An audio link to our conference call this past Thursday:
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.
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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.
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.
Client Talking Points
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.
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 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.
|FIXED INCOME||31%||INTL CURRENCIES||4%|
Top Long Ideas
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.
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.
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.
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).
Hedgeye Director of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.
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