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RTA Live: September 15, 2015

 

 



K | NICE MOVE, BUT NOT ENOUGH

Kellogg (K) is currently on our Hedgeye Consumer Staples SHORT bench.

 

Today K announced a long-term strategic partnership that will significantly expand their presence in Africa. The deal consists of a joint venture in which Kellogg will own a 50% stake in Multi Pro, a premier sales and distribution company and subsidiary of Tolaram Africa. In addition, Kellogg has the right to acquire a stake in Tolaram Africa Foods, which owns 49% of Dufil Prima, a manufacturer and marketer of Indomie noodles, Minimie snacks, Power oil and Power pasta.

 

DEAL DETAILS

Kellogg has agreed to pay $450mm for a 50% stake in Multi Pro and the option to purchase a stake in Tolaram Africa Foods. Total sales are expected to be approximately $750mm in 2015. The purchase price represents a multiple of the average of 2014’s actuals and 2015’s expected total EBITDA of 15x, and 13x 2015’s expected EBITDA. The final purchase price is dependent on actual results for EBITDA in 2015.

 

K will fund the acquisition with international cash and an increase in commercial paper of $350mm. K is expecting a neutral impact to EPS in 2015 and 2016 and slight accretion in 2017. The costs associated with the acquisition will lower reported earnings in 3Q15 by approximately $0.01.  

 

HEDGEYE OPINION

We view this transaction as a great move for Kellogg as it expands their emerging market presence in Africa. But this deal simply is not big enough to make a difference on its own. The true test for K and to turn sentiment more positive will be the resurrection of the U.S. business, which has yet to come to fruition. We are strong believers in the resurgence of the cereal category, and although our thesis that GIS will be a leader in this movement, K will also partially benefit. But for us to turn positive on K it will take a lot more than sequential growth in cereal.

 

We have a positive outlook on growth prospects in Africa, and expect further M&A action from international food manufacturers such as Nestle, General Mills and Mondelez to take place in the region. South Africa in particular given it is already developed will be a focus for these multinational companies.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 

 

 

 


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Two Chilling Demographic Charts Every Investor Needs to See

Editor's Note: What follows below is a small example of the kind of research our loyal subscribers have come to expect and rely upon from Hedgeye over the years. Click here to find a product tailored for you.

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Two Chilling Demographic Charts Every Investor Needs to See - z hot

 

Take a moment to absorb the chart below. It’s something every investor needs to see.

 

Two Chilling Demographic Charts Every Investor Needs to See - z demo 1

 

Bottom line is that global population growth is decelerating at its fastest rate since the early to mid 1990’s. Based on historical precedent, another leg down in global growth is likely to follow.

 

Here’s another huge secular headwind (Demographic Chart) investors need to see.

 

Two Chilling Demographic Charts Every Investor Needs to See - z demo 2

 

These two charts are the bull case for long-duration bonds which we have been (successfully) long for some time now. On a related note, the next bull case for stocks is #GrowthSlowing perpetuating the “need” for more Fed cowbell, bailouts, etc.

 

Unfortunately for the cowbell-inclined, omnipotent, all-knowing central planners across the globe, you can’t CTRL+Print Growth.

 

Two Chilling Demographic Charts Every Investor Needs to See - z caw


CHART OF THE DAY: We Aren’t Suggesting You Buy Chinese Equities This Morning. That Said...

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye Director of Research, Daryl Jones. Click here for more information on how you can become a subscriber to this daily product designed to keep you a step or two ahead of consensus. 

 

CHART OF THE DAY: We Aren’t Suggesting You Buy Chinese Equities This Morning. That Said... - z Chart of the Day

 

...Well, if you want to be a true contrarian (especially with the Shanghai Composite down -3.5% this morning)  it may suggest a re-rating.  As highlighted in the Chart of the Day below, China is currently trading at 9.3x next-twelve-months earnings versus 16.1x for the MSCI World Index.  A re-rating to the World multiple implies 70%+ upside . . . .

 

We certainly aren’t suggesting you go run out and buy Chinese equities this morning.  But eventually, the time will come again to believe in The Dragon.  After all, with Donald Trump emerging as a legitimate candidate for President, we should all be well-practiced at suspending disbelief.

 


One for the Ages

“All the world’s a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”

-William Shakespeare

 

Last week, we touched on the 2016 Presidential election.  So far, it’s been a campaign characterized by two distinct outsiders in the socialist Vermont Senator Bernie Sanders and real estate (and bankruptcy) mogul Donald Trump. Both have taken a lot of mind share.  In the course of the last week, they have only taken more.

 

Trump is now consistently registering over 30+ points in the Republican polls, which features a broad field.  Another outsider, surgeon Ben Carson has now solidly surpassed second place mainstay Jeb Bush.  Collectively, the two outsiders, Carson and Trump, are polling at almost 50% of the Republican nomination voter on a combined basis.

 

Meanwhile, on the Democratic side, the venerable Hillary Clinton seems a lot less venerable these days within the Democratic Party. For the first time in over a year, she is consistently polling below 50%.  In part, this is driven by the emergence of Vice President Biden as a likely candidate.  In addition, the self-avowed socialist Sanders is maintaining his relative strength.   In fact, in the most recent New Hampshire poll Sanders was actually up on Clinton by +22 points!

 

So, how much can change between now and Election Day? The short answer is a lot. 

 

In 2011, right around this time, Governor Rick Perry of Texas was polling around 32% for the Republican nomination versus 20% for Mitt Romney.  In 2007, at roughly this time, Hillary Clinton was polling at about 40% versus now President Barack Obama at 22%.  Interestingly, on the Republican side in 2007, the eventual nominee Senator John McCain was already up by about +10 points on the field.

 

Now, while we do have a crystal ball in our possession in the @HedgeyeTV studio, we are reluctant to use it to predict the outcome of the race.  We are comfortable predicting (if you want to call it that) that on the Democratic side Clinton, Biden, or Sanders will get the nod.  On the Republican side, we see Trump, Bush, or Carson likely to prevail.

 

As investors, our job over the next year will be to prepare for the various potential outcomes and implications on policy, taxes and the markets.  Focusing on and understanding the dynamics in Washington, DC is going to become as important as ever over the next year.  Start doing your homework now.

 

Back to the Global Macro Grind...

 

One for the Ages - China cartoon 04.14.2014

In terms of global macro moves in the last 24 hours, Chinese equities are leading again on the volatility front as the Shanghai Composite is down about -3.5%. Coincidentally, we released a thorough update (more than 80 slides) on China last night.  (You can email to access the deck if you are an institutional subscriber or talk to our Asian analyst Darius Dale.)

 

The key takeaways from our report on China are as follows:

  • China’s secular growth outlook is likely more dour than the average “China bear” is willing to admit, which implies the recent margin-fueled melt-up in Chinese equities was little more than a bubble that is likely to continue popping amid reduced state-backed intervention.
  • Conversely, the secular outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. These conflicting forces have been anything but a "fair fight" given how much could be left of the “Beijing Put” which has proven to be impotent of late.
  • Our analysis continues to pick up on a positive inflection in the Chinese property market. To the extent this nascent recovery is sustained, we expect two things to occur: 1) mainland Chinese investors are likely to continue to flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to show stabilization for at least 1-2 quarters. The former is an obvious headwind to the Chinese equity market(s) and the latter is key risk in terms of reduced expectations for fiscal and monetary stimulus.
  • Ahead of next year’s [likely] rebalancing, Chinese policymakers have lobbied strongly in favor of the yuan to be included in the IMF’s Special Drawing Rights (SDR) basket. Regardless of any success with this initiative, we believe Chinese policymakers are serious regarding their pledge(s) to accelerate capital account reform.
  • We believe an incrementally deregulated Chinese capital account has the potential to be a lasting positive influence upon both the Chinese and global economy – IF spillover risks are curtailed via effective safeguards. The extent to which Chinese authorities are willing to defend the CNY from bearish speculators remains to be seen.

If you were to summarize our key thoughts on China, it is that their secular growth outlook is likely to be lower than expected, though in the short term we expect to see some economic stabilization.  Longer term, if the Chinese are able to implement the appropriate changes in terms of a deregulated capital account and capital market, it may have very positive and lasting influence on global markets and Chinese equities.

 

So, what does that mean for Chinese equities?

 

Well, if you want to be a true contrarian (especially with the Shanghai Composite down -3.5% this morning)  it may suggest a re-rating.  As highlighted in the Chart of the Day below, China is currently trading at 9.3x next-twelve-months earnings versus 16.1x for the MSCI World Index.  A re-rating to the World multiple implies 70%+ upside . . . .

 

We certainly aren’t suggesting you go run out and buy Chinese equities this morning.  But eventually, the time will come again to believe in The Dragon.  After all, with Donald Trump emerging as a legitimate candidate for President, we should all be well-practiced at suspending disbelief.

 

Our immediate-term Global Macro Risk Ranges (with our intermediate-term TREND call in brackets)

 

SPX 1911-1980 (bearish)

VIX 21.49-31.57 (bullish)
USD 94.68-95.99 (neutral)
Oil (WTI) 43.03-47.15 (bearish)

Gold 1095-1141 (bullish)

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

One for the Ages - z Chart of the Day


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