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CPB | Analyst Day Notes

We are taking CPB off of the Hedgeye Consumer Staples SHORT Bench.

 

Campbell’s (CPB) held their Annual Investor Day yesterday afternoon, in which they went through their plan to reshape the company in search for growth.  If you didn’t get a chance to listen, I would say you did not miss anything that you could have just gotten from the press release. Nevertheless we will give you a quick summary and our take on the future for this company.

 

The biggest change the company is making is switching from a geography first mindset to a consumer category first mindset, and consolidating down to only three operating units:

 

  1. Their biggest, ‘Americas Simple Meals and Beverages’ will account for ~$4.6bn of net sales and will be the economic engine for the company. Management is projecting a long-term growth rate for this segment in the 1-2% range, in-line with category averages in which they play. This business has operating margins of 22% and will contribute 71% of operating earnings.
  2. ‘Global Biscuits and Snacks’ is a ~$2.7bn segment which globally unifies the Pepperidge Farm, Arnott’s and Kelsen businesses into a fully integrated biscuit and snack portfolio. This business has operating margins of 12% and will contribute 24% of operating earnings.
  3. ‘Campbell Fresh’ is a ~$1bn portfolio that includes their recently acquired Garden Fresh Gourmet business, Bolthouse Farms and Campbell’s retail refrigerated soups. This business has operating margins of 7% and will contribute 5% of operating earnings.

 

Cost reduction initiatives are also a big part of management’s plan, by 2018 they expect to have annual savings of $250 million by 2018, of which ~2/3 will be non-headcount expenses. Non-headcount savings are in large part a result of zero-based budgeting adoption and changing company spending policies. The other ~1/3 is headcount savings as a result of the organization redesign, in which the company eliminated layers and expanded control.

 

Innovation and product improvement is top of mind for management, but in low impact areas. CPB has set up a new website, www.whatsinmyfood.com to be more transparent with consumers. Soup has a lot of negative ingredients such as MSG that prior to looking at this website I didn’t realize were in the soup. We think it may have been a better idea to take the MSG out before making the website, but that’s just our opinion. That being said, CPB is committed to taking the MSG out and making the recipes simpler.  In August, Campbell’s will be launching the first updated range of kids soups, this happens to be the same time that Annie’s (GIS) will be launching their line of kids soups. Although soup is not our favorite category, this will be an interesting battle to watch unfold, depending on price points we think Annie’s will have the upper hand. CPB has a slew of other product improvements that every other company is doing, such as taking out artificial colors and flavors and high-fructose corn syrup but nothing to truly differentiate the brands from the competition, just doing enough to stay in the game.  

 

Outlook for FY2015 is largely a cost cutting/margin expansion story. Sales are expected to be down -1%, while versus previous estimates for EPS to be down -5% to -3% the updated numbers are projecting -1% to 0%.

 

Overall we believe this reorganization for the company was a great move and will help them expand their brands globally. But this ship is anchored to the floor by soup. Their on-trend growth engine, ‘Campbell Fresh’ where they are doing a majority of the innovation is too small to matter in the grand scheme. Yes, we believe it is a great business and segment to operate in, but as part of this company it won’t be enough.

 

It’s tough to go short on this name (only 6.6% of the float is short) given the constant threat of possibly being acquired especially with KHC probably in the market for another synergistic acquisition in the next year (the can manufacturing synergies alone would probably be enough to make the deal work.) We remain bearish on the name fundamentally, and can’t get ourselves to go long just hoping for an acquisition.

 

This was a brief summary and we would be happy to talk with you more about what we thought over the phone, please send us an email if interested.

 

 

 

 


The Macro Show Replay | July 23, 2015

 


CHART OF THE DAY: Making The Big Macro Market Calls

Editor's Note: The excerpt and chart below are from today's Early Look written by Hedgeye CEO Keith McCullough. If you're interested in getting a step ahead of consensus every morning you can subscribe here. 

 

...I personally love making macro market calls – because, eventually, all of the Big Macro Themes find themselves implied in style factors that many quants have to chase anyway.

 

Put another way, Macro Phase Transitions (think points of market entropy, waterfalls, and yes, breaking the 50-day moving monkey) are where most of the non-linearity lives. They sometimes happen slowly, then all at once.


CHART OF THE DAY: Making The Big Macro Market Calls - Chart of the Day


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

The Visible Hand

“It is a magnificent feeling to recognize the unity of complex phenomena which appear to be things quite apart from the visible truth.”

-Albert Einstein

 

“What is the truth,” you ask? Well, on being long China, Bridgewater’s Dalio says he’s #out. Or at least that’s what it says on the front-page of the WSJ (Wall Street Journal) this morning. A market that you can’t get out of, really Ray?

 

Meanwhile, on the front-page of the CSJ (China Securities Journal) this morning, there’s a new chapter of the communist government’s centrally-planned-market-manifesto, trumpeting the benefits of their “visible hand” in the stock market!

 

Adam Smith, eat your heart (and invisible hand) out, buddy.

The Visible Hand - China cartoon 07.07.2015

 

Back to the Global Macro Grind

 

Halt I say, halt! If the “chart” breaks, show those price momentum boys the hand, ladies. Or was it the ladies that were all amped up about anything with liquidity and a “good looking” chart (i.e. price momentum as a Style Factor) prompting the boys?

 

Who knows. What we do know is that if you’re:

 

A)     Levered long anything “value” that is hidden within the visible truth of #StrongDollar Deflation and/or

B)      Long what you thought was “Low Beta” but is actually trading with wicked high #deflation beta

 

You’re probably not having as good a month as the cool boys and girls who were long Google (GOOGL), Amazon (AMZN), and Facebook (FB).

 

Sure, Apple (AAPL) rocked the alpha-cart some yesterday. But as long as the other ones never go down (imagine that?), the big cap liquidity + growth investing style factors are rocking anything that’s cyclical + slowing.

 

Enough about Style Factoring (modern day risk management tools that a large % of PMs don’t use) your portfolio as a means of explaining the unity of complex phenomena already, KM… let’s talk about some ideas. Show us your picks!

 

In Real-Time Alerts, here’s what I’ve had on the LONG side this week:

 

  1. Hologic (HOLX) – still one of our Best Ideas in the Healthcare sector; Tom Tobin held a call on it again yesterday
  2. US Housing (ITB) – alongside Healthcare, has been one of our Top 3 fav sector exposures for all of 2015
  3. Utilities (XLU) – hasn’t been a favorite for 6 months, but is morphing back into one (alongside REITS)
  4. Long Bond (TLT) – remains the best long-term idea as a way to express growth and inflation slowing
  5. Starbucks (SBUX) – long-time favorite that looks every bit as good (and overbought) as Google and Amazon

 

Then in our INVESTING IDEAS product (weekend product with longer-term ideas) we still have names like General Mills (GIS) that has pretty much every Style Factor a PM would need right now (Big Cap, Low-Beta, Nice Chart).

The Visible Hand - BENNY 07.23.15 chart

 

But I’m not going all style factor on you – I promise! (isn’t that a visible truth)

 

Lots of our SHORTS have been working… especially the stuff:

 

A)     That looked like “value” but has

B)      Commodity #Deflation and

C)      Debt (leverage) #Deflation

 

Like Chesapeake (CHK)… there was a lot of perceived “value” in the “dividend”, I guess, until they cut it this week.

 

#Deflation is not a typical “style factor” that my former quant partners in Chicago would use. That would be a “Macro Idea” to them, and they “don’t do macro”, because they think that’s making a market call (they don’t like those).

 

I personally love making macro market calls – because, eventually, all of the Big Macro Themes find themselves implied in style factors that many quants have to chase anyway.

 

Put another way, Macro Phase Transitions (think points of market entropy, waterfalls, and yes, breaking the 50-day moving monkey) are where most of the non-linearity lives. They sometimes happen slowly, then all at once.

 

What’s not working for me right now is the short call on the US Financials (XLF). For now, this is where the style factors (shorter term) are colliding with my Macro Theme (longer-term) work. In other words:

 

  1. I’m short the Financials because I think rates will back off (again)
  2. Many Financials are #LateCycle stocks with late-cycle earnings
  3. Most levered parts of FICC (Fixed Income, Currencies, Commodities) imploding is bearish

 

And yes, rates backed off at lower-long-term-highs for the umpteenth time (2.31% 10yr Yield in US Treasuries this morning) as Fed Fund Futures back off SEP rate hike expectations…

 

And yes, both Junk and High Yield that is levered to #Deflation retested YTD lows alongside Commodity exposures yesterday…

 

But the Financials (XLF) were +0.75% on the day to +3.4% YTD…

 

So either the bond market (spread risk rising as the both the economic and profit cycle slows – yield spreads compressing too) has it right or the equity quants chasing (Big Cap, Low Beta, Nice Chart) 1-3 month price momentum do.

 

And I have this magnificent feeling that the bond market’s invisible long-term growth and inflation hand still has it right.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22-2.39%

SPX 2100-2130

VIX 11.81-16.42
USD 96.71-98.56
Oil (WTI) 48.63-51.19

Gold 1079-1130

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Visible Hand - Chart of the Day


Growth, Greece and Housing

Client Talking Points

GROWTH STYLE FACTOR

For the first time in 5 years, large-cap growth is trading at a premium to large-cap value and we anticipate this trend will continue as the cycle slows. Specifically, when broad economic growth slows, investors pay up more for real growth opportunities and rotate out of turnaround growth stories at the margins. 

GREECE

You think things are all wrapped up in Greece? (Last night Greek lawmakers approve a second set of reforms, 230 to 63)  Far from!  While we expect Greece will ultimately receive another lifeline (and debt concessions), the Eurozone parliaments all need to vote on the “details”.  We expect the indecision along the way to finalize a deal to continue to pressure Europe’s markets to the downside.  Side note, Greece’s equity market is still not expected to open until next week, at the earliest.

HOUSING

Locally and globally, rates continue to make a series of lower-highs as sovereign bond market volatility calms (and dovish Fed rhetoric ramps) – long-term investors stayed with the Long Bond because they get growth/inflation slowing – people chasing charts, sold them (German 10yr = 0.76%, Swiss 10yr back to negative yield -0.01%, 10yr JGB down to 0.40%).

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

Asset Allocation

CASH 54% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 26% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
GIS

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.

PENN

According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.

TLT

After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road

TWEET OF THE DAY

Nice but sleepy quarter out of $DNKN

@HedgeyeHWP

QUOTE OF THE DAY

If the stars should appear but one night every thousand years how man would marvel and adore.

Ralph Waldo Emerson

STAT OF THE DAY

New York City -- A state wage board has voted, unanimously, to raise the minimum wage for restaurant workers to $15 an hour. At that pay rate, a fast-food worker will make $600 a week for 40 hours of work, or $31,200 a year.


July 23, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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