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INTERVIEW | McCullough: My Top 5 Ideas In This Slow Growth Environment

Hedgeye CEO Keith McCullough appeared on Fox Business’ “Opening Bell with Maria Bartiromo” this morning. In his first segment, he and Maria break down the Q4 GDP number. Keith reiterates that despite expectations of 4-5%, YoY growth in GDP is actually closer to 2. He discusses why numbers for Q1 will look weak comparatively and how Hedgeye front-runs the Fed with our growth and inflation estimates. Lastly, he reveals what he’s been recommending to customers in this deflationary environment. 

 *  *  *  *  *  *  *

 

In light of this slow-growth environment, Keith discusses where investors can find yield, how the current setup points to economic stagflation,  and why housing is gaining traction, despite consensus expectations. 


Cartoon of the Day: GDP Reality Bites

Cartoon of the Day: GDP Reality Bites - GDP cartoon 03.27.2015

 

"After it was all said and done," Hedgeye CEO Keith McCullough wrote earlier today, "US GDP Growth in 2014 was precisely what we thought it would be #SlowerThanOldWallConsensus. It's professionally embarrassing for those economic partisans who called it a 4-5% GDP environment."


**BABA: Our New Tracker (Revision)

Takeaway: Tmall GMV Mix Shift could make or break any quarter for BABA moving forward. Our new tracker suggests it's slowing even further into F4Q15.

Revision: we're correcting a grammatical error to clarify one of the Key Points.  We apologize for the confusion.

KEY POINTS

  1. WHY TMALL GMV MIX IS IMPORTANT: BABA only collects commissions on its Tmall platform, and growing Tmall GMV Mix has been propelling commission revenue growth well in excess of BABA's GMV growth throughout its reported history.  This has been masking the weakness in BABA's core Marketing segment (both reported in China Retail).  However, if this metric stalls, then all the weakness in its marketing segment bubbles to the top (similar to last quarter).
  2. OUR NEW TRACKER IS POINTING SOUTH: We have worked iResearch traffic metrics for BABA into an index, which has produced a .78 correlation with the y/y change in BABA's Tmall GMV Mix dating back to CY 1Q13.  Our index is pointing to a continued deceleration in Tmall GMV mix shift through February.  As it stands now, we're expecting Tmall GMV Mix will grow 1.5 percentage points y/y in F4Q15 (vs. 2.6 and 5.2 in F3Q15 and F2Q15, respectively).  In short, we expect the gap between the y/y growth in Commission Revenue and GMV will narrow further.

 

**BABA: Our New Tracker (Revision) - BABA   Tmall GMV Mix F3Q15

**BABA: Our New Tracker (Revision) - BABA   GMV vs. Commissions F3Q15

**BABA: Our New Tracker (Revision) - BABA   GMV Tracker solo

**BABA: Our New Tracker (Revision) - BABA   GMV tracker

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


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BABA: Our New Tracker

Takeaway: Tmall GMV Mix Shift could make or break any quarter for BABA moving forward. Our new tracker suggests it's slowing even further into F4Q15.

KEY POINTS

  1. WHY TMALL GMV MIX IS IMPORTANT: BABA only collects commissions on its Tmall platform, and growing Tmall GMV Mix has been propelling commission revenue growth well in excess of BABA's GMV growth throughout its reported history.  This has been masking the weakness in BABA's core Marketing segment (both reported in China Retail).  However, if this metric stalls, then all the weakness in its marketing segment bubbles to the top (similar to last quarter).
  2. OUR NEW TRACKER IS POINTING SOUTH: We have worked iResearch traffic metrics for BABA into an index, which has produced a .78 correlation with the y/y change in BABA's Tmall GMV Mix dating back to CY 1Q13.  Our index is pointing to a continued deceleration in Tmall GMV mix shift through February.  As it stands now, we're expecting Tmall GMV Mix will grow 1.5 percentage points y/y in F4Q15 (vs. 2.6 and 5.2 in F3Q15 and F2Q15, respectively).  In short, we expect the gap between the y/y growth in Commission Revenue and GMV will narrow further.

 

BABA: Our New Tracker - BABA   Tmall GMV Mix F3Q15

BABA: Our New Tracker - BABA   GMV vs. Commissions F3Q15

BABA: Our New Tracker - BABA   GMV Tracker solo

BABA: Our New Tracker - BABA   GMV tracker

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


CCL F1Q 2015 CONFERENCE CALL NOTES

Takeaway: Booking strength and strong onboard spend drove the beat on yields and raised FY net yield guidance. Caribbean is the strength, not Europe.

CONF CALL

  • Excluding transactional/translation impact, net yield guidance raised from ~2.5% to 3.5% (midpoint)
  • Off to strong start in 2015
  • $0.28 drag from currency
  • 8% onboard yield growth (across the board strength)
  • Mid-single digit improvement in Carnival brand for 2015
  • Pleased with demand for Caribbean for reminder of year. Much of year booked at higher prices. Will strengthen pricing for remaining inventory.
  • 75% of addressable market in North America plan to cruise in next 5 years
  • Internet connectivity: 40% improvement in guest satisfaction, 30% increase in revenue
  • $70-80m cost savings in FY 2015
  • China: 4 ships
  • Expect a point in improvement in ROIC in 2015
  • Expect Low-mid single yield growth in long-term
  • Expect double-digit ROIC target in next 3-4 years
  • 1Q breakdown:  +0.06 cents from improvement in net onboard yields and +0.05 from timing of costs, -0.06 from FX/fuel
  • (CONSTANT DOLLAR BASIS) 1Q: 
    • Capacity: +2%; NAA: +3%, EAA: flat
    • Net ticket yield: flat , removing transactional impact, net ticket yield up 1%
  • Expect Caribbean yields to be up for reminder of year
  • Bookings from Wave season strong
  • For remainder of 3Q 2015, nicely ahead on bookings at slightly higher prices
  • NA Brand bookings: Caribbean/Alaska nicely ahead on pricing/occu; all other NA deployment brand (ahead on occu but on lower prices)
  • EAA brand bookings:  nicely ahead on price/occu (booking volume lower YoY but at higher prices)
  • Based on strength of bookings, increased revenue yields
  • Impact of fuel of 2015: +$0.63
  • Impact of transactional/translation currency : -$0.51
  • 2Q 2015: increased dry dock days disproportionally impacting costs
  • Marine accounting change: -$0.11 per share (2010-2014), a -$0.01 cent impact in 1Q.

 

Q & A

  • 1Q yield growth:  onboard/other yields.
  • 1% revenue yield raised guidance:  +0.17 impact on EPS
  • NA/Europe:  ahead on bookings (still on lower end on a historical basis). Very positive trend
  • 9 ship deal:  have not signed contracts with the yards yet. China will receive some of these new ships.
  • Marine account change:  one brand was using a different method. Wanted to make the accounting consistent across all the brands.
  • Constant currency explanation:  prices that the consumer in local currency (3-4% in yields)
  • 3-4% yield guidance vs December guidance:  in December, it was 2.5% yield in constant currency guidance. So it was raised to 3.5% (midpoint).
  • Transational impact:  Princess sailing in Australia. Revenues have to be converted back to US$; hence, negative impact given stronger dollar. 
  • For remaining 3 quarters: raised net ticket guidance (since more visibility), left onboard spend guidance the same
  • Not much significant change on 'real demand'
  • Expecting uptick in the Caribbean, stronger than Europe.  Particularly in Q3 where industry capacity down double digits in Caribbean.
  • Removed 4 ships from fleet in 2015 in North America/Europe. Expect they will remove more from North America/Europe in 2016/2017/2018. 
  • Bookings have been occurring closer and closer to time of sailing. Consumers have changed behavior to some extent.
  • Currency impact: -$0.28; net fuel positive: $0.02 (net of derivatives)
  • Brent fell more than their fuel grade
  • Transactional impact much smaller impact on firm in the past in terms of sourcing.  In past, constant dollar was fine. Now need to also consider transactional costs.
  • Europe/UK:  booking curve are farther out
  • Tunisia impact:  2% of port calls, not overly significant

Keith's Macro Notebook 3/27: USD | Oil | Japan

 

Hedgeye Macro Analyst Ben Ryan shares the top three things in CEO Keith McCullough's macro notebook this morning.


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