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Cartoon of the Day: Shed a Tear for OPEC

Cartoon of the Day: Shed a Tear for OPEC - OPEC cartoon 04.24.2015

The collapse of the cartel grows closer. Poor guys.


Crude Oil Update: Thoughts on the Counter-TREND Move

Takeaway: We reiterate our bearish intermediate to long-term view within a myriad of conflicting signals.

In the video below and its accompanying slide deck, we weigh-in on conflicting top-down market signals and touch on the push and pull in global supply/demand dynamics.

 

 

CLICK HERE to download the associated presentation.

 

As, always we appreciate any comments or questions coming our way. 

 

Ben Ryan

Analyst


Amazon: $15 in EPS by 2018? | $AMZN

Editor's Note: This is an excerpt from a research report written earlier today by Hedgeye Retail Sector Head Brian McGough. Click here for more information on how you can subscribe to our services.

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It's tough to say that this was a 'great' quarter for AMZN, as the company still lost money despite adding $3bn in revenue and improving gross margins by 340bp. But relative to expectations, it was killer.

 

Specifically, EBIT came in at $255mm, which compares to guidance of -$450mm to +$50mm. That's particularly impressive given that the international business posted a 1600bp hit in reported sales growth due to FX -- the biggest hit ever for AMZN. 

Amazon: $15 in EPS by 2018? | $AMZN - 1 amzn 

When all is said and done, we think that the AMZN debate is finally getting interesting. It's been a stock that trades at a stratospheric multiple of earnings (about 370x today), but invests and competes away its profit/earnings to gain share. By our math, today AMZN accounts for about 15% of all online spending. At some point sales growth will slow, share will find its final resting place, and AMZN will blow-out its margins. That's when we see the real earnings power of the company. Looked at a different way, Wal-Mart accounts for about 7% of Brick & Mortar US Retail Sales. Based on that metaphor, one could make the argument that AMZN is twice as dominant in its core market as WMT is.

 

The bull case as we see it is that AMZN tops out at 20-22% of Online Retail Sales over 3-4 years, and takes margins up to 6% -- something that's well within reason. This year the company will earn something south of a buck. But a 6% margin in 2018 would result in EPS of about $15. That's about 25x earnings based on today's price. Not bad for one of the most dominant companies to ever do business on this planet.

Amazon: $15 in EPS by 2018? | $AMZN - z amzn


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Greece, Earnings and Germany

Client Talking Points

GREECE

The news for Greece remains primarily negative, no reform list has been submitted by Greece which is a big issue for the Eurogroup. A Eurogroup Chair member came out and said there are still wide differences that remain. The Greek Foreign Minister is being criticized by EU colleagues. The one bright spot is that Germany has said that they see some progress being made.

EARNINGS

72% of U.S. companies have beat earnings estimates, which is a positive and in-line with the 5-year average. However, the blended rate of earnings and revenue growth is down -3.4% in Q1 year-over-year. The big driver of this draw down is likely the energy sector.

GERMANY

Germany remains one of our top long ideas in Macro. The recently released IFO data was mixed. IFO’s current conditions index rose to 113.9 in April from 112.1 in March, while a measure of expectations fell to 103.5 from 103.9. The IFO's business climate index rose for a sixth month to 108.6 from 107.9 in March. 

Asset Allocation

CASH 31% US EQUITIES 14%
INTL EQUITIES 16% COMMODITIES 4%
FIXED INCOME 31% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MTW

MTW revised down its 2015 guidance for the Foodservice Equipment segment and preannounced a weaker than expected 1Q 2015. Sales in the quarter are a noteworthy miss, but we do not believe that the release has relevance for our sum-of-the-parts valuation thesis, and see many reasons to anticipate stronger operating results in 2H 2015.  Basically, we think investors stand to be paid for suffering through this volatility, with potential share price upside on separation ranging from the high 20s to low 40s. Near-term profit weakness is partly why the shares are ‘cheap’, and we think holders may be compensated well for the volatility. The shares are currently trading lower on a weaker than expected 1Q15, but 2Q15 should show improved Crane segment results and 2H should show better Foodservice Equipment results.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was mixed in the latest week with the April homebuilder confidence survey (NAHB HMI) putting in a strong sequential improvement, while March Housing Starts were a bit soft. The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence. The print was strong as it showed a nice bounce across all three survey categories: traffic of prospective buyers, current conditions, and expectations 6 months out.  Housing Starts were up sequentially in March, but by less than the market expected. Total Starts rose by 2% to 926,000 (seasonally-adjusted annualized rate) from 908,000 in February.

TLT

On the domestic fixed income front we’re looking at lower yields for longer. Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). TLT sets-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=more central-planning cowbell=lower yields for longer.

Three for the Road

TWEET OF THE DAY

3.26 million new retail brokerage accounts opened in China . . . . This week ! #TradingTheDragon @HedgeyeDJ

QUOTE OF THE DAY

We are really competing against ourselves, he have no control over how other people perform.

Pete Cashmore

 

STAT OF THE DAY

Roughly 83 million Americans age six and over (about 28% of the population), reported that they did not once participate in any of 104 specific physical activities in the last calendar year which qualifies them as "totally sedentary" (survey results by the Physical Activity Council).


Keith's Macro Notebook 4/24: Greece | Earnings | Germany

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


Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS

Takeaway: AMZN - $15 in EPS by 2018? Adding to Long Bench. KSS launches Yoga line where it operates 0 stores. HBI: Good #s, customer action troubling.

COMPANY HIGHLIGHTS

 

AMZN - $15 in Earnings???


It's tough to say that this was a 'great' quarter for AMZN, as the company still lost money despite adding $3bn in revenue and improving gross margins by 340bp. But relative to expectations, it was killer. Specifically, EBIT came in at $255mm, which compares to guidance of -$450mm to +$50mm. That's particularly impressive given that the international business posted a 1600bp hit in reported sales growth due to FX -- the biggest hit ever for AMZN.  

 

When all is said and done, we think that the AMZN debate is finally getting interesting. It's been a stock that trades at a stratospheric multiple of earnings (about 370x today), but invests and competes away its profit/earnings to gain share. By our math, today AMZN accounts for about 15% of all online spending. At some point sales growth will slow, share will find its final resting place, and AMZN will blow-out its margins. That's when we see the real earnings power of the company. Looked at a different way, Wal-Mart accounts for about 7% of Brick & Mortar US Retail Sales. Based on that metaphor, one could make the argument that AMZN is twice as dominant in its core market as WMT is.

 

The bull case as we see it is that AMZN tops out at 20-22% of Online Retail Sales over 3-4 years, and takes margins up to 6% -- something that's well within reason. This year the company will earn something South of a buck. But a 6% margin in 2018 would result in EPS of about $15. That's about 25x earnings based on today's price. Not bad for one of the most dominant companies to ever do business on this planet.

 

This name is officially back on our Idea Bench as a Long.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS - 4 24 chart1

 

KSS - Kohl's and Gaiam Launch Yoga Line in NYC

 

Takeaway: KSS pulled out all the stops yesterday to launch it's new Yoga line with Gaiam and Two Fit Moms in NYC. The ironic part of the marketing equation is that KSS doesn't have a store in Manhattan proper. Yes, this will probably get picked up by national media and there was a social media campaign behind the event, but we'd think that KSS would leverage an event like this into building awareness and goodwill with people who actually shop at the store. As far as the Yoga play is concerned - nearly every retailer out there has some answer to the 'athleisure' trend. TGT has champion, DKS added Calia with Carrie Underwood this year, Victoria Secret and Gap have done it in house. At this point, it's not a differentiator unless the brand is a leader in the space. Gaiam has been a player in the equipment space mostly in the mid-tier mass space, but has very little exposure to the apparel side of the Yoga/Athletic market. It may keep some KSS shoppers in house, but we don’t see how it’s a major traffic driver for the company.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS - 4 24 chart2

 

HBI - Numbers Fine. Outlook Cloudy. We'd Avoid it.

 

We wouldn't own HBI here, and our sense is that the management team wouldn't disagree given the wave of insider selling we've seen in recent weeks,  To buy the stock at 15.5x EBITDA, you need to believe that the company is sandbagging on accretion from its deals and that real numbers are considerably higher. We're not making that bet until Rich Noll does, especially with the SIGMA reading going the wrong way.

 

The organic growth rate was -3.3% excluding the $184mm from DB Apparel. There were a few puts and takes on the top line in the quarter, but the most notable was that one of the company’s big accounts drew down its inventory position.  It's likely Wal-Mart or Target -- with our bet on WMT. The reality is that WMT took up wages 25% above minimum wage and it has to pay for this somehow. TGT took up wages to a lesser degree, and will certainly look for vendors to shoulder the cost given that consumers won't.

 

Management selling an expensive stock while at least one major customer 'adjusts inventory levels' = a pretty big deflator to the best bull thesis.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS - 4 24 chart3

 

 

OTHER NEWS

 

KORS - Luxury brand Michael Kors strikes back at Quebec counterfeiters

(http://www.theglobeandmail.com/report-on-business/luxury-brand-michael-kors-strikes-back-at-quebec-counterfeiters/article24078693/)

 

WMT - Bonuses for Wal-Mart top execs now tied to sales growth

(http://www.chainstoreage.com/article/bonuses-wal-mart-top-execs-now-tied-sales-growth)

 

U.S. House passes cyber-threat information bill

(http://www.chainstoreage.com/article/us-house-passes-cyber-threat-information-bill)

 

Swire, Simon, Whitman in Miami Venture

(http://wwd.com/business-news/real-estate/swire-simon-whitman-miami-brickell-city-centre-10116562/)

 

LB - Victoria's Secret creates a new holiday for women

(http://www.retailingtoday.com/article/victorias-secret-creates-new-holiday-women)

 


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