- German Equities = Bearish TRADE (3 weeks or less); Bullish TREND (3 months or more).
- TRADE: German fundamental data underperforming, EUR/USD strengthening, and Greek uncertainty. (Bearish)
- TREND: ECB head Mario Draghi will continue to ramp the QE machine, muting EUR/USD appreciation. Expect concessions made to Greece to advert default and Grexit. The macro team forecasts weakness in U.S. data that should perpetuate positive European equity flows, in particular to Germany. Bullish quantitative TREND & TAIL
On 4/14 we presented a 40 page slide deck titled Germany: Still Bullish (CLICK HERE for a video replay). Given the weakness in recent German data and the DAX (down -3% since our call), we believe it’s worthwhile to revisit and update our outlook.
Clearly the data over the TRADE has taken a leg lower. Below we show some key German and Eurozone fundamental data points that have recently missed estimates:
- Germany Manufacturing PMI 51.4 MAY Prelim (vs exp. 52 and 52.1 APR)
- Germany Services PMI 52.9 MAY Prelim (vs exp. 53.9 and 54 APR)
- Germany Retail PMI 52.6 APR vs 53 MAR
- Germany Construction PMI 51 APR vs 53.3 MAR
- German ZEW Sentiment 41.9 APR (YTD low) vs 53.3 MAR
- Germany PPI -1.5% APR Y/Y vs expectations -1.4%
- Germany Q1 GDP 0.30% (vs exp. 0.50% and 0.70% prior)
- Eurozone Inflation (CPI) 0.0% APR Y/Y
- Eurozone MAY Flash Consumer Confidence -5.5 vs consensus -4.8 and prior -4.6
Recent economic data points to weakness, but our bullish call on Germany was not predicated on the data (as the economics YTD have been weak at worse or grinding slightly higher at best). Rather focused on Draghi’s QE program and the benefit that the German economy would reap from a weak EUR/USD.
We believe the recent data misses in concert with the Greek consternation (everything from Grexit to Greek bankruptcy) has roiled European markets (especially the DAX) over recent weeks.
In addition, we’ve seen strengthening in the EUR/USD over the near-term TRADE duration (~ +4.5% since our Germany: Still Bullish call) which has further pressured the DAX lower. And as we move forward over this TRADE duration, here are the key macro calendar catalysts that we think will take the USD lower, and therefore the EUR likely higher:
- May 29th – ugly headline Q1 2015 GDP report will keep political pressure on the Fed to push out the dots
- June 5th – watch out for the cycle on the labor front; especially if we get the 2nd bad jobs report in the last 3
- June 17th – Fed Day in America (FOMC meeting); sleep in until 9AM and just buy everything
All that said, our TREND view on the DAX remains intact. While it’s tenuous ground, we have eyes wide open of the centrally planned world we live in. We expect Draghi to continue to have his foot squarely on the QE gas pedal, especially as fundamental data underperforms. In this light, we see Draghi poised to win the currency debasement war versus Janet Yellen’s Fed, if conditions warrant.
Here’s why we think German equities get a lift over the TREND:
- History has shown that the Eurocrats cave against any and every pressure of a member state to default or threaten to break-up the Eurozone. Therefore, once again, we expect the current Greek debt issues to “settle” (some sort of concessions will be made to kick the can down the road). This should boost most European equities that have been held down in recent weeks by (more) great uncertainty over the Greek state
- All-In QE. We expect the QE machine to ramp higher over the coming months (see recent buying in the chart below). We got a preview of this on Tuesday in remarks from the ECB board member Benoit Coeure who said the Bank will frontload QE purchases in May and June and will backload in September if needed. Expect such commentary from Bank members to chase the EUR/USD lowe.
- ECB Minutes confirm united board. Minutes released today show unity on policy measures (QE and no change in rates). We expect Draghi’s firm hand of “whatever it takes” to prevail –he’ll will Eurozone equities higher even if he struggles to inflect growth and inflation.
- US data weaker. Hedgeye’s macro team forecasts weaker data ahead, which should help fuel the Eurozone equity trade.
Takeaway: Claims continue to show strength, posting the best numbers since April 15th, 2000.
Below is the breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
New Lows...& A Cycle Reminder: Seasonally adjusted jobless claims came in at 274k last week, slightly higher than expectations for 270k. Even with the slight miss, this is a strong print. The rolling 4-week SA figure dropped to 266.3k. This is the lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k. In the first chart below, the 4/15/00 data is circled in red. It is important to bear in mind, though, that that date also corresponded to the peak in equities two cycles ago.
In the second chart below, indexed claims in energy heavy states improved more than the country as a whole in the week ending May 9th. The spread between the two series fell from 25 to 21.
Initial jobless claims rose 10k to 274k from 264k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.5k WoW to 266.25k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -16.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.2%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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Takeaway: Less than 30% of HAIN’s brands are “organic”
HAIN is on the HEDGEYE Best Ideas list as a SHORT
We have just returned from three days of marketing in London. In short, there is a stark contrast between the investment communities in the UK and the U.S. when it comes to the outlook on HAIN. Basically, UK doesn’t get the hype over HAIN and the long-term opportunity. Ironically, during our visit HAIN management was also in London for a conference, management took many members of the UK investment community on a Tilda plant visit and a store tour.
Our summary thoughts from the people we met only confirm our SHORT thesis. Our view is that HAIN’s UK business is misunderstood by U.S. investors. Basically, HAIN’s UK business is nothing more than a private label business with a collection of non-organic brands.
Looking at the entire company, only 40% of HAIN’s products in the U.S. are “organic.” Therefore, looking at the U.S. and UK business in total, less than 30% of HAIN’s brands are “organic.” Having said that in the U.S. today, HAIN boasts that “99% of our products are GMO free,” which is not a bad thing but it’s not a long term competitive advantage. Why this roll-up story trades at a significant premium to other food companies is a complete mystery. Our sum-of-the parts suggest that there is close to 50% downside in the name.
The following are some comments from Irwin Simon Chairman, President & Chief Executive Officer, of HAIN at the UK presentation:
LOWER MARGINS FOR LONGER
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “So, don't look at us as our margins to be the same as every other food company out there because they're not going to be. But at the end of the day I'd love to see our EBITDA margins in the 15% to 18%, as we continue to scale our business, get efficiency, get SG&A efficiencies out there. And most important, is to get that top line growth, organic growth that can drive it down to the margin and bottom line level”
HEDGEYE – On one hand the CEO of HAIN says “don't look at us as our margins to be the same as every other food company out there because they're not going to be.” But then he says he want his EBITDA margins to approach 15-18%, which would look more like the companies he says “they’re not going to be.” Looking out to FY16-FY18, HAIN will be challenged to improve operating margins given the pressure on gross margins.
ACQUISITIONS ARE DILUTIVE TO MARGINS
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “We've done over 50 acquisitions. So, we have 6,300 employees around the world, 33 manufacturing facilities. As you heard me say before, our world headquarters in New York and these are where all our distribution centers are and all our manufacturing facilities.”
HEDGEYE – The best part of the HAIN roll-up story is in the rear view mirror. The last three acquisitions produce operating margins that are high-single digit versus the core U.S. business that is 17%. We expect that this trend will continue, making it nearly impossible for the company to generate 15% EBITDA margins.
HAIN IS GIVING BACK TO SHAREHOLDERS?
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “So, from Hain's standpoint, we're about brands, we're about people, we're about hug our customers, and at the end we're about returning money back to our shareholders.”
HEDGEYE – As far as I know the company does not pay a dividend. The company is also not returning stock to shareholders in the form of a stock buyback that reduces the outstanding share count. From my vantage point this is a throwaway line that suggests that the CEO will say anything to prop up the stock.
DON’T LOOK AT US QUARTER TO QUARTER
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “So I always tells people, don't buy Hain if you want to look at us quarter-to-quarter. You've got to look at the 20 years of growth. You got to look at the industry and look where we're growing. On our last conference call, we've discussed over 100,000 new points of distribution, which will drive consumption.
HEDGEYE – Why should we not look at HAIN quarter-to-quarter? Right, it’s all about the big picture. The big picture says that less than 40% of HAIN’s products are organic. Also, why is 100,000 points of distribution good news? What if it should have been 200,000? The new 100,000 points of distribution is on a base of what?
Irwin Simon Chairman, President & Chief Executive Officer, HAIN – “So if you go back and you look at my slide right here, basically, that is $3.5 billion in 2018 and if you look where we're going to end the year this year, $2.7 billion, if you annualized your acquisitions, we're close to a $3 billion business. So growing 7% to 10% organically is what we're looking for but we – this year, we did three acquisitions. We're looking to do at least $100 million in acquisitions each year and that's something around the world I think we can do.”
HEDGEYE – The HAIN CEO is on record saying that the company will show 7-10% growth organically thru fiscal 2018. That would be unprecedented growth for any company, let alone a food company. Given that the UK business looks more like a traditional food company, with 1-2% organic growth (maybe). This suggests that the U.S. and the rest of the world will need to grow 13-14% to offset the slower growth in the UK. Also, on a base of $3.0 billion in revenues, $100 million in revenues does not move the needle for HAIN any more. Trading at $62 the stock fully discounts the company’s ability to generate $3.5 billion in sales and $2.45 in calendar 2018 EPS.
The following two charts show HAIN UK revenue and operating profit growth for the next 5 quarters. Needless to say, this looks like mature food company and not a company growing 7-10% organically.
In this one-minute excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough lampoons government number crunchers who change the calculations when they don’t like what the numbers reveal. Don’t like the results? Just move the goalposts!
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