Euro Pacific Capital CEO Peter Schiff pulls no punches with Hedgeye CEO Keith McCullough on this latest edition of HedgeyeTV’s "Real Conversations.” Schiff minces no words on his ongoing feud with NYU economics professor Nouriel Roubini, reckless Fed monetary policy, inflation, the beleaguered U.S. middle class, gold prices and much more. (Interview recorded Wednesday May 28th)
Takeaway: 64% said YES; 36% said NO.
It's official. Apple is buying Beats for $3 billion. In a statement, Apple CEO Tim Cook said that the acquisition will "complement our product line and will help extend the Apple ecosystem in the future. Bringing our companies together paves the way for amazing developments which our customers will love."
Today’s poll question was: Do you think Apple's $3 billion purchase was the right decision?
At the time of this post, 64% said YES; 36% said NO.
Of those who voted YES, one person explained, “Google bought Nest. Facebook bought Oculus. Apple buys Beats. We'll see more of this, and Apple will take Beats (and other acquisitions) to a new level.”
Another YES voter agreed, nothing, “What is $3BB for a company with a market cap of $500 BB (sad that with their R&D budget that they have to buy innovation but when you lose the innovator and now have an operator...this is what happens).”
On the opposite end, these NO explained why they thought it was the acquisition was a bad decision:
- “Steve Jobs is rolling over in his grave. They gave away $3 Billion of his money for a headphone brand? Now its not just for your head! Introducing Beats apps, Beats hardware, Beats websites, Beats me over the head! Now not just your headphones will be overpriced and mediocre, your whole experience will be!”
- “What are they getting, other than a couple rich guys whom they just made richer?”
- “Beats are an expensive inferior fad product. If it remains hip and Apple improves quality it might have a chance.”
- “What could AAPL have done with that $3bn if it invested in building its own technology in that area? Even if it failed to win, it'd still likely be a better ROI than buying Beats. Whenever a company that has grown organically through such an astounding innovation agenda buys a headphone/hardware company, it says something about organic growth prospects. Bottom line: What would Steve Jobs think? Doubtful that he'd like this one.”
- “They could've bought anything. ANYTHING. Forget home automation. Forgot in car dash displays. We want headphones!!!!!!”
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Takeaway: The longest and deepest baby recession since the 1970s may be coming to an end.
The Great Recession triggered a steep decline in the U.S. birth rate, but signs show the downward trend may be slowing.
U.S. births are down -10% since 2008. In other words, the cumulative decline over the last five-plus years means almost 1.5 million American babies have not been born. That’s obviously a lot of babies who will never exist, never grow up, never go to school, never enter the workforce (not to mention have their own families) and so on—especially when compared to the 3.8 million kids under one-years-old in the United States today.
While the economic toll of the Great Depression during the 1930s engineered the biggest decline in birth rates over the last century, this present decline is pretty close in scale. Fortunately, the decline of births which occurred during the Depression was eventually followed by the Baby Boomers, The Boomer Echo, as well as the multiple generations in between. These cycles clearly play big roles in economic, political, and social trends as the synchronized peaks and troughs of millions of people wind through the system.
The recent decline is suggesting that a large number of young American adults and potential parents are signaling that they are not quite ready—financially or otherwise—to take on the significant commitment of a life, and a lifetime. That’s a lot of “leaning in” going on: (see Lean In: Women, Work, and the Will to Lead by Facebook COO Sheryl Sandberg) if indeed we are witnessing a deeper, secular change in the attitude women and their partners have toward having children.
That said, our model below shows why we believe the baby making tide may be turning.
While we can’t measure attitudes, we can measure the result using some clever manipulation of data the federal government produces each month. Small positive percentage changes in the last 6 months may mark the beginning of a much bigger move over years to come. After all, there are millions of biological clocks ticking away all across the country.
There are plenty of reasons to care about the trend in baby making in the United States. Our focus and work on the US Medical Economy has drawn us into the analysis; For example, having a baby is the single biggest reason anyone not on Medicare is admitted to a hospital, accounting for 30% of all hospital admissions.
But there are many other reasons to care about declining birth rates, some of which can imperil entire economies and countries. Some of the more obvious implications from a drop in births include the related and chilling effect on retail spending, education, housing, food, and so forth. In other words, less babies means less spending on baby clothes (CRI), toys (MAT) and Happy Meals (MCD). Not to mention an aging workforce heading into retirement and attendant strains on Social Security and tax revenue. On the other hand, “Junior” may have a better shot getting into the college of his choice in 2028.
Look no further than countries like Russia and Japan which are both concerned over declining births in their respective countries. Japan is aggressively encouraging its young people to date and mate to reverse its birth rate plunge which has dropped to just half of what it was only six decades ago.
Meanwhile, “Mother Russia” hasn’t exactly been living up to its name of late and is facing its own plunging population crisis. Not too long ago, Vladimir Putin went so far as incentivizing women with $9,200 to have a second baby—that’s in a country where average monthly incomes are a small fraction of that.
Bottom line: We are bullish on American baby making. We believe an uptick in U.S. births is coming. Of course, there is always the alternative downside scenario lurking in a Children of Men like dystopian future if we’re wrong.
Still not enough stability in the Caribbean puts us on the sideline despite continued improvement in Europe. NCLH at risk.
OVERALL SURVEY SENTIMENT
- CCL: NEUTRAL
- RCL: NEUTRAL
- NCLH: NEGATIVE
CALL TO ACTION
Our pricing survey on May 27-28 showed continued pricing pressure in the Caribbean, although some of it could be attributed to a seasonally slower summer. European pricing was stronger in May for the Royal Caribbean brand, Celebrity and Costa. We’re also seeing pockets of strength in the upcoming summer cruising season in Alaska.
Norwegian remains the brand at most risk given the unabated, pervasive discounting in the Caribbean. Can Breakaway premiums withstand the new competition from Quantum later in the year?
CCL reports FQ2 earnings in four weeks. CCL has the easiest comps among the three publicly traded cruise companies, particularly for the Caribbean. Hence, Carnival brand Caribbean pricing YoY for 2H 2014 is still up mid-to-high single digits YoY, despite the heavily competitive environment. Europe is more of a mixed picture with Costa leading the charge.
We’ll have a more detailed earnings preview on CCL the next time we run the pricing survey on June 18th.
- Carnival brand: Rough seas in the Caribbean as pricing is off substantially for the early summer itineraries in FQ3. More discounting was seen in the Western Caribbean segment, which has been a weak spot. FQ4 2014 and FQ1 2015 pricing are fairly steady. On a YoY basis, pricing dipped for FQ3 in late May but for the past 3 months, it has averaged close to high single digit growth.
- Princess/Holland America: Pricing recovered slightly but remain at lower levels than that seen in late March
- Seasonal discounting for some June itineraries at Holland America
- Princess pricing unchanged
- Costa pricing for FQ3/FQ4 mainly kept its course in late May, suggesting higher YoY comps, +20% in some cases.
- It’s a different picture for CCL’s other brands. Princess pricing fell further, suggesting a modest decline overall for FQ3. While Cunard pricing has stabilized, comps are very difficult, particularly for FQ4. Holland America is struggling with pricing in FQ3. AIDA pricing slipped again for both FQ3 and FQ4 across all itineraries. P&O Cruises UK is doing a little better with pricing holding steady for the latter half of FY2014.
- Fairly quiet with some summer discounting in Princess’s Japan itineraries.
RCL is probably best positioned for this year with its price leadership in Europe and the highly anticipated arrival of Quantum to the New York/New Jersey market. But so far, the brands haven’t been immune to the Caribbean discounting. RCL is doing exceptionally well in Europe and the favorable pricing for Anthem’s 2015 sailings bodes well for that region. After an unusually slow start to the year for the Alaska itineraries, pricing is beginning to pick up.
- For the summer, RC brand pricing slumped in the Caribbean, especially in June/July. However, this is slightly offset by stronger pricing in Alaska.
- Celebrity pricing is down significantly for FQ4 in the Caribbean
- Quantum pricing for Nov/Dec itineraries remain relatively unchanged
- Pullmantur pricing steady
- Pricing in Europe has been extremely robust and they got stronger at the end of May for both the RC and Celebrity brands. Pricing was up high double-digits for the rest of FY 2014.
- Azamara modest declines in pricing for summer itineraries
- While Pullmantur pricing fell sequentially in both the Mediterranean and Baltic Sea regions, comps are so easy that on a YoY basis, they are still able to maintain high double digit pricing growth.
- Slight uptick in Anthem pricing for 2015 itineraries
- While this region will be more material in the 2nd half of 2015, pricing has been generally steady among the RCL brands with the exception of Celebrity which slashed pricing for its January 2015 Singapore itineraries.
- YoY pricing is still significantly behind for winter 2014 but sequential pricing trends have been positive
NCLH maintains the most exposure to the Caribbean which remains a struggle for brand. The charts below show no pricing power. Strength from Europe is a buffer to the bleeding but as the recent lower FY yield guidance indicated, the Caribbean declines have been overpowering.
- Caribbean pricing still has not bottomed for NCLH as it suffered almost a double digit pricing decline since late April. The quarter we're now focused on is FQ4 given Breakaway’s pricing with Quantum of the Seas entering the NY/NJ market. For FQ4, Breakaway’s APD is averaging $86, while Quantum’s APD is ~$200.
- Although premiums for the most part improved for NCLH’s newer ships as seen below, Q4 Breakaway premium shrunk from 24% in April to 15% at the end of May.
- NCLH has 49%, 40% and 62% of its capacity in the Caribbean (including Bermuda) for Q2/Q3/Q4 2014, respectively. Compared with last year, Caribbean (including Bermuda) capacity is up 6% points.
- Pricing environment is challenging with pricing barely up.
- NCLH has 10% and 18% exposure to Alaska in FQ2 and FQ3.
Europe and Hawaii
- Europe looks outstanding for the summer with steady sequential pricing and strong double digit YoY pricing growth
- Hawaii FQ2 summer pricing was slightly weak
STOCK VS SURVEY
Survey has been mostly positive for CCL in the past 6 months
Survey has suggested mixed signals for RCL in the past 6 months
Survey has been bearish on NCLH since the 02/12/14 survey
Takeaway: Target's e-commerce problem can't be fixed by a simple digital advisory council.
- "Target Corp. announced it has formed a Digital Advisory Council, as part of its efforts to accelerate its digital transformation. The panel of technology industry leaders will help guide Target’s omnichannel strategies and push Target to innovate faster, and discover new ways to leverage technology to enhance the guest experience – both online and in stores."
- The council includes experts with varied tech backgrounds, and is comprised of:
- Ajay Agarwal, Managing Director of Bain Capital Ventures
- Amy Chang, CEO/Co-Founder of Accompani, formerly led Google Analytics
- Roger Liew, Chief Technology Officer of Orbitz Worldwide
- Sam Yagan, CEO of the Match Group and CEO/Founder of OkCupid
- "The council will meet quarterly as a group with Carl and others driving Target’s omnichannel strategies, including Target.com and Mobile teams, the Enterprise Strategy team and other Target leaders. Council members, who will serve two-year terms with an optional third year, also will be called upon to provide guidance on various topics and to help Target connect with other tech leaders."
- "In addition to forming the new council, Target is bolstering its internal digital talent with plans to hire at least 50 new software engineers this year for Target.com and Mobile product teams. The engineers will be primarily based in Minneapolis, where they will work as part of the company’s new digital product teams. Some new engineers will be based in Target’s San Francisco office."
Takeaway From Hedgeye’s Brian McGough:
Target's e-commerce problem can't be fixed by a simple digital advisory council. Some of the members make sense to us, like the former head of Google Analytics and the CTO of Orbitz. But the founder of OkCupid – the self-proclaimed 'best Free dating site on Earth'? Not so sure about that one.
The biggest positive, in our opinion, is that Target is hiring 50 new software engineers. We give Target props in that regard, as it's investing in an area it has long ignored. Most of the developers will be based in Minneapolis – which is not exactly a hub for code-writing talent. Most importantly, we've got to ask ourselves, is it enough? After all, Target has a $2.5 billion e-commerce business and it is hiring 50 people. Wal-Mart just announced that it is hiring 500 people to support its e-commerce platform. Could this effort be additive for Target? Possibly. But it can't continue to ignore that the competition continues to run at a faster rate.
Our sense is that this is the first thing that a new CEO addresses. We also think whatever we see out of the new CEO will take down margins for 2-3 years before it ultimately helps the top and bottom line.
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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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