder for YELP to curb attrition; especially if its Revenue Estimator Tool highlights limited advertiser ROI.

YELP's Customer Dashboard Example

YELP: Death of a Business Model - YELP   Customer dash 2

YELP: Death of a Business Model - YELP   CRB Commodity Indexes

TAM IS A FRACTION OF WHAT’S ADVERTISED

Consensus may argue that YELP’s total addressable market (TAM) is substantial, with a pool of 27M businesses in the US (22M Nonemployers, 7M Employers).  But after digging deeper into census data, YELP's TAM is considerably smaller.  Two things to consider 

  1. Can’t Afford: 75% of US businesses make under 100K annually (YELP’s annual ARPU is $4.2K)
  2. Wrong Audience: ~50% are B2B, largely outside the scope of YELP’s core audience

After netting out B2B-focused businesses with less than 100K in annual revenues, we estimate the total addressable US market is closer to 3.4M.  However, we doubt YELP approaches anything close to that. 

 

YELP currently has 67K paying businesses, which is only ~4.5% penetration of its 1.5M claimed business pages as of 1Q14.  In fact, YELP’s advertiser base has never exceeded 5.0% penetration of its claimed pages since the company has been public.  That alone suggests the demand just hasn’t been there.  So unless that changes, YELP’s realistic addressable market is 170K businesses (5% of the total 3.4M opportunity). 

 

That may sound crazy relative to the consensus narrative, but YP, which owns yellowpages.com, only has 575K active customers, and it is the largest local internet ad platform in the US. 

 

Based on its 67K current advertiser accounts, YELP has penetrated roughly 40% of realistic addressable market.  

 

YELP: Death of a Business Model - YELP   TAM

YELP: Death of a Business Model - YELP   Advertiser Penetration

2014 CONSENSUS LOFTY/2015 UNATTAINABLE

The driving forces behind YELP’s revenues are new account growth and attrition.  In 2013, YELP averaged 31% y/y growth in new accounts on a per-market basis, and an average attrition rate of 18.7%.  As you can see in the table below, YELP will need to improve on one, if not, both of these metrics to hit 2014 estimates.  We expect deterioration on both fronts for the reason we laid out above.

 

YELP: Death of a Business Model - YELP   2014 Revenue Growth Scenario

 

However, it’s in 2015 when we expect YELP’s fundamentals to take a material turn for the worse.  It's attrition risk will increase alongside a waning opportunity for new account growth given increasing penetration.  Consensus is assuming revenues of $512M in 2015; a moderate deceleration to 43% revenue growth on a base of $358M in 2014 revenues.  In order to achieve consensus 2015 estimates, YELP will need to produce both accelerating new account growth on a per-market basis and improving customer retention vs. 2014.  We’re expecting revenues of $444M, 30% increase on our 2014 estimate of $342M, and we're being conservative.  In the table below, you can see the assumptions driving our model

 

YELP: Death of a Business Model - YELP   Hedgeye vs. Consensus 2

$30 STOCK?

YELP’s trades at ~14x and 10x 2014 & 2015 revenues, respectively.  That multiple is justified only if you believe consensus growth expectations.  Below we relate the forward P/S multiples of the group to consensus revenue growth rates to illustrate this point

 

YELP: Death of a Business Model - YELP   Valuation Table

 

However, we do not believe YELP has the growth profile that the consensus assumes.  In 2015, we believe it can grow 30% (vs. consensus 43%).  On a growth-adjusted P/S basis, YELP should trade closer to LNKD (7.5x), if not lower, based on a more comparable growth profile. 

 

That said, YELP shouldn’t be trading anywhere above a 2015 P/S multiple of 7x; a more appropriate multiple would be in the 5x-6x range given our estimate for 30% growth in 2015, which would translate to $30-$36 stock based on our 2015 growth estimates.  We expect the stock to trade in this range once the street realizes YELP is a 20-30% grower, rather than a 40-50% grower.

ADDITIONAL DETAIL

The above analysis focuses on YELP’s core market: the US local ad market, which is the substantial majority of its revenues (~80%).  We plan to prove additional detail during our YELP Short Best Ideas Call (details to be announced shortly), as well as discuss the rest of its business model

 

In the interim, let us know if you have any questions, or would like to discuss in more detail

 

 

Hesham Shaaban, CFA

@HedgeyeInternet



PODCAST | McCullough: Why Janet Yellen Is Like Punxsutawney Phil


In this unlocked Q&A portion of this morning’s macro call, CEO Keith McCullough talks stocks, bonds and currencies and says economic growth is slowing sequentially which will make Janet Yellen more dovish as a result.  



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