This Is the Biggest Risk in the Industrial Sector Right Now

This Is the Biggest Risk in the Industrial Sector Right Now - mm


In the industrials sector, significant debt financed capital investment has been directed toward feeding the commodity bubble – from iron ore, copper mines and rail networks, to oil well service and agriculture equipment. 


Losses on project financing and equipment backed lending may prove to be a big surprise later in 2015 and beyond, particularly at captive finance companies like Caterpillar Financial.


The cessation of credit available for commodity-related equipment sales and remarketing of used equipment may also lengthen and deepen the downturn.  We have estimated that approximately 10% of sector sales go to commodity-related capital equipment, with many highly visible companies facing much more significant exposure.


The bottom line here is the commodity correction should drive a prolonged blow back into several segments of Industrial equipment and finance.


This Is the Biggest Risk in the Industrial Sector Right Now - 779

Initial Claims | Still Strong

Takeaway: This morning's labor market report was good, and the energy state complex got less bad in the most recent week.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


Last week's note (Initial Claims: Cognitive Dissonance & Mice) ran through both a high level and ground level overview of the labor market data. This week we'll keep it tight. After bouncing notably higher last week, claims retreated this week, dropping 21k to 283k. The four week moving average declined by a further 6k to 283k. The Y/Y rate of improvement in rolling NSA claims also accelerated. This week's numbers correspond to the sample period for the February jobs report and the M/M dynamic (4wk rolling) is lower by ~23k jobs vs the prior sampling period. 


On the energy side, job losses eased slightly as the gap between our energy state basket and the US as a whole tightened in the most recent data. The gap between the two closed by 4 pts to 26 from 30. 


Net net, the labor market data continues to hang in there, for now. 


Initial Claims | Still Strong - Claims18 normal  1


Initial Claims | Still Strong - Claims20 normal  1


The Data

Prior to revision, initial jobless claims fell 21k to 283k from 304k WoW, as the prior week's number was unrevised.  Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.5k WoW to 283.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -14.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.1%


Initial Claims | Still Strong - Claims2


Initial Claims | Still Strong - Claims3 normal  1


Initial Claims | Still Strong - Claims6



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Cartoon of the Day: Consequences

Cartoon of the Day: Consequences - Risk cartoon 02.19.2015

No, we do not believe this unprecedented global central banking experiment ends well.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Wal-Mart Earnings Read-through to Top Shorts (TGT, HIBB, KSS)

Takeaway: WMT's 4Q15 print read-through to top SHORT ideas - TGT, HIBB, KSS

The Wal-Mart US business posted its first positive traffic count since 3Q13 and it’s no surprise Comp number followed suit even against a 14 week quarter last year.


A few read-throughs from the WMT print to some of our top SHORT ideas:


1. TGT - The across-the-board wage hikes are not good for TGT. It will cost WMT about $0.20 in earnings or about $930mm pre-tax for the 500,000 US WMT store level employees. That equates to $1870 per employee. TGT will need to maintain the compensation spread. If we extrapolate the cost to TGTs ~300K store level employees we are looking at an additional $560mm in compensation expense (about 75bps of EBIT margin). That flows through to about $0.56 in EPS, about a 12.5% hit to the company's forecasted 2015 earnings number of $4.48. Chances are that TGT does not follow suit immediately, but will see if it can comp with a tighter wage gap to WMT. This is officially on the table for TGT.


2. HIBB - Historically the company's comp trends have mirrored the traffic and comp trends at its neighbor WMT. WMT US just posted its first positive traffic number in 9 quarters, and that coincides with HIBB comping against a -10% number last January. To us that set's HIBB up for a surprise to the upside on the revenue line. If we don't see it, it's a clear indication that this business is broken. For FY16 we're 10% below the street, that spread widens to -75% by year 5 of our model.


3. KSS – Everyone already knows that KSS recently reported positive store comps for the first time in 3 years. The question on most people’s minds is whether it is due to the company’s own initiatives, or a better macro climate. After seeing retailers like BonTon and Belk put up mid single digit comps after a horrendous stretch for 2+years and now seeing WMT’s comp tick up on the margin – it supports the case even more that KSS’ recent strength is not company specific. When people attribute macro tailwinds to company-specific ‘Greatness’, it gets us a lot more intrigued on the short side. KSS remains one of our favorites.

McCullough: Wall Street Won’t Call Stocks “Expensive” Until It’s Too Late

In this excerpt from today's edition of RTA Live, a subscriber asks Hedgeye CEO Keith McCullough if he can ever remember a time when Wall Street called stocks "expensive."

***Check out Hedgeye Financials analyst Josh Steiner's article (mentioned in the video at the 1:09 mark) here.


RTA Live is available EXCLUSIVELY to Real-Time Alerts Subscribers. Click here to sign up.


Takeaway: Q4 performance, 2015 guidance, and clear strategic and capital deployment vision justifies 52 week high stock price and big multiple


  • Every region signed a record number of deals in 2014
  • Added 5 brands in 5 years (Autograph, Moxy, AC Hotels, Gaylord, Protea)
  • Edition: 2 London/ 1 Miami already open; New York Edition will open in next few months; closed Miami Edition last night
  • Booked $10bn revenue on; nearly 20% coming through mobile 
  • Rewards membership: 49m (contributed 1/2 of worldwide occupancy)
    • 60% new members were next generation travelers
    • 40% new members are outside NA
  • 2015: gross rooms growth 7% (6% net of deletions)
  • Supply:  STR estimates supply increased 0.9% in 2014 and expects 1.3% growth for 2015 
  • Have 10% share of NA rooms
  • Have 26% of share for under construction market
  • Expect to have more than 100 Autograph hotels open by end of 2015
  • 16 Moxies in pipeline (Europe) and 5 Moxies in pipeline (US)
  • Last month, approved 2 Moxy deals in Manhattan. Expect 150 Moxy hotels open by 2023. 
  • Aggressive expansion abroad for limited service (Residence Inn/Fairfield)
  • In 2014, US htoels reported 20% increase in guests coming from Greater China
  • Q4 2014:
    • Higher termination fees added 1 cent
    • NA systemwide REVPAR : ~7%
      • Strong REVPAR in San Francisco, Pacific NorthWest, Florida
    • Transient demand was strong. Nearly half of top 20 markets increased retail REVPAR by double digits
  • Q4 Group REVPAR rose 6%; 4% growth in full service hotels reflecting holiday timing
      • For 1Q 2015, group revenue pace up 6% while FY 2015 group pace is up 5%. Meeting planners bullish, booking windows lengthening and room rates are strengthening
      • In 4Q, group room revenue booked for all future periods increased 9%.
      • 2015 corporate rates will increase 5-6%
  • Across US system, international guests make up only 5%. So don't see FX headwind for US business
  • Expect 5-7% 2015 NA REVPAR
  • Caribbean/Latin America
    • REVPAR rose 8% in 4Q
    • Strong leisure/good group drove results in Caribbean/Mexico
    • Brazil soft
    • Expect constant dollar REVPAR of mid single digits for 2015
  • Europe
    • Q4 REVPAR: 3%
    • Good group attendance, strong holiday demand in Germany/Austria, easy weather comps
    • Weak Russia
    • In 2015, London will benefit from strong group business and rugby Cup later.  
    • ~30% of European lodging demand comes from outside Europe (20% NA, 6% Asia)
    • Expect 2015 REVPAR increase in low single digit rate
    • In 2014, 7% of fees came from Europe
  • MEA
    • REVPAR up 15% in 4Q
    • Egypt strong
    • Expect 2015 REVPAR increase in high single digit rate
    • In 2014, 3% of fees came from MEA
  • Asia Pacific
    • REVPAR increased 3% in 4Q
    • Weaker yen boosted Japan
    • RevPAR in Greater China increased slightly reflecting strong Shanghai demand offset by the disruption from political demonstrations in Hong Kong.  
    • In 2015, expect demand will remain strong in Shanghai and improve in Hong Kong...a mid single digit growth rate for the region.
    • In 2014, 9% of fees came from Asia-Pacific (5% from Greater China)
  • Operations outside US contributed 25% of fees in 2014
  • For 2015, 1% move in dollar, net of hedges would change adjusted EBITDA by $3m
  • In 2015, new accounting rules require service charges to be included in property revenue. Expect WW house profit margins would increase 60bps instead of 90bps as a result of this change
  • 2014: incentive fees increased 18% with more than half of hotels worldwide paying incentive fees
  • 2015:  fee 9-11% growth
    • Incentive fees growing in low double digit rate
      • Constrained by unfavorable FX, lower deferred fee recognition, and renovations
    • Estimate FX to reduce fee revenues by $15-20m in 2015
  • 2015 guidance excludes pending Delta acquisition.  P&L impact from Delta will be 'noisy'.  Transaction should be modestly accretive in 2016.
  • REVPAR sensitivity unchanged: 1 point REVPAR = $20m fees and $5m on owned/leased
  • 2015:  plan to renovate several owned/leased hotels and begin construction Fairfield Inn Brazil
  • Cash return to shareholders in 2015 will be at least that in 2014
  • 1Q 2015
    • Fee growth in mid teens rate with higher relicensing and application fees
    • While group pace is strong, full service RevPAR growth in North America is likely to be a bit lighter than later in the year due to property renovation schedules and the recent northeast snow storms.  
    • Expect owned leased and other revenue net of expenses will increase more than 20% with the Addition of the Protea leased hotels and higher credit card branding fees.  
    • G&A should increase in the first quarter reflecting higher brand initiatives and hotel development expenses.  However, first quarter G&A will also benefit from a roughly $12  million net favorable impact to our legal expenses associated with certain litigation resolutions.

Q & A

  • Difference between upscale and UUP #s is really about group
  • In a higher rate environment, transient grows faster than group
  • Shortcoming of REVPAR is that it doesn't include non-room revenue...that's associated with group business
  • Don't think near maturity of cycle
  • Focused on G&A costs flat, growing at a minimum
  • Limited service paying fees: 50% in 2014, 38% in 2013
  • No hotel renegotiations that have moved the needle
  • Lending market getting a little better for big hotels but it's targeted.
  • Lead times extended out for construction
  • Full service development:  very small volume of deals
  • Asia-Pacific REVPAR rising in 2015: In 1H 2014, Thailand was rough. China should be similar to 2014 but easier comp.
  • Potential Asset sales ($600-650m) 
    • Have small Courtyard in Europe on the market. 
    • 2 EDITIONS in Miami and Residences 
      • Expect $50m in Residences
    • Also will collect some notes due 2015 ($30m)
    • Preferred stock coming due
  • Buyback vs dividend:  buyback more flexible. PE multiple at 26 (higher than 20-yr avg of 22) but think EPS can grow 20% in next couple of years so valuation not a concern
  • Conversions:  into Marriott and Renaissance brands from independents
  • Capex breakout:  need to spend $80-100m to finish Edition buildings. Don't need to put a lot of capital to get new Select-Service hotels. $100m or so on key money and loans. Not more aggressive on key money than their competitors
  • US Net room growth:  most will be upscale in secondary markets
  • Half of 2015 openings will be US. Most will be franchised select service and extended stay hotels
  • Assume breakeven on Miami Edition Residences
  • Intensely competitive business
  • NY international exposure: 10-15%
    • FX will hurt arrivals in NY
    • Room night international arrivals to NY down 3% in 4Q 2014
  • FX helping travel to Paris/London
  • Shanghai REVPAR: 6-7%; continues to see it perform well
  • Expect govt austerity to continue to China
  • Q4 interest accretion $7m benefit: had been recording too much interest on accreting bond.
  • Expect US pipeline to continue to grow
  • Expect fewer signings in China in 2015
  • Delta impact in 2015:  transaction costs will result in a couple of pennies impact (not in guidance)
  • Fees 1Q 2015:  more chunkier relicensing fees than other quarters
  • Tough comp for 3Q 2015:  in 3Q 2014, had $15m deferred fees
  • Expect franchise fees to grow faster than managed fees
  • Expect REVPAR for franchise and managed to be roughly comparable
  • FX impact most pronounced in Europe 
  • Moxy Europe per key costs:  40-50k euro range
  • Diluted share count at end of 2014: 286m 
  • 1Q NY Group could be negative: (Super Bowl comp, snow storms and supply)
  • Expect NY to underperform by few hundred basis points with Q4 2015 being the weakest