Sure... when you compare the Dollar to its peers in this global #CurrencyBurning gong show, the greenback looks pretty good.
We recently added YUM to our Best Ideas list as a long.
We are hosting a call next Tuesday, December 2, 2014 at 10am EST to run through our thesis and field questions. We will send out dial-in information and materials for the call next week.
Key Topics Will Include:
- Vulnerable to Activism – There have been a number of events over the past two years that suggest the timing is optimal for YUM to simplify its corporate structure. While there several different avenues of value creation, one thing is clear: YUM’s new corporate structure, multiple brands and underleveraged balance sheet almost ensure that the company is vulnerable to change. What remains to be seen, however, is if the new CEO will be proactive and effect change or be reactive to the changing marketplace.
- Spinoff China (and/or Pizza Hut) – For the better part of the past two years, management has been asked about a potential spinoff of the China business. In our view, this move would be the first step in a series of potential transactions that would simplify the structure and improve the operating performance of the company. We find it likely that a group of influential shareholders begin to push the board in this direction. It also makes sense to consider spinning off the dilutive Pizza Hut (co-owned stores) business, which would trade at a substantially higher multiple as a standalone entity.
- Multiple Ways to Win – The new global reporting structure of the company allows for a clean split of YUM's business units into multiple asset-light business models. We also believe there is an opportunity to increase leverage (to repurchase stock or pay a special dividend), cut excess SG&A, refranchise additional restaurants and command a premium valuation.
Under the scenario we will layout in our upcoming presentation, we see approximately 30-50% upside to the stock from current levels.
The verdict is in. The UST 10YR Yield is reading Japanese/Chinese/European PANIC (i.e. global growth slowing) as bearish ... as it should.
It’s 2.29% for the UST 10YR this morning… That’s a 2 week-low as the total return of the Long Bond in 2014 continues to be:
A) higher than most U.S. stock market averages and
B) without all the SEP-OCT volatility
If you’re new to Hedgeye research, we’ve been making this non-consensus bearish call on Treasury yields and global growth slowing throughout 2014 despite a ton of naysayers.
Case in point was the first week of September when hedge fund manager David Tepper grabbed headlines proclaiming to Bloomberg’s Stephanie Ruhle that we were witnessing “the beginning of the end of the bond market rally."
That hasn’t worked out so well.
After beginning 2014 at 3%, the yield on the ten-year fell to less than 2.4% during the summer, and is currently trading south of 2.30%. Hedgeye CEO Keith McCullough and our macro team thinks yields go lower from here and are continuing to advise our customers to stay long TLT.
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Takeaway: Odell’s ‘The Catch’ made wearing Nike gloves, big UA snub – again. WMT CMO leaves 3 days before Black Friday. TIF, DSW, BWS SIGMAs.
Takeaway: Not the type of strength we'd expect to see out of the ICSC through Nov. so far in light of the fact that disposable personal income was slightly negative during the same month last year. Comps get easier throughout the month and December when DPI was -3.1% YY. We could talk all day about cheap gas and easy comps, but the fact is that we haven't seen any data points during this earnings season that would make us get more constructive on the US consumer.
WMT - Wal-Mart’s Chief Merchandising Officer to Leave
Takeaway: What does this tell you when Wal-Mart loses (or fires) it's Chief Merchant three days before Black Friday?
TIF - 3Q14 Earnings
Takeaway: The US business continues to look rock solid and Europe surprised to the upside as comp trends improved by 1100bps sequentially and 400bps on the two year. The rest of the Globe underperformed expectations though each region improved sequentially on a 2yr basis. Comps get easier on the top line over the next 3 months, but over a little longer duration we don't love the set up. Gross margins are at peak and consensus has that expanding by another 100bps by 2018. SG&A is at post recession lows. Not a name that we want to put on our short bench -- yet at least -- but one we'll avoid on the long side unless an unwarranted price drop gives us an opportunity for a TRADE.
NKE - Odell Beckham Catch Means $2.2 Million for Nike Gloves
- "Nike Inc.’s official football Twitter account sent a photo of the 22-year-old New York Giants rookie with the tagline 'Drop Jaws. Catch Everything Else.'"
Takeaway: That catch will be played on Sports Center's 'best catch' top ten (potentially in the #1 slot) for decades to come. Nike definitely is using that as a big authenticator for it's football gloves -- especially when the picture shows that Brandon Carr, the Cowboy cornerback who fouled Odell and still couldn't make him drop the ball -- was wearing UnderArmour gloves.
Source: NBC Sports
BWS - 3Q14 Earnings
Takeaway: Perennially-underperforming BWS definitely beats out DSW yet again this quarter. Its SIGMA looks better, as margins remain strong and inventory position is right-sizing. Absolute EPS growth was 20.9% on top of 3.7% revenue growth. DSW, however, de-levered 5.8% sales growth into a -3.5% earnings decline, and inventories still look problematic.
DSW - 3Q14 Earnings
AMZN - Amazon to team up with Royal Mail to allow parcel collection
KSS, TGT - ‘Frozen’ Overtakes Barbie as Holiday Season’s Most Popular Toy
Chow Tai Fook’s sales hurt by China’s economic slowdown
WMT - Wal-Mart names former American Airlines CEO to board
- "Wal-Mart Stores Inc. has appointed Tom Horton, former chairman and CEO of American Airlines, as a new member of the company’s board, effective Nov. 21."
ODP - Office Depot using new location-based marketing app Shazam In-Store
Takeaway: The rate of change in home price growth matters to prices and the 2nd derivative is stabilizing.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
With the Corelogic data in hand for about a month already, we completed the HPI trinity for September with the Case-Shiller and FHFA price series releases this morning.
THE DATA: The Case-Shiller HPI data for September showed home prices growing +4.9% YoY, decelerating -70bps vs. +5.6% in August. Meanwhile, the FHFA series showed home prices growing at +4.2% YoY, decelerating -60bps vs the 4.8% rate of increase reported for September.
So, home price growth continues to decelerate. However, its that rate of deceleration that we’re principally concerned with.
THE DERIVATIVE: Its worth re-highlighting our base conceptual, top-down framework for housing as its been effective across cycles and centers on HPI trends:
Housing Demand leads HPI --> Home price growth follows the slope of demand on an 12-18mo lag --> Housing related equities follow the slope of home price growth
We have anchored on the 2nd derivative move in HPI trends as a key signal because, historically, equity prices across the housing complex have followed the slope in home price growth.
The 1st chart below illustrates the Equity Price-HPI relationship. The 2nd chart shows the emerging 2nd derivative stabilization in HPI trends.
We’ve seen this same cycle dynamic play out again in 2014 with housing related equities significantly underperforming alongside the ~6 months of discrete deceleration since home price growth peaked in February.
INFLECTION INSPECTION: Our tone on housing has shifted (we were explicitly bearish from Jan-Oct) in the last month as many of the negative dynamics that we flagged earlier this year have largely or completely played out.
While the macro environment remains a discrete risk to housing, (very) easy volume compares, the lapping of weather/QM Implementation/FHA loan limit reductions, looser regulation, and a fledgling stabilization in 2nd derivative HPI trends all sit as modest, prospective tailwinds for 2015.
Essentially, the balance of risk from a rate of change perspective has largely shifted.
We'll be hosting a call on December 11th to update our views on housing heading into 2015.
About Case Shiller:
The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.
Frequency and Release Date:
The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.
Joshua Steiner, CFA
Christian B. Drake
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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