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July 2, 2015

July 2, 2015 - Slide1

Cartoon of the Day: True North vs Truly Indebted

Cartoon of the Day: True North vs Truly Indebted - Canada Day cartoon 07.01.2015

Happy Canada Day!

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,


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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:



  • 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.



  • 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.




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,


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,



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