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McCullough: Sure, Ford's Sales Are Hot. Its Stock? Not So Much | $F

Earlier today on Fox Business, Hedgeye CEO Keith McCullough discussed the rise in auto sales with Maria Bartiromo, along with FBN's Sandra Smith, Dagen McDowell and Cheryl Casone.


RTA Live: September 2, 2015

 

 

 


Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to subscribe.

Keith's Daily Trading Ranges [Unlocked] - Slide1

BULLISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - Slide2

Keith's Daily Trading Ranges [Unlocked] - Slide3

BEARISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - Slide4

Keith's Daily Trading Ranges [Unlocked] - Slide5

Keith's Daily Trading Ranges [Unlocked] - Slide6

Keith's Daily Trading Ranges [Unlocked] - Slide7

Keith's Daily Trading Ranges [Unlocked] - Slide8

Keith's Daily Trading Ranges [Unlocked] - Slide9

Keith's Daily Trading Ranges [Unlocked] - Slide10


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New Highs = Historic Lows | Resi Construction & the Cycle

Takeaway: Resi construction as a % of GDP is now 3.3%, a new post-crisis high, but also right in-line with prior cycle lows.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

New Highs = Historic Lows | Resi Construction & the Cycle - Compendium 090215

 

Today's Focus: MBA Mortgage Applications & July Construction Spending

 

Resi Construciton Spending | New Highs = Historic Lows

The long-term mean reversion upside to new construction activity is about as conspicuous as it gets for a large-scale Macro factor. 

 

Yesterday’s Construction Spending data showed both Total and Resi Construction spending made new post-crisis highs in July with private residential construction rising +1.1% MoM and accelerating to +15.6% YoY (along with the positive revision to 2Q data). 

 

However, inclusive of the multi-year recovery, resi construction remains just 3.3% of GDP – a relative level associated with trough activity observed across 75 years of housing cycles.  The 1st chart below serves as a simple but stark reminder of the current reality and secular opportunity. 

 

A Note on the Housing Cycle:  A somewhat obvious but seemingly underappreciated dynamic of the current cycle is that the recovery in housing lagged the broader macro inflection by more than two years.  Given that housing was the final, pre-crisis beneficiary of an epic, multi-decade (policy) game of rotate-the-asset bubble, it’s not surprising that the subsequent recovery has been slow, choppy and broadly unimpressive.

 

However, Housing's unique role in precipitating and propagating the financial collapse also makes historical cycle precedents (in terms of housing's position in the temporal pattern of the archetypal cycle) less informative as an analog

 

In short, while we’re late or mid-late cycle more broadly, we’re somewhere closer to early-mid or mid cycle in housing itself.  The housing cycle and the economic cycle are, of course, not mutually exclusive but they can tread variant medium-term paths.

 

 

Purchase Apps | Rates Ebb, Volume Flows

The MBA’s high frequency purchase application data showed demand rising to close out (what had been) an uninspiring August. Purchase demand rose +4.1% WoW and accelerated to +24.8% YoY – the fastest year-over-year rate of growth YTD – and comps remain easy through the balance of 2H.  On a QoQ basis, purchase activity is currently tracking -1.2% sequentially.  

 

Rates on the 30Y FRM were static at 4.08% in the latest week, holding at 3-month lows.  At current interest rates, affordability remains +4.2% better than the 2014 average and sits as a modest tailwind for HPI.   

 

 

New Highs = Historic Lows | Resi Construction & the Cycle - Resi Construction    of GDP

 

New Highs = Historic Lows | Resi Construction & the Cycle - Construction Spending Table

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase index   YoY Qtrly

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase YoY

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase   refi YoY

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase 2013v14v15

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase LT

 

New Highs = Historic Lows | Resi Construction & the Cycle - 30Y FRM 

 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


WSM | Cat Out of the Bag, But Still Expensive

Takeaway: Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.

 

WSM  |    Cat Out of the Bag, But Still Expensive  - wsm chart1

 

CONCLUSION: There’s nothing structurally broken here (nothing major, at least). This is a good company with a portfolio of above-average quality brands. But growth is absolutely slowing here – not just cyclically, but also secularly. This should half the EPS growth rate into the mid-single digits (without an acquisition), and take down WSM’s industry leading returns. At a 15x multiple, we wouldn’t care, especially given that the company just rightsized the upcoming quarter’s expectations last week. But at almost 22x earnings when we’re looking for growth of 8%, we simply think this is too rich.

 

What We Like:

a) The core Williams-Sonoma brand is extremely defendable.

b) West Elm scores very well on our consumer surveys. It’s like a down market RH – and there’s a market for that.

c) DTC stands at 50.5% of total, which is the highest in all of retail except for pure play e-tailers like Amazon and Wayfair. d) WSM has a demonstrated history of buying back stock.

What We Don’t Like:

a) The core brand only accounts for 21% of sales.

b) West Elm should have 87 stores by the end of the year. We think there are only about 120 markets in the US that make sense for WE.

c) WSM is not ‘channel agnostic’. It is set up in a way where Retail competes against DTC for the same sales dollar. It works for now, but we don’t like it.

d) When net income growth reverts down to the 7-8% range, the company is likely to cut its repo activity in half unless it levers up to support it.

e) Ultimately, we think that the balance sheet will be put to use to make an acquisition – a late-cycle move to get growth going. We’re actually not against this at all for WSM assuming the deal is right, which is odd for us to say.    

 

WSM  |    Cat Out of the Bag, But Still Expensive  - WSM chart2 


PIR | We're Going Against The Grain -- Long

Takeaway: Here's a quick summary of where we stand on PIR, as well as links to our 90 page Home Furnishings Black Book and video presentation.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

Here's a quick summary of where we stand on PIR, as well as links to our 90 page Home Furnishings Black Book and video presentation.


PIR  |  We're Going Against The Grain -- Long - PIR chart1

PIR  |  We're Going Against The Grain -- Long - PIR chart2

 

CONCLUSION: PIR is a beaten-up, ugly value stock…there’s no two ways about it.  But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything stupid and destructive that would otherwise emulate a major recession?  If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock.  

 

Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.

 

2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything stupid that would cause a downturn in the business (espec w ouster of CFO in Feb). Quite the opposite, in fact.

 

Consider this…

1. Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.

2. Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR. 

3. We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally. 

 

 

 


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