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Takeaway: We are adding Manitowoc to Investing Ideas.
We are adding MTW to Investing Ideas today.
Below is a note written by Hedgeye CEO Keith McCullough.
With both equity and treasury beta (SPY and TLT) signaling immediate-term TRADE oversold, I'm getting more buy signals here obviously than sells.
Manitowoc remains one of the misunderstood sum-of-the-parts names on our Institutional Best Ideas list. Jay Van Sciver is our Industrials analyst and recently wrote the following summary:
Breaking-Up Is Good…: Manitowoc is splitting the business into two companies, along the lines sought by activist investors and presented in our recent Black Book. The move also puts the assets in play, with adequate time for acquirers to take a look. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive.
How much of a positive? The low-end of our sum of the parts valuation is $26 vs. the $19 close, and the low-end is not based on a MIDD comp (not that there is anything wrong with a MIDD comp). In theory, spin-offs and break-ups unlock shareholder value while increasing operating potential of the formerly smothered units.
There are all sorts of narratives that support this separation: complexity breeds a discount, conglomerates trade at a discount, or people mistakenly treat MTW as a ‘deep cyclical’ instead of the half cyclical, half a potential 'growth company like MIDD' that it actually is. In this sense, perhaps Goldman is doing “God’s work” by advising the split.
Buy red, sell green.
Insular Strength: The domestic labor market remains insularly strong with February employment holding near cycle highs despite serial storm activity, the rising drag from the energy sector, and global growth in discrete retreat. The best run in payroll gains since the late 1990’s extended in the latest month with employment growth accelerating for a 6th straight month, the unemployment rate approaching the Fed’s NAIRU level and employment growth across the key housing demographic of 20-34 year olds accelerating.
Best Before the Crest: We remain late cycle in the current expansion and the data is always best before the crest but the labor market remains the recipient of positive macroeconomic reflexivity currently and the expectations build into the Fed announcement on March 18th will now be that much more acute.
A summary review of the February NFP highlights:
- Energy: The slowdown is starting to show up in the industry employment data but not enough to move the aggregate numbers. Oil & Gas extraction employment - which includes data thru February - was down for a 3rd straight month with YoY growth moving toward 0%. Broader energy sector employment - data thru January - showed the same trend. So, while the energy sector is, in fact, a spot of weakness, strength elsewhere is swamping the drag. As we’ve highlighted, direct energy employment is only 60bps (~770K workers on NFP base of 141mn) of total and ~1% of total on an effective worker basis.
- Weather: An estimated 328K workers missed worked due to severe weather in February. This compares favorably with last year’s polar vortex spike but was moderately worse than the historical average and likely had a concentrated impact in specific geographies.
- Housing: Key housing employment demographic continued to accelerate and should continue to flow thru to housing demand at a modest rate. We continue to like housing on the long side.
- 20-34YOA employment accelerated to +2.7% YoY from +2.3% (growing at a premium to aggregate NFP which grew at +2.4% YoY)
- Resi Construction employment down -1K sequentially after last months epic gain (largest since November 2005). Industry employment is still up +7% on a year-over-year basis. Severe weather probably a had a moderate impact on construction demand.
- Employment Mix: Low wage jobs constituted 199K of the 288K gain (69%) on the private side but the trend has been in favor of high wage job gains with high wage growing as a share consistently over TTM. Accelerating employment + positive mix has supported ongoing improvement in aggregate disposable income growth.
- Unemployment Rate: U-3 and U-6 rate both declining with employment approaching “full” although the decline in LFPR and increase in those dropping out of labor force drove most of the delta (so largely negative dynamics and opposite those that drove last months change)
- Wage Growth: Private sector Wage Growth slowed to +2.0% YoY from +2.2% prior and wage growth for nonsupervisory workers decelerated to +1.5% YoY. So, nominal wage growth remains flat-to-down but with inflation falling at a faster rate of late, real wage growth is actually improving.
- PCE/Household Consumption: The personal income numbers have been strong and the household consumption has been a source of strength against flagging export demand and the slide in goods pricing. The February employment figures suggest stable-to-strengthening income and spending figures for February (savings (rising) rate + credit growth remain the swing factors).
Christian B. Drake
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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
I love how political the monthly Jobs Report gets. Everyone has their own spin. Unfortunately, not everyone has math or facts, which are one and the same. Let the numbers talk.
To that end, please see the charts and commentary below which should help you contextualize today's February jobs report.
Month-over-month Nonfarm Payrolls growth accelerated on a sequential basis, but are decelerating on a trending basis:
That deceleration is from a really high growth rate, however. The latest 3MMA is in the 88th percentile of all readings over the last 10 years, which compares to the 95th percentile recorded in the prior month.
On a Year-Over-Year basis, Total Employees on Nonfarm Payrolls are up 2.39%, the fastest rate of growth since MAY '00. The 2yr average of 2% is the fastest since NOV '00.
It would not behoove you to see MAY/NOV 2000 and say, "Well that was it for the market/economy." That was in a clear down-cycle. We are still in up-cycle mode.
How do we know? Well, A) the data is still accelerating. And B) the leading indicator for employment growth continues to support that conclusion:
In research, #math > storytelling. In risk management, #process > hope. In the seeking of context, @Hedgeye > the alternative.
This note was originally published March 04, 2015 at 21:32 by Hedgeye Industrials Sector Head Jay Van Sciver.
Outside of housing/construction, much of the recent industrial data point to weakening activity. Some of the deceleration may relate to broader deflationary trends, such as weaker resource-related capital spending.
ISM New Orders
While still in expansion territory, both the Manufacturing and Nonmanufacturing New Orders readings weakened.
Intermodal Rail Traffic
While weather and port disruptions play a part, the recent meaningful declines in intermodal rail traffic are the first since the great recession.
U.S. Manufacturers New Orders
While we typically track the more timely ISM Manufacturing New Orders readings, other measures also point to a deceleration in orders. Ex-Defense also shows YoY declines.
Crude-by-rail volume showing slight year-on-year declines in recent weeks.
Single Family Building Permits
Residential construction/housing appears to be positioned well into 2015.
Architectural Billings Index
While the ABI points to strengthening activity through much of 2015, the recent 49.9 reading points to a deceleration into 2016. Of course, by then no one will remember where ABI was 11 months prior.
Public Nonresidential Construction Spending
After several years of being a drag on nonresidential construction, public sector spending is showing solid signs of growth.
Inventory to Shipments Ratio
Inventory is building relative to shipments, which is typically a negative indicator for higher cost transportation spending. It is also typically associated with weaker economic activity.
IATA International Airfreight FTK Growth
Even airfreight growth seems to be slowing, which is surprising given recent declines in fuel costs. (Freight Ton Kilometers = FTK)
Truck Demand Index
While some of this may be weather/port related, it is not a positive indicator for heavy trucks.
US Truck Backlog to Build
From a trading perspective, we look to enter truck OEMs when this reading is low. Recent slowing may portend an entry opportunity for that group.
Brazil Heavy Truck Registrations
A stronger dollar and deflationary trends are not typically favorable for Industrial top-lines.
AWP Value Index
This series seems to be decelerating. (AWP = Aerial Work Platforms)
Business Jet Flights YoY%
Growth appears to be slowing in recent months, although the January decline may be partly weather related.
China HSBC PMI
Ending on a more positive note, the HSBC China Manufacturing PMI has moved into positive territory.
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