McCullough: Why Carl Icahn Is Absolutely Right to Be Worried About the Market

Hedgeye CEO Keith McCullough weighs in on activist investor Carl Icahn's stock market warning on Fox Business "Mornings With Maria" with host Maria Bartiromo.

Avian Flu Update After Talking with Industry Professionals

Takeaway: Just when we thought AI was taking a break another outbreak was reported.

Editor's Note: Since this note was originally published on May 28, 2015, over one million birds have been euthanized. Our Consumer Staples and Restaurants team is hosting a special "thought leader" call with Dr. Thomas Elam tomorrow Wednesday June 3rd at 11am ET to discuss the effects Avian Flu is having on the food and restaurant industries. Ping for access.   

The Avian Flu (AI) has been wreaking havoc on the egg and poultry industry this year.  As I was researching our previous note on AI on Tuesday (printed on 5/27/15) it was looking that poultry farmers were getting a break with no reported infections for five days.  But that optimism was short lived as another outbreak was detected in Nebraska and Iowa, affecting 293,200 chickens and 20,700 turkeys respectively in each state.


Wholesale egg prices continue to rise, nearly doubling versus pre-AI prices. As we previously reported companies are looking elsewhere for eggs, mainly international and alternative egg-substitutes.



Importing eggs is more complicated than it seems, and given the U.S.  has always been an efficient producer, few countries are pre-approved for egg importing. French and Dutch farmers are acting fast to try to take advantage of the U.S. AI outbreak, working with their embassy’s in the U.S. to expedite the approval process.


You may be thinking, what is the difference between a U.S. and a European egg? When you travel to Europe you will notice in a majority of supermarkets that the eggs are not refrigerated, while in the U.S. they are always refrigerated.  This is because eggs have a natural protectant on them called a cuticle, which acts as a shield to keep bacteria out. In Europe they are required to not clean the eggs and leave the cuticle intact, while in the U.S. all eggs must be washed in 90⁰F water and sprayed with sanitizer. Given this difference there will have to be a change in process to export the eggs to the U.S. but European companies want to take advantage of this opportunity.


After speaking with industry professionals we have determined that the egg prices in Europe are usually priced at about a 20% premium in a non-AI environment, and that to do all the additional cleaning and ship the fresh eggs across the pond would cost an additional 20% on top of that.  We have provided our math in the below chart for a visual:


Avian Flu Update After Talking with Industry Professionals - z shayne



POST provided an update on the recent AI outbreak that is affecting their business.  They are now stating that a third of company owned chickens in Nebraska has tested positive for AI.  Bringing the total affected supply to ~35% of the company’s volume commitments.  Post management has determined that this amount of loss constitutes a force majeure event for the Michael Foods egg business.  They have started to take drastic measures to minimize the financial impact such as, discontinuation of certain products and price increases. 


HRL has stated that their Jennie-O turkey supply has been greatly impacted by the AI outbreak in Minnesota and Wisconsin and could inhibit their ability to fully meet orders, and will assuredly raise prices.  Thanksgiving feels far away but when you calculate the time to clean facilities and get birds to a mature size, it doesn’t seem possible that they will be able to fully rebuild their supply.



As the summer approaches we will begin to see a slow down as the AI and all flu’s for that matter don’t survive well in high temperatures.  One concern is when migrating birds from northern states start to fly back south in the fall we may have a relapse of AI, but not to the same extent we are seeing now.

Retail Callouts (6/2): WWW, PVH, FL, DG, Ashley Furniture

Takeaway: WWW CFO change. PVH Earnings Callouts. FL insider sales picking up. Ashley Furniture shopping itself.

WWW - CFO Don Grimes Departure


Takeaway - This is the second notable change in management at Wolverine in the past month. The first being the departure of Gene McCarthy, who headed up WWW's biggest brand, Merrell, which has been struggling YTD putting up a flat Q1.  Let's be clear, however, in that McCarthy leaving was not voluntary, while Grimes' is. Grimes accepted a position to be EVP, COO & CFO of Neiman -- so he's in effect trading up to a $5bn company from a $3bn.


WWW is a deep organization, so there's no doubt in our minds that the company will not miss a beat financially.  But where Grimes was particularly strong was in communicating the appropriate message to the investment community. CEO Blake Kreuger is a first-rate CEO and great leader -- but he does not know how to speak to Wall Street. We don’t know the new CFO Michael Stomant -- and while we don't doubt his abilities as CFO given the massive pool of divisional CFOs WWW has to pick from, his 'Wall Street Management' skills are untested.


Nonetheless, we’re comfortable with owning this sleepy name that has several levers. We think that the PLG brands are growing outside the US to a far greater extent than is apparent in the GAAP results.  Merrell with the leadership change probably has a free pass for another few quarters.  Estimates look extremely achievable this year. Also the Street is not accounting for what should be 500bps in financial deleverage. If we don’t see this, it is likely bc WWW goes ahead and does another deal – and it can stomach up to a $1.3bn transaction at current leverage levels. We usually don’t like deals, but in WWW’s case they usually serve as a positive catalyst.


PVH - 1Q15 Earnings Callouts

1) Excluding translation effects, the growth algorithm in the quarter looked clean. Revenue +3%, EBIT +8%, Earnings +20% with the delta between EBIT and earnings growth driven by an $11mm reduction in interest expense. Net debt to total capital down from 44.4% to 40.9% since 1Q14. The company expects to generate $450mm in FCF this year, and use $350 million of that to pay down debt, with the remainder being used to ‘opportunistically’ fund new $500mm share repo announced today. We wouldn't rule out a deal -- it's what these guys do.

2) On the guidance front, the company took the range up to $6.85 -$6.95 after a $0.12 beat (+9%) from $6.70 - $6.90 while increasing the Fx hit from $1.20 to a $1.25. Relative to expectations, the 2Q guidance looks light (11% below current consensus numbers) as the company benefited, at least on the top line, from the shift of wholesale Heritage shipments into 1Q from 2Q and the shift of the Chinese New Year (which landed in 2Q14) into 1Q15 this year. Fx continues to be a sizable headwind, taking 17 percentage points off the earnings growth for the year. We’ve heard RL take considerable flak for the way it (mis)managed its way through the strengthening dollar, but PVH may be a close 2nd. As a percent of revenue, Int’l is a bigger chunk of PVH’s portfolio at 47% compared to RL at 33%, but 15% earnings dilution is amongst the biggest we’ve seen in this space.

Retail Callouts (6/2): WWW, PVH, FL, DG, Ashley Furniture - 6 2 chart2 

3) We don't currently have a call on PVH. At 14.7x P/E and 10.4x EBITDA, valuation isn’t prohibitive here. Numbers in the near term are coming down, setting a low bar for the quarter PVH will report in 3 months. But, the company will need to continue to keep CK cranking and find a way to turn Tommy. Tommy NA just put up its first negative growth rate (-1% C$) in a quarter in over 4 years, and the first miss usually isn’t the last. Not much margin upside left to engineer, which makes this a very top line dependent story -- and we're uncomfortable making the leap in this situation.



FL - Notable Insider Sale

Takeaway: John Maurer, Treasurer/IR at FL,  executed 18,000 options struck at (an average of) $20 worth $775,000. This is the individual that knows the numbers better than anybody. Management stock sales have picked up meaningfully in both size and frequency since former CEO Ken Hicks resigned back in early November. We don't think that's a coincidence.

Retail Callouts (6/2): WWW, PVH, FL, DG, Ashley Furniture - 6 2 chart1



Ashley Furniture Shopping Itself


Takeaway: We'll be watching this deal with interest. Ashley might be the biggest concept in the home furnishings space that nobody talks about. Fact is, the company is the 2nd biggest concept in the home furnishings space behind only IKEA.   At 1x EV/Sales the valuation looks much more like ETH than a higher end concept like WSM or RH. Makes sense that Ashley would be shopping itself in this environment because a) growth looks more or less tapped in the US with a 25k footprint and 475 units and b) productivity is approaching pre-recession peaks up 25% since bottoming out in 2008. But let's be clear...great assets don't need to be 'shopped'.


ICSC - Chain Store Sales

Takeaway: We've seen trends improve marginally since a slow start to the first 1/4 of the year which got his by both weather and the port closure, or so the retailers say. Starting next week, comps get much tougher for the balance of the summer -- when we had a 13-week period of sales growth clocking in at 4% or better (which is VERY high for this data).

Retail Callouts (6/2): WWW, PVH, FL, DG, Ashley Furniture - 6 2 chart3

Retail Callouts (6/2): WWW, PVH, FL, DG, Ashley Furniture - 6 2 chart4



DG - 1Q15 Earnings

Retail Callouts (6/2): WWW, PVH, FL, DG, Ashley Furniture - 6 2 chart5





WMT - Walmart to raise wages for some employees starting in July, promises $10 minimum by 2016



Neiman Marcus Group Names Grimes in Top Role



GME - GameStop Corp. Announces Agreement to Acquire Geeknet, Inc.



Daily Trading Ranges

20 Proprietary Risk Ranges

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June 2, 2015

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Another Head-Fake?

Client Talking Points


German 10YR Bund Yields just ramped +20%, in a day – yes, from 0.49% to 0.59% is “from low levels”, but that’s not the point – rate of change matters most in macro and this move moved the entire FICC complex, dropping SPX futures fast too. We highly doubt ECB President Mario Draghi lets this manifest into a breakout in Yields at the ECB meeting tomorrow; fade it.


Yields Up, Euro Up, Dollar Down = Oil Up. WTI is up +1.3% this morning re-testing $61 – we still like Oil and Gold on the long side ahead of what could be a bad U.S. jobs report Friday (which could also drop 10YR UST back towards 1.99%). 


India cut rates by 25 basis points to 7.25% and the BSE Sensex drops -1.6% on that! How do you like us now central planning fans? Australia down -1.7% is having a tough time convincing people that rate cuts and easing are the path to economic prosperity too. India continues to signal bearish TREND @Hedgeye with Global #GrowthSlowing.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility. PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016. Both properties should well exceed current Street estimates for win per slot and EBITDA. PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.


Housing went 3 for 3 as the Trinity of Fundamental Data Points released in the latest week continued to reflect accelerating rates of improvement across both the New and Existing markets. New Home Sales in April rose +6.8% month-over-month to +517K.  More notably, sales were up a remarkable 26% on a year-over-year basis as NHS re-converged back to the trend in New Home construction. Pending Home Sales rose +3.4% sequentially in April, accelerating to +14% year-over-year with the Index making a new 101-month high.  Pending Home Sales represent signed contract activity and are a historically strong lead indicator of Existing Home Sales.  The MBA’s weekly Mortgage Purchase Application Index re-captured the 200-level, rising +1.2% week-over-week and accelerating +250bps sequentially to +13.1% year-over-year.  


We believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it. Friday’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year. We reiterate our call to be long of long-duration in its many forms:  TLT, VNQ, EDV, and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).

Three for the Road


NEW VIDEO McCullough: Front-Run the Sell-Side Herd and Get Paid … via @KeithMcCullough



Don't watch the clock; do what it does. Keep going.

Sam Levenson


The Chinese Shanghai Composite Index continues,  up +1.7% overnight to up +6.4% in 2 days, +52.1% year-to-date.

Invite | Avian Flu ― Thought Leader Call with Dr. Thomas Elam

Please join us on June 3, 2015 at 11:00am EST for a call discussing the Avian Flu (AI) and the effect it is having on the food and restaurant industries with Dr. Thomas Elam.


AI has reached epidemic levels and as we have been keeping you updated, we are bringing in a thought leader to speak to the effects AI is having on the food and restaurant industry. 


Dr. Thomas Elam, President of FarmEcon LLC will be meeting with us to discuss the topic and provide his insights that have been built up over his 40 year career. Dr. Elam has been recognized for his knowledge on the industry in numerous publications and written in-depth research on the topic. Dr. Elam brings a real business mind to the conversation, having been a professor of both economics and statistics. His education includes a BS degree in Economics with a minor in mathematics from Union University, Jackson, TN (1969), he also earned MS (1971) and PhD (1973) degrees in Agricultural Economics from the University of Tennessee, Knoxville.


He retired in 2003 and established a consulting practice, FarmEcon LLC. In November, 2006 Dr. Elam was recognized by Poultry USA magazine as one of the top 20 consultants to the U.S. poultry sector. Since 2003 Dr. Elam has worked on over 300 client projects, made over 100 personal appearances, and authored numerous articles on livestock, poultry and grain outlook.


Eggs are an important input for many products besides just table eggs, such as, baked goods, pasta, chocolate, ice cream, cosmetics, etc.


There are many companies currently being affected by AI:


Positively affected: GIS, K, ADM, CALM

Negatively affected: MCD, PNRA, POST, HRL, TSN, DIN, DNKN, NESN, BDBD

In this call we will discuss what losing 25% of your breaking eggs supply will do to food and restaurant industry supply chains and when it will make an impact on the bottom line.



US Toll Free:

US Toll:

Confirmation Number: 39899343

Materials: Coming Soon


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