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Real Conversations: Lacamp, McCullough Unplugged on Markets, Fed & the Economic Zeitgeist


Poll of the Day Recap: 72% Think E-Cigarettes are Here to Stay

Takeaway: 72% said HERE TO STAY; 28% said FAD.

Hedgeye analyst Matt Hedrick covers consumer staples and one area of focus is electronic cigarettes within the tobacco industry. Hedrick added Lorillard (LO) as a high-conviction long to Investing Ideas on 3/7/14 (it’s up 20% since then). Included in his thesis is the longer-term earnings power from blu, its e-cigarette brand.  
 

Today’s poll question was: Are electronic cigarettes a fad or here to stay?

 

Poll of the Day Recap: 72% Think E-Cigarettes are Here to Stay - ecig
 

At the time of this post, 72% said electronic cigarettes are HERE TO STAY; 28% said it’s a FAD.


Of those who voted that e-cigarettes are HERE TO STAY, they explained:
 

  •  “Vaporizing is the future of smoking anything, herbs, nicotine related products. There is no tar, extra filler products, and harmful second hand smoke. All of my friends that used to smoke now vape, because they also do not feel short of breath. I also know multiple people that used e-cigs to quit smoking all together. It is time to move on from traditional methods of smoking and embrace this new technology."
     
  • “They are at least a long term fad.  Here for 10-20 years and vaporizing marijuana will be the preferred delivery as legalization spreads.”
     
  • “Not only here to stay as smoking replacement, and as a new addiction of its own, but will also become the delivery technology of choice for legal marijuana.  this will be multi billion $ industry.”
     
  • “For people who have struggled to quit smoking or always on the verge of starting to smoke again, they offer a great compromise as they replace the nicotine and the physical habit of smoking.  As always, better not to start in the first place...  cost and smell are just 2 huge additional benefits.”

 

  • “4-7% of smokers have success in quitting. Smoking as a practice is obviously here to stay. The question is whether the electronic cigarettes ‘take the edge off.’ Seems likely.”

 

Conversely, one voter who believes it’s a FAD said, “Stick with the patch, I did. Most doctors are adamantly against them and are claiming that there are unhealthy elements within the vapor. Look for the FDA to pooh pooh the idea.”

 

Another agreed: “Someone will come up with a more natural version of an alternative cigarette (different than American Spirits) and potentially wipe out the e-cig category.”

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Hedgeye Retail: Adidas Can’t Afford to Sell Everything but Shoes | $ADDYY

Takeaway: Adidas Chief Executive Herbert Hainer makes a pretty damning admission.

 Hedgeye Retail: Adidas Can’t Afford to Sell Everything but Shoes | $ADDYY - alansmith 2755508c

 

Adidas sees boost to sales from World Cup

 

• "German sportswear company Adidas has given a more precise sales growth target for 2014, amounting to a rise of up to 8 percent, as it gets a lift from the soccer World Cup that starts in Brazil next month."

 

• "'This year we will add 1-1.2 billion euros ($1.4-1.6 billion) to operational revenue, with the World Cup playing an important role,' Chief Executive Herbert Hainer told journalists at a briefing in Munich in remarks released for publication on Thursday."

 

• "That increase represents a rise of 7-8 percent from the 14.492 billion euros of sales Adidas recorded in 2013. Previously, Adidas had guided for a 'high single-digit' increase in currency-neutral sales in 2014."

 

• "'Football is the DNA of our company. We want to clearly show that we are number one in football,' Hainer said, adding Adidas expected to sell significantly more balls than at the last World Cup in South Africa four years ago and about as many shirts."

 

• "Hainer acknowledged, however, that Adidas faced a 'head-to-head' race with Nike in the business for football boots, including in Germany, predicting Adidas would sell 2 million pairs of special boots designed for the World Cup."

Takeaway From Hedgeye’s Brian McGough:

Pretty damning admission by Hainer. Adidas is 'head-to-head' with Nike in the football boots arms race? We would have guessed as much, but Nike is just starting to gain traction in the soccer market. Add Under Armour to the mix and it’s a pretty bleak outlook for Adidas. When soccer balls and t-shirts are the key pillar of growth for a footwear company, we get concerned.

 

 *     *     *     *     *     *

 

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail.

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Cartoon of the Day: Crushing Inflation

Takeaway: While lies about inflation in Washington can most definitely live, they can’t live forever.

Cartoon of the Day: Crushing Inflation - Inflation.AvgAmerian5.22.2014

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GLD: Adding Gold to Investing Ideas

Takeaway: We are adding GLD to Investing Ideas.

Hedgeye's Macro team is adding Gold to Investing Ideas. 

 

We will send out a full report shortly detailing our bullish case.

 

GLD: Adding Gold to Investing Ideas - gold


Sticking With Long LO on Fundamentals and Rumor Takeout Winds

Once again rumors swirl that LO is going to get taken out. Late into yesterday’s close Reuters reported that RAI remains the interested party, caught in a 3-way with BAT that owns 42% of RAI.  LO ripped +10% higher on the unconfirmed source (rumors began in March of this year), however the stock has given up some of its move intraday (down ~ -4%); we think the market is getting over its ski tips on an imminent timetable for a deal given acquisition challenges.

 

We maintain our Best Idea Long Call Lorillard (presented on March 4 of this year). We think investors are best served to ride out the rumor mill pushing the stock higher as we don’t expect an imminent deal, and maintain that LO is fairly valued as a stand-alone or takeout target at $80/share (more below).

 

We view a hypothetical deal (especially an imminent one) between RAI and LO as challenged on three main factors:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   
  • BAT may look to maintain or increase its ownership in RAI (for the remaining 58%), however it cannot act until July of this year when a 10-year standstill agreement between it and RAI expires.

A scenario suggests that RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ, however all of this shopping would take time.

 

As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the decision to replace CEO Daan Delen with Susan Cameron, who held the CEO seat for 7 years ending in 2011, is contributing fuel to the speculation that she wants to come out of the box “strong” with this deal. 

 

Our thesis is built on the superior fundamentals of the Lorillard portfolio:

  • We do not see Menthol Regulation Risk from the FDA over the medium term (1-2 years) and assign less than a 20% probability over the long term.
  • We expect blu e-cigs to benefit from first mover advantage and maintain leading market share despite competitive pressures from Big Tobacco’s entry into the category. Looking out 5 years to 2018, we model blu’s earnings contributing 31% to total LO, and accelerating earnings growth in the combined company.
  • We expect strong and stable menthol fundamentals driven by lasting consumer and demographic trends that differ from traditional tobacco.

 

Below we’ve outlined the earnings power of a combined base business plus the blu e-cigarette business and a scenario table on EPS estimates five years out, as outlined in our original presentation. A fair value $80/share target would equate to a price 30% higher than today’s, so we think it pays to hold on to LO amidst the rumor winds!

 

Sticking With Long LO on Fundamentals and Rumor Takeout Winds  - zz. risk reward LO

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
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