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Keith's Macro Notebook 4/17: China | Greece | Oil

 

Hedgeye Director Of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.


Retail Callouts (4/17): NKE, UA, COH, FL, GIL, ROST, SKX , +93 More

Takeaway: We think that this summer’s preannouncement calendar is setting up to be particularly robust. Update on math for NKE NBA deal - UA impact.

Preannouncement Season -- Three Months Away

 

Conclusion: Yesterday we updated and emailed our SIGMA deck for about 100 companies, (Ping us if you would like a copy). The number of companies screening short is nearly 3x what we usually see. We think that it’s game-time for picking stocks in this group. Earnings matter more than ever. We need to manage risk ahead of what will likely be a busy preannouncement season this summer. We’ll be back with changes to our Idea List and Bench after vetting the tickers below appropriately.

 

As background, in this analysis we triangulate the P&L and balance sheet to hone in on which companies are likely to beat on the Gross Margin line, and of course…which companies are going to miss. Over time, the relationship between this analysis and stock moves is just over 90%.

 

In running this analysis for the group, we typically find that roughly 10% of the stocks fall onto our Long screen, with another 10% Short. This quarter, however, we’re looking at about 20% screening Long, and just over 30% Short. Tickers are as follows… (particularly notable callouts are bold and underlined)

 

Positive: AMZN, ADIDAS, BEBE, BGFV, CAB, CACH, CHS, COH, CRI, DG, GMAN, HD, INDITEX, KORS, LOW, MW, OXM, RH, SPLS, SSI, TFM, TPX, UA, URBN, WMT, ZQK

 

Negative: AMER Sports, APP, BBW, BBBY, BKS, COST, DDS, ETH, FIVE, FINL, FL, FOSL, GIL, GPS, HBI, H&M, JCP, JWN, KSS, NILE, NKE, PIR, RL, ROST, SHOO, SKX, SUMR, WSM, ULTA, TUMI, TIF, Fast Retailing

 

Industry Trend: The retail group in aggregate ended the fourth quarter in the sweet spot – sales growing faster than inventories, and margins up y/y. We know, that’s old news.  When earnings season kicks off in earnest next week, we’ll see this position hold – which absolutely needs to happen with the group at 22x earnings and 9.5x EBITDA (peak, by a long shot).  It is very rare that we see the group hold the upper right quadrant for more than two quarters – meaning that there’s likely risk to either a) guidance with the upcoming round of earnings reports, b) earnings misses when 2Q earnings hit in July, or c) multiple compression in anticipation of slowing earnings growth. We think that this summer’s preannouncement calendar will be particularly robust.

Retail Callouts (4/17): NKE, UA, COH, FL, GIL, ROST, SKX , +93 More - 4 17 chart1

 

NKE, UA, AdiBok - Nike near deal for NBA uniform rights

(http://www.bizjournals.com/baltimore/news/2015/04/16/nike-near-deal-for-nba-uniform-rights.html?ana=yahoo)

Takeaway: There is not a chance that Nike let's this NBA deal slip through its fingers. Nike couldn't care less about Adidas or Reebok as a threat to its basketball franchise. But the thought of UnderArmour securing the NBA deal likely has Nike quaking in its boots. That's why there's almost no chance Nike loses it. Consider the math. The deal is now for about $36mm/yr. Let's say the new deal comes in at $45mm per year, that's just 4.5% of NKE's existing endorsement budget, for UA it's 50%. That's actually not too far above what Kevin Plank had Board approval to pay for Kevin Durant before Nike outbid them (near $30mm). But make no mistake, if Nike had to pay $100mm for this deal, we think it would. If UA was smart, it would push the bidding as high as possible to potentially dislocate marketing dollars that Nike would otherwise spend elsewhere.

 

 

OTHER NEWS

 

Carlyle Group eyes retail and CPG world with Walmart exec on team

(http://www.retailingtoday.com/article/carlyle-group-eyes-retail-and-cpg-world-walmart-exec-team)

 

Sneaker Makers Train Their Eyes on Fashion

(http://www.wsj.com/articles/sneaker-makers-train-their-eyes-on-fashion-1429228188)

 

TJX - TJ Maxx Now Sells Plus-Size Clothing On Its Website

(http://www.huffingtonpost.com/2015/04/16/tj-maxx-plus-size_n_7078554.html)

 

TGT - Lilly Pulitzer for Target Pop-Up Opens in Bryant Park

(http://wwd.com/retail-news/mass-off-price/lilly-pulitzer-for-target-pop-up-opens-in-bryant-park-10112411/)

 

JWN - Nordstrom Partners With Italian Trade Commission

(http://wwd.com/retail-news/department-stores/nordstrom-italian-trade-commission-10112446/)

 

Macerich Shareholders Threaten Lawsuit

(http://wwd.com/retail-news/department-stores/macerich-shareholders-threaten-lawsuit-10112353/)

 

SRSC - Sears Canada CEO says more store closures possible

(http://www.bnn.ca/News/2015/4/16/Sears-Canada-CEO-says-more-store-closures-possible-.aspx)

 

Do It Best relaunches ecommerce site

(http://www.chainstoreage.com/article/do-it-best-relaunches-ecommerce-site)

 

DSW - U.S. shoe giant DSW sticks to big-box format as it plans to double presence in Canada

(http://business.financialpost.com/news/retail-marketing/u-s-shoe-giant-dsw-sticks-to-big-box-format-as-it-expands-in-canada)

 


China, Greece and Oil

Client Talking Points

CHINA

China has been very topical this week, Chinese equities had another strong day today up 2.2%. We continue to believe that cyclical headwinds will weigh on Chinese growth. Chase the A-shares at your own risk.

GREECE

There will be no debt deal for Greece by April 24th when the Eurogroup meets. Banks abroad have been told to exit their Greek debt holdings and neighboring banks have reduced exposure to Greek banks...clearly a lot of preparation for some sort of Greek default.

OIL

OPEC reported that its March production jumped 810,000 bpd to 30.79 million bpd. The International Energy Agency also reported a surge in OPEC production to 31 million bpd, which it said could delay a tightening in the global market. CLICK HERE to watch Director of Research Daryl Jones discusses the three biggest bearish data points on oil for both intermediate and long-term durations.

Asset Allocation

CASH 34% US EQUITIES 12%
INTL EQUITIES 14% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
MTW

Manitowoc  (MTW) is splitting the business into two companies. While the crane business receives the most attention in part due to its cyclicality and because they are well, more noticeable, Manitowoc’s other business, Foodservice equipment, is the larger of the two in terms of operating income (60% vs. 40% for Cranes). Several indicators are pointing towards upward momentum for MTW’s Foodservice business. Restaurant same store sales have benefitted since the drop in oil prices. Furthermore, an indicator by the National Restaurant Association, RPI Capital Expenditures Index, has surged recently in part due to lower fuel prices driving restaurant traffic and restaurant owners’ outlook.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was again strong in the latest week with Pending Home Sales, HPI and Purchase Demand all accelerating to close out March. Pending Home Sales rose +3.1% sequentially in February with signed contract activity up a remarkable +12% YoY, taking the index to a new 19-month high. Mortgage Purchase Applications – the most real-time, high frequency housing demand indicator - rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis. HPI: The Case-Shiller 20-city series showed home prices grew +4.6% year-over-year in January.  A stabilization/inflection in home price growth is important as housing related equity performance tracks the slope of home price growth strongly.

TLT

It was another week of declining long-term yields getting you paid on the long-side of Low-volatility Long Bonds (TLT). To reiterate our view over the longer-term, we pin a good chance the U.S. Dollar will reach new highs ($120 anyone?) with the probably of long-term Treasury yields reaching all-time lows very much in play.

Three for the Road

TWEET OF THE DAY

Rich K on $KMI call: "there's just a lot of very cheap money flowing into the energy segment." But none of it's going into $KMI, right Rich?

@HedgeyeEnergy

QUOTE OF THE DAY

The trouble with most of us is that we would rather be ruined by praise than saved by criticism.

Norman Vincent Peale

STAT OF THE DAY

Based on a study conducted by YouGov in August 2013, 6% of Americans don’t know how to ride a bike.


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*PNRA Flash Call Today @11am EST

Takeaway: We’re hosting a flash call today at 11am EST to run through the activist playbook on PNRA.

The Activist Playbook

We believe changes Panera’s business model will significantly enhance the margins, returns, and overall earnings power of the company.  We put the baseline earnings power of the company between $8-10 per share and the implied stock price between $240-300.

 

Call Details:

  • US Toll-Free:
  • US Toll:
  • Confirmation Number: 39514730
  • Materials: CLICK HERE

 

*PNRA Flash Call Today @11am EST - 1

 

Wednesday night, Panera announced in a press release that its Board of Directors approved an increase to the company’s share repurchase program to $750 million. The company expects to repurchase $500 million over the next twelve months.  The release also highlighted the progress that Panera is making in its previously announced refranchising initiative.  The company has entered letters of intent to sell 73 cafes and is expected to reach its refranchising goal by year end (50-150 cafes).  This initiative, which is expected to be accretive to earnings, was reflected in management’s 2015 EPS guidance.

 

On March 3, 2015 we penned an open letter to CEO Ron Shaich detailing our activist playbook on the company:

 

Note: PNRA: RON SHAICH MUST BECOME AN ACTIVIST CEO

 

In this letter, we recommended five steps he should consider taking in order to unlock significant shareholder value:

  1. Sell-off non-core assets
  2. Slowdown the rollout of Panera 2.0 and begin molding a concept of the future
  3. Slow unit growth and cut capital spending
  4. Cut excessive SG&A spending
  5. Aggressively refranchise stores

 

We look forward to further articulating these recommendations on the call today.

 



The Kinder Conundrum

“Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes impossible to be listed without omission.” – Gerald Loeb, The Battle for Investment Survival

 

 

 

After rolling up its MLPs in December 2014, Kinder Morgan Inc. (KMI) is now the third-largest energy company in the S&P 500 by enterprise value ($137 billion) and fourth-largest by market cap ($95 billion).  It’s also one of the more polarizing names out there – you either love it or you hate it.

 

KMI kicked off the earnings season for the energy sector on Wednesday, and with KMI being a relatively new and large name in many portfolio managers’ benchmarks, we figured that the generalists that subscribe to the Early Look would be interested in, and benefit from, our latest thoughts on KMI – the company and the stock.  Regarding the former, the commentary below was sent to our Energy sector subscribers yesterday:

 

The Kinder Conundrum - kmi

 

“In its 1Q15 report … Kinder Morgan Inc. (KMI) declared a quarterly dividend of $0.48/share, reiterated its 2015 dividend target of $2.00/share, and emphatically reiterated its long-term dividend growth guidance of 10% p.a. through 2020.  KMI bulls need not read any further.

 

The quarter was soft overall as the more-commodity-sensitive segments of CO2 and Natural Gas Pipelines posted a combined 5% YoY decline in segment cash flow.  Adjusted EBITDA came in at $1,743MM, down 1% YoY and missed the consensus estimate of $1,861MM by 6%.  EBIT was $1,193MM, down 5% YoY.  Pre-tax earnings were $679MM ($0.31/share), down 16% YoY.  (All metrics are "before Certain Items.")  

 

KMI incurred ~$935MM of CapEx in the quarter, $104MM (11%) of which was classified as sustaining / maintenance.  It spent ~$3.2B on acquisitions, ~$3,060MM on Hiland and ~$160MM on the Vopak terminals.  The Hiland acquisition closed on February 13th, so it was a significant contributor to the 1Q15 numbers.

 

Free Cash Flow (defined here as EBITDA – net interest expense – CapEx) was ~$295MM or $0.14/share.

 

Rich Kinder remarked on the call, “…our enormous footprint and our diversified set of mostly fee-based assets can produce very good results, even in times of tumultuous market conditions.”

 

Very good results?

  

EBITDA and EBIT were down YoY in 1Q15 despite $9.4B of capital invested since the start of 2014 ($5.0B of CapEx – ~$1.0B per quarter – and $4.4B of acquisitions).  That’s mediocre, at best.

 

What is exceptional about KMI is 1) its valuation at 20x EV/EBITDA, 29x EV/EBIT, 35x P/E (pre-tax!), and a 1.3% FCF yield (all metrics are 1Q15 annualized); 2) its leverage at 6x debt/EBITDA and 9x debt/EBIT; and, of course, 3) its dividend payout ratios at +230% of net income and +150% of pre-tax income.”     

 

---

 

Here’s our opinion of KMI – the company – in as succinct of a form as possible, a 140 character #tweet:

 

MegaCap energy conglom. Capital intensive, cyclical, competitive. Avg ROIC. Super-levered. Low organic growth. Roll up. Ponzi divi.

 

And all of that really isn’t that hard to see.  Which of those points could you convincingly argue the other side of? 

 

The debate and difficulty lies in what to do with KMI the stock here. 

 

Our current view, one that is, of course, subject to change, is that it’s just one to watch from the sidelines.  We apologize to the bulls for not joining the rest of the sell-side in the Rich Kinder booster club, and to the bears for not betting on the imminent collapse of the evil empire, but the risk / reward set-up does not warrant action at this time and price. 

 

The challenge on the short side is that the higher KMI’s valuation, particularly relative to its peer group, the more “accretive” each acquisition will be.  Say what you want about this growth strategy (and we suggest you re-read Buffett’s thoughts on it on pages 29 and 30 of the latest BRK letter!), but the market has bought into it and it’s going to work until it doesn’t. 

 

Reflexivity is clearly at work; we’d consider a short position in KMI on the way down.  But for now, we’re interested in playing KMI’s well-advertised acquisition ambitions via second derivatives.  More on that to come…

 

We’ll leave it there on this battleground stock.  If you own KMI, we hope that you at least know what you own!

 

Enjoy the weekend,

 

Kevin Kaiser

Managing Director

The Kinder Conundrum - 04.17.15 chart


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