Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter which was written by Hedgeye U.S. Macro Analyst Christian Drake. (You could read the whole thing and be staying a step ahead of consensus if you subscribe.)
In the Chart of the Day, we annotate the latest household Income and Spending numbers for March released yesterday.
Generally, our Macro-for-Dummies/Lazy’s color-coding protocol follows a green = good, red = bad convention. Over the last couple quarters, however, I’ve struggled with what colors to use to characterize the existent income and spending dynamics
“What I do have are a very particular set of skills.”
-Liam Neeson, Taken
Officially, the Taken film franchise is a trilogy. The 1st installment was a deservedly acclaimed action-suspense juggernaut with Liam Neeson launching what has been affectionately dubbed the “geri-action” star genre.
Unofficially, there are probably more like 6-10 Taken movies. The high concept mystery-action airplane drama, Non-Stop, was essentially Taken on a plane. The survival thriller The Grey was basically Taken in the woods, and the 2011 psycho-drama Unknown was more or less Taken with amnesia. I’m sure there are others.
The industry, I suppose, is simply supplying to the emergent demand and Neeson, after decades in the business, is simply capitalizing on an unlikely late career renaissance.
Back to the Global Macro Grind...
If you feel like you've seen this Macro movie before, you’re not mis-Taken.
A fascinating and sometimes confounding aspect of being a living participant in a Keynesian Eco Carnivale is that, at times, it’s difficult to tell which way is up.
In the Chart of the Day below, we annotate the latest household Income and Spending numbers for March released yesterday.
Generally, our Macro-for-Dummies/Lazy’s color-coding protocol follows a green = good, red = bad convention. Over the last couple quarters, however, I’ve struggled with what colors to use to characterize the existent income and spending dynamics.
Income ↑, Savings ↑, Spending ↓: In recent months, aggregate wage and disposable income growth has been accelerating alongside a commensurate rise in the savings rate to multi-year highs. The net of those dynamics has been further middling in aggregate consumption. In other words, while the capacity for consumption growth has improved alongside accelerating income, the ongoing rise in the savings rate has muted the translation to actual household spending growth.
Is this good or bad?
In a Keynesian framework, total spending is paramount and the dearth of demand should be construed as a negative immediate-term development. At the same time, however, it’s difficult to characterize accelerating income growth, a rising savings rate and moderate credit growth alongside increased investment as a fundamentally negative development for the populous balance sheet or the prospective durability of the expansion.
How did spending and Income close out 1Q?
Income ↓, Savings ↓, Spending ↑: The savings rate saw its largest sequential drop in a year in March and spending grew at a premium to income for the first time in 8-months while aggregate disposable and salary and wage income growth moderated for a 2nd month. Inflation-adjusted disposable income actually declined -0.2% on the month while, on the spending side, a strong rebound in durables consumption growth buttressed headline spending against sequential softness in Services consumption and a modest gain in non-durables.
There a few takeaways from the March numbers:
What do you do with these divergent macro vectors from an investment standpoint? Probably not a whole lot until we get the employment river card next Friday.
While we like to think we have a “particular set of skills”, the expectation for 20-20 macro forecasting vision is quixotic. As Keith highlighted yesterday, sometimes the cacophony of macro crosscurrents breeds confusion more than high probability opportunity….and “going to cash beats confusion.”
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.86-2.08%
Oil (WTI) 53.38-59.93
Sunny & 70’s on tap for the Northeast. Enjoy the weekend.
Christian B. Drake
U.S. Macro Analyst
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Hedgeye Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman hosted a live Q&A session today today exclusively on Hedgeye TV.
They discussed athenahealth (ATHN) quarterly results, our long term bullish thesis and provide additional insight into the Trinity deal before taking questions from viewers.
This note was originally published at 8am on April 17, 2015 for Hedgeye subscribers.
“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:
“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,
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