The Economic Data calendar for the week of the 26th of October through the 30th of October is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: Current Investing Ideas: TIF, JNK, W, WAB, ZBH, GLD, MCD, RH, LNKD, ZOES, GIS, EDV & TLT
It was a very good week for our Investing Ideas recommendations.
Below are our analysts’ updates on our thirteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
To view our original note on McDonald's click here.
What week it was for MCD shareholders! Shares finished the week up 7.3%.
We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.
This quarter was astounding.McDonald’s proved once again that their brand is not dead. The operationally led turnaround is happening and the 3Q15 print was the inflection point. MCD reported total company revenue of $6.62bn roughly $210mm over consensus estimates of $6.41bn. Global same-store sales for the quarter increased +4.0% versus consensus estimates of +1.9%. The segment results were also very encouraging:
Given the robust performance throughout the segments MCD reported 3Q15 EPS of $1.40 beating consensus estimates of $1.27 by $0.13. The currency impact to 3Q15 was $0.17, as the USD continues to hold its strength against most foreign currencies.
From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.
To view our analyst's original report on LinkedIn click here.
Shares of LinkedIn (LNKD) were up 5% today and finished the week up almost 8%. Our Internet analyst Hesham Shaaban reiterates his high-conviction in the name into its next earnings release on October 29th. We expect a clean beat and raise. We expect this will be a positive catalyst for the stock.
To view our analyst's original note on Wabtec click here.
Our short call on Wabtec played out extremely well for Hedgeye Industrials analyst Jay Van Sciver with shares down 8.4% on the week. Here's Jay's update:
We see freight rail equipment spending just starting to enter a multi-year downturn. It’s a cyclical market, and WAB shares remain priced for growth. This does not sound like a management team positioned to rescue shareholders from what we see as a ‘growth trap’. We expect 2016 EPS estimates to move below $4.00, with the recent ratcheting down just the first step.
To view our analyst's original report on Wayfair click here.
Since the IPO lockup expiration at the end of March, we’ve seen a steady drip of insider stock sales totaling ~$40mm in market value. That peaked out in August at the same time the stock hit all-time highs, but the steady flow of sales remains among the highest in consumer discretionary.
We think investors are significantly overestimating the addressable market, and that incremental sales will come from either excessive discounting, or from a part of the home furnishings space that is inherently subject to SKU transparency and commodity pricing. All of that leads to Wayfair being unable to sustain a profit over the long term.
While it might take a while, we think that Wayfair is ultimately headed to zero. Heck, if we were insiders, we'd sell our stock here too.
To view our analyst's original report on Tiffany click here.
A notable insider purchase at Tiffany (TIF) hit the tape this week. But, contrary to what the headline suggests this is not an open market purchase, which many would consider a bullish indicator. Member of the Board of Directors, Abby Kohnstamm (former CMO IBM, now Pitney Bowes) exercised 10k options at a $39.64 strike – for net proceeds of $398,100.
Here is the skinny on TIF – Street estimates for earnings in 2016 sit at $4.54. If the macro environment plays out like we believe, then we think we’re looking at a number closer to $4.00. It is definitely not a ‘headed to zero’ short. But stocks of good companies like Tiffany go down all the time, and we think TIF is headed lower.
Abby Kohnstamm Historical Stake in TIF
To view our analyst's original report on Restoration Hardware click here.
Restoration Hardware (RH) unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.
Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.
RH Flatiron Store
To view our analyst's original report on Zimmer Biomet click here.
SYK reported a mixed quarter this week, there was weakness in ex-US markets, in particular Brazil and China, not from the core US Orthopedic market as we would have anticipated.
After the carnage across our #ACATaper Theme this week, the SYK quarter surprised us a little with the upside in US revenue growth. While JNJ’s Depuy division reported +2.0% growth in US Knee revenue a few weeks ago, SYK followed up with the second earnings Orthopedic report, posting 5% growth in US Knees.
We are focused on the US Knee market because we think it is the arena with the most #ACATaper potential, and the biggest product category for Zimmer Biomet (ZBH). ZBH missed revenue expectations 2Q15, the first with Biomet in the mix. At the time they suggested temporary disruption from the merger had caused the revenue miss, but “cascading execution plans” were in place, and well, executing.
Will ZBH report a number more like Depuy’s +2%, or SYK’s 5% when they report 3Q15? If SYK is benefitting from the disruption at ZBH, which we think they are, it’s likely to be closer to +2% than the +5%. Over the coming weeks we’ll continue to speak to surgeons about the trends they are seeing in case volume, device pricing, and the new Medicare global payment program, CCJR.
To view our analyst's original report on Junk Bonds click here.
At Hedgeye, we like to pave our own non-consensus road and short things that the crowd chases. Junk bonds (JNK) are one of those vehicles. Investors have already plowed, by far, the most money ever into JNK, in October, with a full week to spare post rate-hike fears. That sounds risky to us.
The total into junk bond funds was $4Bn in October. $2.2Bn of it went directly into JNK. Large institutional players may see this as a value play post rate hike fear and sell-off, but our body of work suggests JNK is a cyclical and it’s not the beginning of the cycle. It’s maybe the 7th or 8th inning.
Here’s a chart of the October JNK Pile-in:
With deflation seemingly back for the time being post-ECB this week, piling into and ETF with some commodity leveraged credit risk isn’t something we subscribe to. In fact, we’re taking the other side and keeping with the short. Below is the chart of the day that we used in Friday’s “Early Look” note to product subscribers. Draghi cowbell = more global deflation:
As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.
Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.
(No material update this week)
General Mills continues to be one of our top ideas in the Consumer Staples sector. Sector head Howard Penney loves the name for its characteristics during this macro driven market. Big-cap, low-beta, and their line of sight at growing the top line in a meaningful way, are contributors to our LONG thesis.
There has not been much notable news on GIS as of late, but they did recently announce the launch of a venture capital arm. Preexisting division, 301 inc., will now be given more control and freedom around investing and incubating smaller food startups. GIS has dabbled in this before but never in a truly focus way. Companies such as Boulder Brands and Coke do this currently and have seen success.
This is not something that will have a meaningful impact within the next year. But hopefully with some good investing and smart partnerships we will be able to see results.
(No material update this week)
Nothing has changed at Zoës Kitchen. We still love the management team and the concept of the restaurant. But due to the macro-driven market, high beta, low-cap names such as ZOES have fallen out of favor.
If you are a "buy and hold" type of investor this is a name you want to be in for the long run, especially at these values. This company has a long runway of growth which we believe is only just in the beginning stages.
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Editor's Note: Our Gaming Lodging & Leisure analysts added Boyd Gaming (BYD) to their Best Ideas list on 9/25/2015. Since then the stock has gained 17%. Here is a brief recap of a note they released earlier today.
In Q3, BYD delivered on the tenets of the long thesis we laid out in our 9/25 conference call/presentation - growth in Las Vegas and AC, stabilizing regional gaming trends, and operational improvements combined to produce a big beat and higher Q4 guidance.
More good news: it looks sustainable.
We remain positive on BYD as earnings visibility continues to improve and the locals Las Vegas market (remains well below peak) and Borgata could provide upside. Moreover, while BYD is making progress operationally, there is still significant room for higher productivity and margins across the portfolio.
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Diamond Foods (DMND) remains on the Hedgeye Consumer Staples LONG Bench.
The original LONG thesis on DMND was based off of margin improvement, and/or a strong chance of it being acquired. It appears that the latter will be coming true as a rumor has broken out about Kellogg (K) acquiring the entire company for somewhere between $35 to $40 per share. With the stock currently at $34.57 up just 5.30% from yesterdays close of $32.83, doesn’t seem that there is much additional upside.
The real question is how desperate is DMND to sell, will they look at this range as a fair value? Or will the Board require a greater premium in order to sell the company? We think up to $40 is what DMND is worth, but not more than that, leaving little upside from the current share price.
Previous reports said they were struggling to sell the company as one unit. No surprise here, Pop Secret and Emerald are less than desirable assets. Pop Secret is in a category of the past, as consumers prefer Ready-to-Eat popcorn over microwave varieties, and Emerald, a lower tier brand competes in a category where prices are high, giving anyone with the edge on price (private label) the edge on the market.
Kettle Chips seems to be their saving grace from a sale perspective and will without a doubt obtain the highest purchase price multiple. Kettle is not without its challenges though. They compete as a regional brand in a very saturated market with the likes of PepsiCo and Synder’s-Lance, making it very hard for them to gain serious distribution versus the competition.
What does this mean for Kellogg? If they turn out to be the eventual buyer, we will still be keeping K on the SHORT bench. Although we like their further diversification of the portfolio, we don’t like Pop Secret or Emerald. We do believe that Kettle will be a great buy, as K will be able to expand the brand more effectively given their distribution capabilities versus DMND.
Please call or e-mail with any questions.
Takeaway: Adding it to the SHORT bench.
Our Healthcare Team has developed the Macro Monitor, a web-based tool for identifying relationships across thousands of data sets. They have since expanded the Macro Monitor to include restaurant related macro and company fundamental time series. We started the process several months ago and have identified several relationships that we think are interesting and worth tracking over time. Our plan of action is to continue to build out our data sets and capabilities using the Macro Monitor and come out with additional high frequency trackers that provide a read into the company’s fundamentals. This note represents our first tracker, THE DONUT TRACKER, right now we are using it to focus on DNKN, but will expand it to KKD in the near future.
DNKN is a name that we track very closely. That being said, it has not been on the immediate radar screen, but it is moving up the list. The business model is enviable, but only if they are generating positive same-store sales. Same-store sales for DNKN are important, but only as a leading indicator for future development.
With the company making $0.02-$0.03 in EPS on every new store opened, development is crucial to the overall DNKN story. Once same-store sales trends turn negative the development pipeline will begin to slow down as franchisees will not want to open up stores at the same rate.
ADDING IT TO THE SHORT BENCH
In this context, at 13.4x EV / NTM EBITDA the stock is overvalued. As a result, we are adding DNKN to the Hedgeye Restaurants Best Ideas list as a SHORT, but on the BENCH for now.
The company has guided to 1-3% same-store sales growth for 2015 and 2-4% over the next five years. Same-store sales are currently tracking at the low end of expectations. In 2015, they will open 410-440 total net units (excluding the speedway closures). Over the next five years they will grow units 4-6% versus 5.1% and 5.3% in 2013 and 2014, respectively.
Given the current trends in same-store sales over the past three years and the increased competition, DNKN sales trends are under pressure. No question DNKN will be one of the companies that will be impacted by a resurging McDonald’s.
THE DONUT TRACKER
Given the size of the DNKN system it will be difficult to get a good read on system same-store sales by talking just to franchisees. In addition to our conversations, we will be looking to other sources of data to indicate how sales trends are faring. Over the past year we have tracked a number of other reliable indicators that show a strong correlation to DNKN quarterly same-store sales.
Consumer price index (CPI) and producer price index (PPI) information provided by the Bureau of Labor Statistics (BLS) has proven to be a good indicator of the overall trend for DNKN. Below we provided four charts out of the 6-8 that are working well since we started to track them. CPI – Bakery Products YoY % is the tightest, and most relevant correlation to DNKN SSS at a 0.89 correlation. We find this to be very indicative of performance given its strong relevance to DNKN and the tight correlation over the last five years.
With these indicators being reported monthly we can get a strong sense of how sales are trending intra-quarter. We will be using these data sets in order to get a read on the trend and what to expect from DNKN. In addition, we will monitor menu changes and quarterly LTO’s to gauge how the company is managing the business.
We would also note that DNKN reported traffic declines of 70bps last quarter. Over the last couple of years the company has increased menu complexity and used price aggressively to drive same-store sales. Both of those actions are separate issues that will need to be addressed if sales trends continue to decline.
We will continue to update you on the progress of our trackers on a regular basis.
Please call or e-mail with any questions.
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