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DE: Adding Deere to Investing Ideas (Bear Side)

Takeaway: We are adding Deere to Investing Ideas (Bear Side).

DE: Adding Deere to Investing Ideas (Bear Side) - z dee

 

According to Hedgeye CEO Keith McCullough: 

 

Follow the bouncing macro puck...

 

1. Europeans freak and devalue

2. USD starts to strengthen again vs Euros and Yens

3. Commodity #Deflation remains the TREND

 

I've been waiting, patiently, to start re-shorting some of these commodity plays and as our Industrials analyst Jay Van Sciver wrote recently "the only thing worse than forecasting a stock is forecasting a stock based on a commodity that is dependent on the weather."  

 

Per Jay, excessive rain in parts of the U.S. Midwest, along with some drought conditions in Europe, pushed prices for Corn, Soy, and Wheat higher this past week. But my risk management signal wouldn't call that a bullish TREND (it was a counter-TREND trade).

 

Shorting DE high,

KM


GIS | Flat Performance Persists, But Moving in the Right Direction

Takeaway: Looking into FY16 we are excited about the possibilities.

General Mills is on the Hedgeye Best Ideas list, and after this quarter we remain confident in our position on GIS. Robust performance was seen in the core growth businesses, while management has a keen eye on improving struggling businesses. 

 

Today, GIS reported Q4 FY15 and it was basically what we were expecting, not awe inspiring but not a disappointment either. Below is a look at the numbers for the quarter and the year:

 

FOURTH QUARTER SUMMARY:

  • Net sales: Reported net sales were $4,299mm missing consensus estimates of $4,547mm by ~5.5%.  Versus the same period last year, top line was up 6% on a constant-currency basis. The 53rd week in this year contributed 6 points of net sales growth in the fourth quarter.
  • Segment operating profit: Increased 13% on a constant-currency basis to $800mm, beating consensus estimates of $704mm by 12%.
  • Adjusted diluted EPS: Beat consensus of $0.71 by $0.04 and increased 12% versus the same period last year to $0.75 on a constant-currency basis. The 53rd week contributed roughly the difference between consensus and actual adjusted diluted EPS.

 

FISCAL 2015 SUMMARY:

  • Net sales: Net sales increased 1% on a constant-currency basis to $17,630mm, coming in just shy of consensus at $17,635. The 53 week contributed roughly 1 point of net sales growth and the addition of the Annie’s business provided another 1 point lift. So backing those out sales were down roughly 1%. This year started off rough, but gained traction in the 2H, and we expect this momentum to continue into FY16.
  • Segment operating profit: Declined 2% on constant-currency basis to $3,035mm coming in above consensus estimates of $2,899mm.
  • Adjusted diluted EPS: Totaled $2.86 for the full year, up 4% from a year ago levels on a constant-currency basis. The 53rd week drove much of the improvement versus last year, contributing $0.04 of EPS for the full year.

 

LET’S TALK ABOUT THE COMPANY BY SEGMENT

 

U.S. RetailFor the year the segment declined 1% to $10.5bn, reflecting lower pound volume. U.S. operating profit declined 7% to $2.2bn. Although the year in total was a disappointment, one must look at the quarter by quarter progression. In the 2H GIS showed signs of improvement. Q4 net sales increased 5% to $2.5bn; pound volume contributed 3 points, while net price realization and mix added another 2 points. Segment operating profit totaled $565mm, a 13% increase versus the same period last year.

 

In the 2H of the year Snacks grew at HSD to MDD rates, Yogurt up LDD to HSD, and Cereal returned to growth albeit against a week comp, sales were up 3%. They are still struggling in some areas such as baking products, where we have suggested a divestiture, but management seems adamant that their turnaround efforts will be effective.

 

Gaining Share in Key Categories: General Mills improved their share in key growth categories for the company. Increasing Grain Snacks share by 168 basis points (bps), Frozen Hot Snacks by 97bps, Yogurt by 88bps, RTE Cereal by 26 bps and Frozen Pizza by 23bps. Now, not all the performance was positive they lost substantial share in underperforming categories; Frozen vegetables lost 168bps, Dessert Mixes down 144bps and Dry Packaged Dinners down 72bps, all categories that we believe need to be divested.

 

Natural & Organic is at the forefront of every food discussion, and GIS is adapting. Their portfolio has grown to $700mm in sales, well on their way to $1bn by 2020. And they are innovating, Annie’s brand will be launching a soup this summer just in time for the core soup season (Fall/Winter), Food Should Taste Good has a bar now and Larabar is gaining distribution with sampling and media backing its growth.

 

International In FY15 sales on a constant currency basis increased 6% to $5.1bn. Pound volume was basically flat versus last year, and net price realization and mix contributed 6 points of net sales growth. International operating profit totaled $523mm, up 9% on constant-currency basis. In Q4, international segment net sales totaled $1.2bn, up 9% on a constant-currency basis; pound volume added 2 points, while net price realization and mix added 7 points. Segment operating profit totaled $134 mm up 12% on constant-currency basis.

 

Robust growth seen across the segment, on a constant-currency basis, Latin America increased 17%, Asia / Pacific up 5%, Europe up 5% and Canada was about flat. This robust growth was driven by innovation in key markets like Brazil with Yoki and China’s dumpling and ice cream businesses.

 

Yoplait in China is on shelf in Shanghai and the business is seeing a positive initial reaction. It remains unclear on when this business will provide meaningful earnings for the company.

 

Convenience & Foodservice (C&F) In FY15 sales for the segment totaled $2.0bn, an increase of 4% versus last year. Pound volume added 1 point of growth, while net price realization and mix added 3 points. Segment operating profit totaled $353mm, an increase of 15%. In Q4 net sales grew 4% to $527mm driven mainly by pound volume. Segment operating income in the quarter rose 17% to $101mm reflecting the extra week and favorable business mix.

 

C&F continues to improve the product portfolio by pruning lower performing SKUs, freeing the business to focus on the key priority platform. These platforms (cereal, snacks, yogurt, mixes, biscuits and frozen breakfast) are providing all the growth for the division, collectively up 9% this year.

 

 

FY16 Management Summary ―

  1. Expanding our consumer-first focus to generate growth
  2. Investing in core renovation and incremental innovation
  3. Disciplined cost management
  4. Continued emphasis on shareholder returns

 

FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is not a comprehensive list but some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original Yoplait yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International

 

Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business.

 

We will be attending the General Mills analyst day on July 14 in Boston. Coming out of that we will dive deeper into what we think GIS can do this year.

 

Please reach out with any questions.


VIRT: Adding Virtu Financial to Investing Ideas (Bear Side)

Takeaway: We are adding Virtu Financial to Investing Ideas (Bear Side).

VIRT: Adding Virtu Financial to Investing Ideas (Bear Side) - z virt

 

According to Hedgeye CEO Keith McCullough:

 

I've been waiting for one of Jonathan Casteleyn's best new ideas (on the bear side) to bounce to the top-end of the range (on decelerating volume)... and here's what I've been waiting for.

 

Shorting VIRT is a good way to express what I'm really bullish on right now (have been since July of last year), and that's market volatility.

 

Per JC, "shares of newly issued Virtu Financial (VIRT) are very richly valued and despite principal risk in their daily trading operations, the stock is being priced in-line with the exchanges.

 

VIRT has no tangible equity capital to absorb a potential trading loss and would have to draw down credit lines should their historical track record in trading break down. We estimate shares are worth $18 per share or the mid point of our scenario analysis."

 

Short Green,

KM


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

ZOES + FNGN: Removing Zoe's Kitchen and Financial Engines from Investing Ideas

Takeaway: We are removing Zoe's Kitchen and Financial Engines from Investing Ideas today.

According to Hedgeye CEO Keith McCullough: 

 

This is not a research call (our all-star Restaurant Analyst, Howard Penney, remains long-term bullish on the ZOES business model). This is another opportunity to give you a Portfolio Manager’s Risk Management call.

 

I’ve only reduced the number of long positions in Investing Ideas for risk management reasons once before, and the feedback I received from many of you was that you appreciated both the #timing and perspective.

 

Despite the Global Macro market’s most recent bounce to lower-highs on Greece saving itself from itself (allegedly) again, the liquidity risk in the equity market (especially small caps like ZOES and FNGN) remains.

 

So I wanted to amplify my concern about this risk with an action, taking something  off the list that I actually like. This may sound counterintuitive, but that is precisely the point. By the time the crowd has to sell what they “like”, it will be probably be too late.

 

Happy Canada Day from the homeland,

Keith 

 


[UNLOCKED] Keith’s Top-3 Things: $VIX | #China | #Europe

Hedgeye CEO Keith McCullough shared the Top-3 things in his macro notebook on today's edition of The Macro Show. Keith’s “Top-3 Things” is available every morning to subscribers. Don’t miss another edition – click here to subscribe today!

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Subscribe to Hedgeye on YouTube for all of our free video content.

 


LEISURE LETTER (07/01/2015)

TICKERS: 1159.HK, H, TUI.LN, NCLH

HEADLINE NEWS

Macau Casino Revenue - GGR down 36.2% YoY in June. Macau raked in MOP17.4 billion (US$2.2 billion) in gross gaming revenue in June, official figures released today by the Gaming Inspection and Coordination Bureau show.

  • This is a decrease of 36.2% YoY, represents thirteen straight months of slump in casino revenue in the city. 
  • The latest data also means that the accumulated gross gaming revenue for the first six months of 2015 at MOP121.6 billion is 37% lower than the same period in 2014.

ARTICLE HERE

Takeaway: Slightly better than the most recent conensus but exactly in line with our forecast. However, June represented a sequential, seasonally adjusted GGR decline. Based on the prior 3 months, June should've fallen only 27% per our estimate, which was our forecast at the beginning of the month. 

COMPANY NEWS     

1159.HK - Jimei International Entertainment Group Ltd, known junket investor, has agreed on a deal to operate at least seven VIP gambling tables at NagaWorld casino resort, in Cambodia.  The filing didn’t specify the incentives the Jimei entity would receive in order to send players to NagaWorld. But it did say that the Jimei side would be responsible for services including accommodation, transportation, food and beverages.

ARTICLE HERE

Takeaway: China won't make it easy for VIPs to visit often but luring mainland junkets could pay off.

 

Mohegan Sun - Mohegan Sun finalizes ideas for South Korea Casino.  U.S. regional tribal casino operator Mohegan Tribal Gaming Authority, known as Mohegan Sun, announced on Tuesday it has finalized what it referred to as a “concept agreement” for a casino resort it hopes to develop in South Korea. The project, first announced in April, is to be in partnership with South Korea’s Incheon International Airport Corp (IIAC).

  • The integrated resort would have a two-tower luxury hotel complex with 1,000 rooms, a private air terminal, and more than 18,500 sq. meters of shops, restaurants, art exhibition and music entertainment areas.
  • The companies estimate the construction cost for the private terminal at $35 million, with a further US$320 million to be spent on the entertainment arena and US$140 million for the theme park. The statement did not provide an estimated cost either for the hotel towers or the casino.

LEISURE LETTER (07/01/2015) - Korea Casino

ARTICLE HERE

Takeaway: The competition to win over foreign gamblers continues.

 

H - Kansas City, MO, developers of the proposed downtown Hyatt convention headquarters hotel, now estimated to cost $310.8 million, took a big step forward Tuesday, with a recommendation of approval of a tax increment financing plan.The Tax Increment Financing Commission of Kansas City board voted 8-2 for the TIF levels KC Hotel Developers LLC requested for the 800-room hotel, which remains on track for a late 2018 opening.

ARTICLE HERE

 

TUI.LN - TUI Cruises and Meyer Turku signed an agreement for two more cruise ships. The newbuilds, planned for 2018 and 2019, will successively replace Mein Schiff 1 and Mein Schiff 2. "We regard the cruise market as a growth market for our Group. By expanding our activities in this segment we want to drive the planned revenue and earnings increases for the TUI Group and at the same time develop into one of Europe's leading cruise providers," said Sebastian Ebel, responsible for cruise activities on the board of TUI Group. 

ARTICLE HERE


Celebrity Cruises - Starting July 6, Celebrity Cruises is set to roll out a permanent change to its pricing structure.  The new system builds on Celebrity's 123Go! promotion, which offers a menu of perquisites, such as free gratuities, beverage packages or an onboard spending credit. 

  • The pricing structure, to be called Go!Big, Go!Better, Go!Best, adopts the rhythm and language of the 123Go! promotion, but Celebrity is emphasizing that it is not a temporary campaign. 
  • Guests can choose among four perquisites: a Classic beverage package, free gratuities, unlimited internet or a $150-per-person spending credit.  All ocean view, balcony and suite accommodations will be priced at minimum with the choice of one perquisite built in. 
  • The new pricing will not apply to Celebrity's Xpedition ship or to transatlantic and transpacific crossings.

ARTICLE HERE

 

NCLH - Norwegian Cruise Line Holdings is making a bigger push into Australia and the surrounding region.

  • "In view of the growing international interest in cruising combined with our strong growth strategy, the new office in Australia is a natural next step in our global expansion of Norwegian Cruise Line Holdings,"Harry Sommer, executive vice president of international business development for Norwegian Cruise Line Holdings, said in a statement. 

  • "It reflects our confidence in the growing Australia and New Zealand markets and we believe that our three brands...are all a perfect fit for the Australian market, offering a wide variety of experiences and worldwide itineraries."

ARTICLE HERE 

INDUSTRY NEWS

Macau Casino Promotions - Casinos in Macau are assigning an increasing share of their revenues to promotions and discounts in order to attract new customers, now that the market has slowed.

  • From discounts on room rates to free meals to shopping vouchers to better loyalty programs everything has been thrown at Macau visitors.  Never have the casino operators here spent so much on promotions as a share of gaming revenues as today. 
  • In the first quarter of this year, casino operators MPEL, WYNN, and LVS collected $2,011 million in mass gaming revenues in Macau and gave away $206 million in promotions, a 10.2% YoY increase.

ARTICLE HERE

Takeaway: Too competitive to cut promotional allowances faster than gaming volumes are falling. Not good for margins.  Given the state of the midweek business, we wouldn't be surprised to see elevated promotional activity targeted at this segment, i.e. "double point Tuesdays"

 

Macau Smoking Ban - The government will present to the Legislative Assembly a bill to ban smoking in casinos, increase taxes on tobacco products and prohibit the sale of electronic cigarettes, officials have said. “Predictions tell us that the economy will be hit by these measures,” Health Bureau director Lei Chin Ion told a press conference.  “But there are different predictions. We are concerned with public health – and without health there is no economy at all.”

ARTICLE HERE

 

Singapore Home Prices - Singapore’s home prices dropped for a seventh consecutive quarter, the longest losing streak in 13 years, as tighter mortgage curbs cooled demand in Asia’s second-most expensive housing market.  An index tracking private residential prices fell 0.9 percent in the three months ended June 30th. 

  • Residential prices have already declined 6.7 percent since the peak in September 2013. 
  • Home sales dropped 57 percent to 638 units in May from a year earlier as developers offered fewer projects, according to previously released URA data.
  • The government began introducing residential property curbs in 2009 as low interest rates and demand from foreign buyers raised concerns that the market was overheating. They have included a cap on debt repayment costs at 60 percent of a borrower’s monthly income, higher stamp duties on home purchases and an increase in real estate taxes.

ARTICLE HERE

 

Massachusetts Lottery - Record lottery sales made way for $935 million in profits for the state.  Lottery sales for the fiscal year through June 27 totaled $4.973 billion, compared to $4.825 billion for the same period in fiscal 2014. June has been a "high payout month," a Lottery spokesman said, with one $15 million prize claimed and one $10 million prize, as well as ten $1 million prizes.

ARTICLE HERE

 

4th of July Weekend - According to a projection from AAA, this holiday period between Wednesday and Sunday is expected to be the busiest since 2007, with an estimated 41.9 million people traveling 50 or more miles from home nationwide. According to an early survey of Miami-Dade hotels, occupancy is expected to be higher than last year, at about 81% between Thursday and Sunday. On Miami Beach, that figure is 88%, according to William Talbert III, president and CEO of the Greater Miami Convention & Visitors Bureau. 

ARTICLE HERE

MACRO 

China Home Prices - New Home prices up 0.56% MoM (100 major cities index) 

Macau Home Prices - MoM home prices dropped 12.6%, and the number of homes sold fell from 664 in May to 582 in June. 

 

Hedgeye Macro Team remains negative on Europe 

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot has happened in 2015.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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