WAB | RSI Orders, Not Sales


Takeaway:  Orders for both rail cars and locomotives are well below delivery rates in 3Q, a situation that we do not expect to improve given weak rail volumes.  2016 build rates look at risk to us, as customers may seek stretched deliveries and manufacturers would benefit from steadier production.





RSI reported rail car order, delivery and backlog data yesterday that provided further support to the view that rolling stock demand has entered a downcycle.  GE received only 3 locomotive orders last quarter, and the RSI data points to 7,374 rail car orders vs. a build rate over 20,000.  While it might seem reasonable to look at the large backlog and assume the 2016 is in the bag, many of the orders in backlog are scheduled for delivery more than 12 months forward – some into 2020.  The rail car backlog itself may be vulnerable to both delivery date push outs and cancellations from captive lessors. Cancellations of third-party orders can be costly for buyers, but can also occur.  At current order rates, we would expect a drop down in build rates by mid-2016, a potential negative for WAB shares.



Rail Car Demand Down

Orders…: Both rail volume growth and fleet age demographics point to a sustained period of weak rail car orders, as we see it, with the recent demand spike due to tank car regulations and the boom in fracking.  


WAB | RSI Orders, Not Sales - WAB Orders 10 21 15



…Not Deliveries:  While deliveries will tend to correspond to 3Q equipment sales for WAB, equity markets should focus on the forward looking order data.  Deliveries are peaking out, in our estimation, while orders have likely entered a sustained period of below replacement demand activity.


WAB | RSI Orders, Not Sales - WAB Deliveries 10 21 15



Backlog Not So Clear:  While it might be tempting to see the backlog as 6 quarters of demand, many of the orders are scheduled for delivery more than 12 months out.  For example, TRN disclosed that 45% of orders were longer than 12 months out at the start of the year.  Given the implementation date of tank car regulations, we would expect the backlog duration to be reasonably far out.  We also think that as much as 10% of the backlog may be ‘spec’ orders from lessors owned by rail car manufacturers.  We estimate that the current pace of orders and deliveries portend a potential step down in deliveries by mid-2016. 


WAB | RSI Orders, Not Sales - WAB Backlog 10 21 15



Timing A Bit Clearer:  Orders will need to improve, build rates will need to be pushed lower, or 2017 will be very messy, by our estimates.


WAB | RSI Orders, Not Sales - WAB Book to Bill 10 21 15


Retail Callouts (10/21): UA E-Trends Best in Class, AdiBok 'SpeedFactories', NKE, LULU

Takeaway: UA Web Traffic trends leading athletic space. AdiBok to onsite manufacture by 2020. Nike will be there 1st.

UA - E-comm  Traffic Trends = Best In Class


UA traffic trends on a YY are basis are the best we've seen in the athletic space. Yep, better than LULU, Adi, and even NKE which has been growing like a weed -- in excess of 40% online in each of the past six quarters. The metric - which ranks all sites on the internet on a relative basis based on a) unique visits and b) page visits per user, has looked dynamite for UA throughout the year.


That tell us that a) UA continues to push its DTC agenda with sales growth in this channel on par with or outpacing the company average in 8 of the past 12 quarters. And b) brand heat remains strong as visitation to continues to outpace the rest of the industry on a relative basis.

Retail Callouts (10/21): UA E-Trends Best in Class, AdiBok 'SpeedFactories', NKE, LULU - 10 21 chart1


Adibok - Adidas Expects to Establish US Speedfactories by 2020 



3-D printing and on site manufacturing are hot button topics in the athletic space. But we can be sure of two things. 1) AdiBok will not beat NKE to market with this technology. 2) NKE's FlyKnit technology lends itself much more to this process than anything Adi currently produces. Adi is saying 2020 for on site customization, NKE quietly should have it rolled out by 2017.


UA - Under Armour Reuniting Jamie Foxx and Steph Curry for the Curry 2 Launch



DKS - New Dicks Sporting Goods Store Openings: Numbers 641 to 645

Glendale, CA

Cerritos, CA

Sevierville, TN

Las Vegas, NV

Muskogee, OK


HD, LOW - The hipster hardware store that has Home Depot scared



Prime FREE Same-Day Delivery Expands to Chicago and Orlando Metro Areas – Serving More Than 750 Cities and Towns Nationwide



AMZN - targets fake reviewers in Lawsuit



AMZN - Amazon gets into the restaurant delivery biz in Oregon



Why McDonald's Stock Will Never Trade Below $100 Again

Why McDonald's Stock Will Never Trade Below $100 Again - 10 21 2015 Fortune Howard


The fast-food chain’s stock will likely pop next year, thanks to its real estate holdings and its ‘All-Day Breakfast’ menu.


Last week, McDonald’s shares jumped 1.5%, amid speculation that the fast-food giant might spin-off its massive real-estate holdings. That looks increasingly likely under the activist-like new CEO, Steve Easterbrook. It’s another welcome development and a broader sign that McDonald’s is finally turning the corner. Our prediction: This year will be the last time McDonald’s stock sees a price below $100.


Let’s be clear. A lot has changed at McDonald’s in the past year...


Click here to read more of Hedgeye analyst Howard Penney's story on Fortune.  

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Purchase Demand | Rollercoaster Returns to Trend

Takeaway: TRID chop has played out in MBA, but will be back next week in NHS & EHS. The better-than-reality optics may help Housing's short-term momo.

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.


Purchase Demand | Rollercoaster Returns to Trend - Compendium 10.21.15


Today's Focus: MBA Mortgage Applications

The three-week, TRID catalyzed volatility ride is ebbing and the data is back to looking much like it did for most of 3Q.  Purchase Demand rose +16.4% WoW (after falling -34% prior and gaining +27% two weeks ago), taking the index back up to 197.4 – for reference, the Index average in 3Q was 201.   On a year-over-year basis growth also re-accelerated back to trend at +20% and, given the continued easy comps dynamics, static activity levels from here imply a similar pace of growth over the balance of the year.   


Rates on the 30Y FRM contract, meanwhile, held below 4% for a third consecutive week, declining -4bps to 3.95% and marking the lowest level since the first week of May.  At current levels, and ceteris paribus, rates remain a modest tailwind to both HPI and affordability.


So, takeaway = the ongoing march toward housing market normalization (↑ conventional/mortgaged purchases, ↓ cash/investor/distressed sales) and the stable demand environment that has characterized 2015 YTD remains ongoing.  We do expect TRID related issues to drive some further chop in the data over the nearer term. Specifically, we expect the Pending Home Sales and New Home Sales numbers for September - both will be reported next week - to benefit from TRID pullforward. The reverse will hold in late November when we get the post-TRID hangover in those series.


Purchase Demand | Rollercoaster Returns to Trend - Purchase YoY


Purchase Demand | Rollercoaster Returns to Trend - Purchase 2013v14v15


Purchase Demand | Rollercoaster Returns to Trend - Purchase Index   YoY Qtrlypng


Purchase Demand | Rollercoaster Returns to Trend - Purchase   Refi YoY


Purchase Demand | Rollercoaster Returns to Trend - Purchase LT


Purchase Demand | Rollercoaster Returns to Trend - 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. 



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



Joshua Steiner, CFA


Christian B. Drake


The Macro Show Replay | October 21, 2015



Yesterday, YUM announced plans to de-risk the company from its China business by executing a major restructuring, including the spin-off of its China business (YUM CHINA).  In addition, in a shift from their previous thought process, the company will lever-up its remaining predominately franchised business (YUM BRANDS).


We fully believe that this move will create significant shareholder value.  The timing of the actual restructuring will be dependent on achieving final approvals and executing the necessary steps, but is expected to be completed by the end of 2016.


As more details become available, we believe the stock will trade higher over time.  In the short run, holding things back will be the good bank/bad bank mentality.


Over the coming months, Yum! Brands (the good bank) is expected to execute a Leveraged recapitalization. In a complete shift from it’s current philosophy, YUM announced intentions for its franchised business to “become a non-investment grade credit rating with a balance sheet more consistent with highly-levered peers.” As a result, we believe that the new Yum! Brands will execute a $13-$15 per share leveraged recapitalization, bringing the new company to a debt-to-EBITDA ratio of 4.5x-5.0x. Upon this event we see the stock trading above $80 and the market capturing a majority of the leverage recap immediately. 


Spin-off of Yum! China (bad bank for now) will likely be a better managed company as a stand-alone entity.  It can also be argued that giving the public a direct way to play in the growth of KFC will boost consumer attachment to the brands - China KFC and Pizza Hut. While not specifically announced, we believe that YUM China will trade on the Hong Kong exchange, and will be the largest consumer company traded on that exchange.  It also could be a must own equity for funds and indices in that region.  We have long believed that the process of KFC China going public will act as a significant positive catalyst for the business as we have seen numerous times in the USA. 


SHAK Chairman, Danny Meyer, said on CNBC last week that all the press about going public helped build brands awareness.  KFC China will likely see that same benefit from months of substantial positive press.  Lastly, looking at the Corvex plan the Yum! China business can also execute structural changes that can accelerate growth by selling stores and bringing in sub-franchisees. 



Our new YUM model assumes that YUM China will pay YUM Brands a 4% royalty rate. 


In the coming days we will be updating our sum-of–the-parts model for the combined entities.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




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