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Welcome to Month-end

Client Talking Points

USD

One of the best positions you could have had this month was LONG the U.S. Dollar and SHORT the #Deflations (commodities and their country, currency, debt, equity, etc. links) – USD is retesting the top-end of its range here and hammering Oil (-1.5%), Russian Stocks (-1.9%), etc. 

#DEFLATION

Eurozone and/or Italian CPI of 0.2% year-over-year isn’t a win for Mario Draghi, and the sovereign-bond market is starting to figure that out again (he needs to bring more cowbell to Jackson Hole); 10YR German Yield down to 0.65% this morning and could go a lot lower.  

JAPAN

On a positive note, we hope you stayed with the net LONG Japanese equity position in July – it performed as well as the Yen did not. Last night’s core CPI print of 0.1% year-over-year in Japan (Household Spending -2% year-over-year) keeps the easy money play firmly intact.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Hedgeye CEO Keith McCullough and Macro & Housing Analyst Christian Drake.

Asset Allocation

CASH 49% US EQUITIES 5%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.

PENN

Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.

TLT

Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

Italy's unemployment rate ramps to 12.7% (from 12.5%) - Draghi's drugs doing nothing but asset inflation

@KeithMcCullough

QUOTE OF THE DAY

The force of character is cumulative.

Ralph Waldo Emerson

STAT OF THE DAY

According to a Quinnipiac poll, 30% of Republican voters said they definitely did not support Donald Trump in his bid for the party’s presidential nomination.



July 31, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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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.

Cartoon of the Day: Coo Coo Clock

Cartoon of the Day: Coo Coo Clock - Fed cartoon 07.30.2015

"Yesterday’s Fed statement had a wiggle," Hedgeye CEO Keith McCullough wrote in today's Early Look. "It adjusted (just a bit, but on the margin is what matters) for the recent marked-to-market change in inflation. Very few at the Fed want to raise rates as nature’s pace of #deflation is accelerating."

 


HOT Q2 CONFERENCE CALL NOTES

Takeaway: And another...

cONF CALL 

  • EBITDA and EPS ahead of guidance 
  • Revpar and Fee growth below guidance. FX and macro headwinds to blame.
  • Market share increasing across 7 of 10 brands
  • Focusing on reducing cost and remaining effective in the industry and continuing their asset light strategy 
  • Owners seeing greater accessibility to management 
  • They would like to remain lean and nimble in the future
  • On April 16 launched new tribute portfolio collection brand with the Royal Palm and Miami South Beach
  • Development group announced that they will open a tribute hotel in London
  • Cited the new website and new reservations display, has been received well
  • In august the new Sheraton grand hotels will be named 
  • This fall they will role out a brand new advert campaign for Sheraton 
  • Renewed focus on service and innovation for the guest experience 
  • Marketing and sales efforts ramping up for the luxury collection 
  • Notable conversions into the luxury collection include Chicago's miracle mile property and their hotel in Prague, CZ 
  • Owners of the luxury collection are spending liberally on renovations 
  • Limited service in Upscale segment has largest portion of pipeline 
  • Aloft is next in terms of pipeline growth 
  • Aloft US RevPAR increased by 13%, and up 24% since 2013. Aloft was up 10% in Q2. Intend to grow Aloft's room count and grow the brand. 
  • HOT is serious about organic growth, Aloft is major focus, but it is widespread. 
  • Willing to use BS flexibility to seek new opportunities
  • HOT opened 21 hotels with 5k rooms in Q2
  • 64 deals for new hotels in signed Q2. Up 70% YoY
  • 15 of which were conversions from other hotel brands, a 100% increase YoY
  • Net room growth in 2016, should be up to historical 4-5%
  • Excited about their recent deals, Phoenician and Gritti palace and the prices they commanded
  • On track to meet $800mm disposition goal for 2015
  • Search for successor CEO and board of director seat is ongoing, nothing to report as of now
  • Intl revpar came in weak, and dragged the Q down. 
  • Management and franchise fees down 1%
  • FX a major issue 
  • OCC up 140bps YoY to 72.2%
  • Owned and leased hotels outperformed - 
    • WW revpar +7%
    • NA +9%  
  • Vacation ownership earnings came in at $44 million at the high end of the expectations 
  • contracts signed up 1.8% YoY
  • average price was down YoY
  • on track to complete the spin off in Q4 
  • SG&A down 3.4% YoY
  • Run rate pnl savings of 21mm 
  • Expect additional write downs of 30-35mm 
  • Negative impacts in oil states and western canada on revpar 
  • Gain of share in NYC 130bps
  • Room nights from intl spg guests are flat yoy
  • Group bookings remain on pace for rest of the year 
  • Difficult comps in South America due to world cup, but also a weakening economy is to blame 
  • Mexico is showing strong signs, resorts revpar up 18%
  • Argentina is very similar to brazil
  • not seeing this changing in 2H
  • Volume of US travelers to Europe up 20%, and strong Chinese travelers which assisted better than expected results
  • Due to soft comps, MEA should be at the higher end of the range in 2H
  • Mainland china revpar growth driven by occ 
  • Thailand showing good signs of growth (off low comps)
  • $285-$295mm is the new ebitda range for q3. 
  • Increasing revpar range for owned hotels to 5%-7% 
  • vacation ownership earnings up to ---
  • CF guidance up to 84mm 
  • 1.2mm share buy back in Q2
  • YTD they returned $228 million, expect to buyback $380mm in shares this year. 

Q&a 

 

Timeline on new CEO search?

  • No comment, can confirm they're in the middle of the search but will not rush to make an announcement. 

Timing of the timeshare spin? 

  • On track for the end of 2015. Continue to believe it will add value 

How to drive unit growth? ideas on the market? 

  • They are working harder to reach out to owners and streamline processes to drive unit growth. seeing material results due to this approach 
  • not worried about it, 

Mkt share increase in 7 of the 10 brands? 

  • Technically its 9 because Tribute is new. Sheraton and Fourpoints are the only ones to not increase share. 
  • most increases in share are not more that 100bps. 
  • Aloft continues to be the strongest brand for them in terms of growth. 

Restructuring costs? 54 million? Transitioning that into additional savings? how?

  • Actually closer to 30-35 million in costs

When will HOT be 100% fee driven?

  • After vacation ownership spin, they will be at 80% or so. there is no new timeline, but there is substantial progress. Never have said they intend to be 100% fee driven, but north of 80% is likely. 

IHG and WYN rumors? 

  • No comment. 

Buyback this Q? only 100mm but asset sales over 500mm, why not buyback more shares?

  • They are simply ahead on asset sales, and trying to remain consistent with the $300-$350mm capital return policy.  After the spin off leverage will be at high end of range, no need to buyback more shares as of now. 

Strategic review and CEO search a distraction to owners and developers?

  • No, they haven't seen it hurting business and relationship with owners and developers 

Likelihood of more asset sales despite uncertainty with new CEO search? 

  • No slowdown experienced, they have brokers out to market and there is a lot of interest worldwide for their properties. 
  • quite confident they will meet the target of asset sales. 

Expanding distribution? what is ideal? how will you get there?

  • Open to a wide array of new distribution channels, trying to build out mobile and websites to make them more functional.  listening to consumers and watching where the market is headed.

Corporate travel? Trends seen this year and the trajectory? 

  • Too early to call for 2016. Transient booking growth will continue through the year, think it will continue to drive rates. 

Momentum building for select service? How do you get out to scale?

  • The answer will come from the strategic review. From that review they will build out their plan for more growth. 

How many Sheratons need to come out of the brand to keep consistency in the brand? 

  • No need to think about taking rooms out. With more marketing efforts they can redefine the whole brand, to move it up the latter and become a top choice hotel. 
  • In sum, they are working on making sure they refresh the brand and make it better. 

Additional restructuring costs in Q3?

  • There will be additional charges. $9mm for the company plane. Additional trickle of charges going into 2015. 

Any black out dates for buybacks? did you buyback enough?

  • Achieved target they wanted, and are pleased to be in a good position to complete the pledged buyback.  

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH

Both General Mills (GIS) and WhiteWave Foods (WWAV) are on the Hedgeye Consumer Staples Best Ideas list as LONGS.

 

We know what the obvious reaction is going to be to this deal.  GIS’s management would never do a deal like this and there is a significant amount of dilution.  It’s just not a realistic possibility, or is it? It’s true that this deal would be dilutive, but this is a unique opportunity for a transformational transaction that would overshadow the dilution.  Given the strategic rationale for bringing together two high quality companies in the food space, we are confident the street will look past the 10-20% dilution in year one and two, and focus on the long-term potential it would provide GIS.

 

This is a transformational, portfolio shaping transaction that will change the way GIS operates forever. Acquiring $3.5bn in rapidly growing sales is exactly what we called out GIS needs to do in our GIS Black Book.  If GIS were to take on WWAV it would be the beginning of other substantial changes at the company.  Management still needs to divest the anchor brands attached to the portfolio, the self-identified 28% of non-priority brands representing $5.4bn in sales.

 

On a pro-forma basis GIS would overnight become the largest global natural and organic company with $4.2bn in natural & organic revenue.  Once the transformation is complete the pro-forma total company would be generating mid-single digit organic volume growth, rather than the low-single digit growth GIS produces on its own. 

 

Naturally, there is also going to be a significant amount of skepticism around the possibility of this deal coming to bear given, GIS’s perceived sleepy corporate culture.  At age 61, GIS Chairman and CEO Ken Powell, has a significant opportunity to cement his legacy in the food industry as one of the most dynamic CEO’s.

 

The following is an overview of how the GIS/WWAV deal would unfold. 

 

COMPANY OVERVIEWS

These companies are more similar than people think, just at different stages of maturity. Both operate multinational corporations focused on growth globally. GIS is building out a yogurt business in China, while WWAV recently launched a joint venture in dairy-free drinks under the Silk brand. Although GIS has strong growth brands, the company in total has hit a growth plateau recently and is currently working on growing its portfolio. This is where WWAV comes in, providing immediate growth, and an abundant amount of international expansion possibilities.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 1

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 2

 

STRATEGIC RATIONALE

GIS already plans to get their natural & organic portfolio to $1bn by 2020 organically, this transaction will allow for greater learnings to help GIS’s core portfolio to grow even faster. The perception of GIS will begin to change as they acquire WWAV and divest less desirable brands. Imagine GIS actually being perceived as a health company, the company will gain a lot of appeal from both consumers and Wall Street.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 3a

 

GIS NATURAL & ORGANIC

GIS is going to be a healthier company with or without WWAV. The company has been adamant about changing the consumers perception of their brands by taking out artificial colors and flavors, going gluten free, and innovation towards cleaner ingredient decks.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 4

 

SYNERGIES

Revenue synergies are going to be a big aspect of this deal. The strong equity that WWAV’s brands have will help to support growth among GIS brands. Cost synergies will be big as well; we imagine some cuts coming from the GIS side, in order to retain the strong talent at WWAV. WWAV knows how to run a natural & organic company and we would hope that instead of absorbing the brands, GIS would create a new division for only natural & organic products and have WWAV personnel run it. We believe this would maximize the benefit.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 5

 

PERFECT COMPLIMENTS

These two companies solve each other’s issues.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 6

 

MANAGEMENT TEAM REDESIGN

GIS shouldn’t just want the brands, WWAV has an enormous amount of talent that needs to be retained. Gregg Engles is a phenomenal CEO at WWAV, although he wouldn’t be promoted to CEO at GIS (we think he should some time down the road) he would be a perfect fit as COO of U.S. Retail. A noticeable switch on this chart is the resignation of Ken Powell, current CEO of Chairmen, coupled with a splitting of the CEO and Chairman positions. Jeff Harmening the current COO of U.S. Retail, would work well as the CEO of this improved GIS, he has strong experience across the organization.

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 7

 

This is one of those transactions we get very excited thinking about. The new General Mills would be a powerhouse in the industry with some of the best brands and people the industry has to offer.

 

HEDGEYE’S ORIGINAL LONG THESIS

GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH - GIS CHART 8

 

LINKS TO BLACK BOOKS:

GIS BLACK BOOK

WWAV BLACK BOOK

 

 

 


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