GIS | Time to Close this Deal

General Mills (GIS) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.


The widely rumored sale of Green Giant by General Mills continues to swirl. The latest is that B&G Foods (BGS) is taking a serious look into the asset. Frankly, we don’t care who buys it as long as it is a half way decent price. Our LONG bull call on GIS is partially dependent on them shedding non-core assets and acquiring high growth businesses. We believe this could be the first of multiple divestitures that GIS executes throughout the next couple of years. In our GIS Black Book we highlighted management identified non-core assets that could be up next.


GIS | Time to Close this Deal - CHART 1


The selling price of Green Giant is expected to be in the range of $600mm-$800mm pre-tax. We are expecting a hefty tax bill given the likely large step up in asset valuation that will need to occur.  This will still give them the ability to reinvest further into growing the top line or buy a small snacking business. We have talked a lot about the potential snacking assets out there right now and we think this would be the best use of cash.


Talking with many industry professionals it seems as though sales are starting to stabilize. More specifically, cereal, something that everyone seems to think is all GIS has, (in reality its only 20-25% of net sales in any given year) will start to see growth return. The cereal category has bottomed and we feel that there will be a year-over-year increase in the category as GIS and the competition have invested heavily to revive the category.


At the end of the day, rumors are exactly that, rumors, but this sale seems to be coming to fruition, baring complete disconnect on price. To reiterate, this is the first deal of many that GIS has to execute in order to transform their portfolio for growth into the future.


We continue to view GIS as one of the best large cap companies in the staples space. They just announced that they will be releasing 1Q16 results on September 22nd before the market opens. We expect to see continued sequential improvement as they have cleaned up ingredient decks and streamlined the business.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw





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TIF | This Short’s Not Done Yet

Takeaway: The 2Q miss, scant 2H guide-down, and lack of color on '16 leaves expectations wound too tight in the face of increasing headwinds.


We didn’t like TIF into the print, and we definitely don’t like it on the way out. The company lowered back half guidance, which we expected to see, but we’re not sure if $0.10 is enough off of 2H14’s $2.27 base. We’re inclined to think ‘no’. But the bigger tell for us will be how much consensus numbers come down for next year. They currently sit at $4.77. If numbers come down as far as the $4.50 vicinity, then this is still probably a good short. The only thing that makes us walk away from our positioning is if we see estimates shake out near $4.25 — but that’s unlikely. While management clearly articulated its business, as always, the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. We’re staying short this one.



Our Previous Note from Tuesday 8/25


TIF | We Don't Like It


Takeaway: 2Q looks fine. The back half is a stretch. 2016 needs to come down.

We don’t like TIF into the print as we think 1) back half numbers look too high, and 2) this model is extremely poorly positioned for the consumer climate we’re forecasting. There are definitely redeeming qualities about the name – most notably the Brand (and that’s pretty much it).  But it is trading near a peak multiple (18.5x) on peak margins (21%), peak earnings ($4.24E), peak returns (18%), has the worst cash conversion cycle we’ve ever seen (490 days), while sentiment is sitting at all-time highs. It’s feast or famine – if one of those metrics breaks, then they all do.  


Common perception seems to be that “just because TIF blew up earlier this year, it can’t blow up again.” We simply disagree. The environment has changed significantly, and the company’s guidance for back half growth “in the double digits” is not going to happen. Could the company grow earnings in the 4-6% range? Yes. It can. But that implies at least a $0.15 guide down. Importantly, that could/should cause the consensus to revisit its $4.75 estimate for next year, which we don’t think is achievable. We think a base case is $4.50, with downside to $4.00 as the macro environment worsens.


Historically, TIF’s multiple change has been fairly explosive. As you can see, when earnings have been revised meaningfully up or down, we’ve seen TIF’s multiple relative to the S&P move by up to 40%. The point is that a $4.00 earnings number won’t get a high-teens multiple. It will get something in the low teens while the market waits for earnings to find a bottom. Using that logic, it is not unrealistic to model a $50 stock -- $30 lower. Are we making a call right now for such severe downside? No, we’re not. But that’s where the research initially appears to be headed.

TIF | This Short’s Not Done Yet - TIF PE NTM EPS


Mother Macro Could Make $4.00 (or less) A Reality?

Consider the following… Domestic economic growth is now well past-peak in rate-of-change terms for this economic expansion, with US GDP growth getting tougher in the 2nd half of 2015 vs. the 1st half. That means, if you held all other risks equal, the probability is higher that growth slows in Q3 and Q4 than Q2.  And the last two cycle tops didn’t have this mother of all demographic secular slowings – and note that this isn’t just the US -- the chart below represents better than 90% of Tiffany’s earnings.

TIF | This Short’s Not Done Yet - z ben 08.24.15 chart large


Modeling Considerations

2Q:  Overall, 2Q looks ok to us. Street estimates imply a slowdown in the 2 year constant currency comp by ~200bps.  That seems fair. LVMH and Kering both noted rebounds in jewelry sales in their second quarters.  Additionally, TIF's comp has directionally followed the organic growth of LVMH watch and jewelry sales for the past 4 quarters.  A potential positive is the Tiffany T collection which could/should boost penetration of the higher margin gold/silver fashion product. TIF’s US e-commerce business implies healthy demand in 2Q – though the trends look problematic into 3Q. It’s only 6% of TIF’s business, but is a good barometer for overall demand. Furthermore, TIF’s SIGMA chart looks very bad. Inventories are out of whack with the P&L in a way that is unlikely to be a 1-quarter fix without a meaningful margin event.

TIF | This Short’s Not Done Yet - tif sigma


Back Half

Here’s where we think the problem lies. Comp estimates are reasonable against easy compares, but Q3 margin comp is toughest of the year (even worse on 2 year rate).  SG&A growth was just 1% in Q4 last year, yet the street looking for SG&A leverage in this Q4 despite the company putting more capital into its new watch collection and "Will You" engagement campaign.  FX pressure is likely to ease in Q4, but what helps revenue and GM will hurt SG&A. The Street has 11% EPS growth in Q3 and Q4. We see it more as flat Q3 and HSD Q4.

TIF | This Short’s Not Done Yet - TIF CCC


TIF | This Short’s Not Done Yet - TIF Rank


TIF | This Short’s Not Done Yet - TIF reach


TIF | This Short’s Not Done Yet - TIF Sent

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