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Avian Flu ― Higher Grocery Bills for Consumers and Higher Input Costs for Producers

Takeaway: Currently estimated that more than 30 million birds have been euthanized because of AI.

This is an unprecedented outbreak that U.S. farmers have never had to deal with, it is currently estimated that more than 30 million birds have been euthanized because of AI.

 

Recent Events:

Thursday, May 14th, Post Holdings announced that roughly 25% of the company’s egg supply has been affected after the most recent AI outbreak in company owned chickens in Nebraska. Just three days ago on Tuesday they announced the flu had affected 20% of their supply. When they announced the 20% it was estimated it would be a $20 million hit, they are working on updating this estimate now.

 

Tuesday, May 12th, agriculture officials confirmed that the outbreak has been spread to Nebraska, making it the 16th state with confirmed cases of the virus.

 

May 1st, Iowa Governor Terry Branstad declared a state of emergency due to the outbreak in his state.

 

Into the Note:

It is widely accepted that the Avian Flu virus poses no threat to humans, but every chicken or turkey that is infected must be destroyed in order to preserve the health of the poultry population. We are beginning to see an impact on prices and availability at the grocery store. Dr. Dermot Hayes, an agricultural economist at Iowa state explained that, “…for every million birds we lose, we’ll see about a 1.6% price increase…We’re looking at between a 20-30% increase in retail prices.” With these rise in prices it’s not just the cartons of eggs that will be affected, there are many products like mayonnaise and ice cream that use eggs as an ingredient.

 

What does this mean for the rest of the breakfast category?

Per our recent discussion with David Sprinkle at Packaged Facts, eggs hold the number 1 household usage rates for breakfast in the United States, as seen in the chart below.

 

Avian Flu ― Higher Grocery Bills for Consumers and Higher Input Costs for Producers - Avian Flu Chart 1

 

With these rising prices soon to be seen across the country, we do not believe usage will stay this high.  Average price for a dozen eggs in March 2015 was $2.13 per dozen (BLS), while a box of Cheerios on Amazon Fresh are $2.99 and Milk is $3.46/gl (BLS).  As the price of eggs begins to creep up, we believe that it won’t be a default choice for consumers to pick up a dozen eggs as their go to choice for breakfast.

 

GIS, K, POST

We expect to see slight benefit going forward in the cereal category as consumers rethink their breakfast choice and go back to the classic bowl of cereal. But the bigger problem we see is the hit this will be to POST’s earnings. POST’s Michael Foods division a processor and distributor of mainly egg products representing ~28% of POST net sales, will undoubtedly be an area of concern for management. POST management recently stated, “Michael Foods is taking various measures including discontinuation of certain product lines and appropriate pricing actions to offset reduced egg supply and increased operating costs.” This spells trouble for earnings going forward and there is no telling yet just how deep the impact will be.

 


GIS – THE TRANSFORMATIONAL TRANSACTION

Takeaway: One way an activist can transform this portfolio is to do a Reverse Morris Trust (RMT)

GIS is on the HEDGEYE Best Ideas list as a LONG!

 

GIS is a great company with strong brands. Its business practices and backward looking are insular. Reshaping the portfolio of brands, CPW and G&A cuts are just some of the ways to create significant shareholder value.

 

We view GIS as an attractive target for an activist and that the recent performance suggests that management may be too stuck in the past to reshape the company in a way that will accelerate top line growth.  As it stands today, given the current portfolio of brands, it’s unlikely that management will be able to accelerate top line growth without making significant changes to the company. 

 

As we outlined in our Black Book on GIS, we continue to believe that the opportunity to create significant shareholder value from repositioning the company is significant.  A key tenant to the value creation strategy is a re-shaping of the company’s portfolio, which means selling the brands that management has determined as non-core brands.   

 

GIS has been rumored to sell off a number of brands, but doing it one by one is inefficient and not tax effective.  We calculate that management has identified roughly $5 billion in sales that are non-core brands that could potentially be sold.

 

One way an activist can present this possibility is to do a Reverse Morris Trust (RMT) with some of the brands.  All of the brands that we have identified as non-core can fit nicely in a separate company.

 

The idea is to spin the slow growing low margin businesses into an RMT, leaving the NEW GIS as a company focused on the fast growing parts of the food business – yogurt, snacks and food service.  It will also allow the company to focus on reinventing the core cereal business.

 

Below is a look into what an RMT is, precedent transactions using this method and a couple diagrams for a visual.

 

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT Chart 1

 

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT Chart 2

 

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT Chart 3

 

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT CHART 4

 

Let us know if you have any questions, or would like to discuss in more detail who GIS could partner with in a RMT.

 

Howard Penney

@HedgeyeHWP

 


Keith's Macro Notebook 5/15: Japan | 10YR | SP500

 

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


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Macro Snack: Love Me Some Tokyo Cowbell!

Macro Snack: Love Me Some Tokyo Cowbell! - z kuroda

Bank of Japan Governor Haruhiko Kuroda was up all night talking and talking…

 

...about his central planning experiment. And while he didn’t do anything exactly, Japanese Government Bonds (JGB 10yr) did – they are down 5 basis points to 0.39%. That’s the biggest move lower in a month. The Yen is down -0.4% versus the US Dollar.

 

The Weimar Nikkei? It likes this. It’s up +0.8% to +13.9% year-to-date.

 

Of the majors, Nikkei looks better than both the German DAX and S&P 500 right now.

 

Macro Snack: Love Me Some Tokyo Cowbell! - z japannnnnnnn

 

This is a brief excerpt from Hedgeye morning research. Click here to see our full offerings.


Retail Callouts (5/15): More Inventory = Lower Margin Growth

Takeaway: Dept Store SIGMAs show just how tough the quarterly growth algorithm gets -- starting now.

COMPANY NEWS

 

Department Store SIGMA

Department store results are out -- and the SIGMA comparisons are flat-out ugly. In the SIGMA chart below we plot the incremental move from 4Q to 1Q for each company. While the margin results are often predictable based on easy or tough yy compares, the sales/inventory spread is not. Unfortunately for the department store group, EVERY company printed an erosion in inventories relative to Sales -- with an average decline of 6%. The biggest offenders are JCP and KSS at about 2x the group average. The problem here is that the retail industry in aggregate just put up its last 'easy' quarter before margin compares get very difficult. With a less favorable inventory position, it makes the gross margin setup even more difficult for 2Q. Add on wage pressure that is likely to hit in late summer when retailers hire flex employees for back-to-school, and the potential pressure from 'free shipping' in 4Q, and it tells us that the group is reliant on a significant acceleration in consumer demand to maintain its current growth algorithm. 

Retail Callouts (5/15): More Inventory = Lower Margin Growth - 5 15 chart 1

 

EVENTS TO WATCH

Retail Callouts (5/15): More Inventory = Lower Margin Growth - 5 15 chart2

 

 

OTHER NEWS

 

TGT - Target sells its office furniture business to Omni Workspace

(http://www.startribune.com/target-sells-its-office-furniture-business-to-omni-workspace/303803391/)

 

Schubert Jonckheer & Kolbe LLP Exploring Lawsuit Against Urban Outfitters

(http://wwd.com/business-news/legal/schubert-jonckheer-kolbe-llp-lawsuit-urban-outfitters-10129372/

 

TGT - Target to Remove Controversial Shirt After Designer's Copycat Claim Goes Viral

(http://abcnews.go.com/US/target-remove-controversial-shirt-designers-copycat-claim-viral/story?id=31043778)

 

Hicks Lanier to Retire From Board of Directors of Oxford; Tom Chubb Expected to be Named Chairman

(http://investor.oxfordinc.com/releasedetail.cfm?ReleaseID=913295)

 

South Africa’s Brait Acquires New Look for $1.3 Billion

(http://wwd.com/retail-news/mergers-acquisitions/south-africas-brait-acquires-new-look-for-1-3-billion-10129984/)

 

 

 


LEISURE LETTER (5/15/2015)

Tickers:  RCL

headline news  

Skill-based gaming -

  • A bill backed by Nevada’s gambling equipment manufacturers that would allow slot machines to add a skill-based, arcade-style element to the game has been approved by both legislative chambers and awaits the governor’s signature.  AGEM Executive Director Marcus Prater said Gov. Brian Sandoval had expressed early support for the bill as part of his platform to keep Nevada as the hub for the world’s gambling technology.
  • Under the concept, gamblers could play a slot machine with an 88% payback, but the figure could jump to 98% if the player was proficient in a video game skill element that would be part of the bonus round, such as shooting down enemy airplanes or outracing other players in a road race.

ARTICLE HERE

Takeaway: This could be a monumental change for the slot industry and for domestic gaming, and the first step starts with Nevada. Generation X and younger do not play slot machines.  This could be the catalyst for video game generations to try slots.

COMPANY NEWS  

BEE - closed on the sale of the Four Seasons Austin Hotel for $197m (291 guest rooms)

Takeaway: $677k average price per room for this luxury property.

 

RCL - Royal Caribbean International plans to raise the suggested daily gratuity amount on its cruises from $12 to $12.95 per person. Cruise Critic members also are reporting that Celebrity Cruises will raise its recommended gratuity guidelines.

 

DIS - After announcing last month that it is launching river cruises through a partnership with AmaWaterways, Adventures by Disney has already added two more departures "due to popularity and mass interest in the program."

Originally, Disney’s tour operator arm said it would offer four sailings along the Danube River during summer 2016, and one holiday-themed sailing in December 2016. There will now be five sailings in the summer, as well as two sailings in December of 2016. The itineraries will travel through Germany, Austria, Slovakia and Hungary.

ARTICLE HERE

Takeaway: River cruises are doing well in Europe and will continue to pressure ocean cruise liners there.

INDUSTRY NEWS

Hotel price peak - hotel prices in the U.S. were just 1% point short of their pre-recession peak, according to Moody’s/RCA Commercial Property Price Indices (CPPI) report, indicating that values can’t go much further.  Moody’s reported that hotel prices rose by 33% over the past 12 months, as property fundamentals improved and more and more investors flooded into the sector. 

ARTICLE HERE 


 

MACRO

China April new yuan loans CNY707.9B vs consensus CNY950B and CNY1.180T in March

  • Loan growth +14.1% y/y vs +14.0% in March
  • Deposits +9.7% y/y vs +10.1% in February
  • Total social financing CNY1.05T and CNY1.18T in February
  • M0 +3.7% y/y vs +6.2% in February
  • M1 +3.7% y/y vs +6.1% in February
  • M2 +10.1% y/y vs consensus +11.9% and +11.6% in February

Takeaway: Weak loan data for April. Bad for the VIP business in Macau.

 

Singapore new private homes sales jump 83% in April - Data from the Urban Redevelopment Authority (URA) on Friday (May 15) showed developers sold 1,124 housing units last month - well above the 613 units sold in March and 390 units in February. April's sales were the highest since May 2014, when developers sold 1,488 units.

ARTICLE HERE


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


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