The Economic Data calendar for the week of the 2nd of November through the 6th of November 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 (another) strong 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. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.
To view our original note on McDonald's click here.
Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.
The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.
Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.
To view our analyst's original report on LinkedIn click here.
LinkedIn (LNKD) shares soared approximately 14% this past week (versus a 0.36 decline for the S&P 500) after the company reported strong 3Q results and 4Q guidance coming in ahead of the Street's expectations.
Most notably was an acceleration in organic Talent Solutions growth, which not only vindicates management for its 1Q15 salesforce account transition, but puts to rest concerns that the Lynda acquisition was a decoy for deteriorating core fundamentals.
However, we wouldn’t be chasing this print today. The next catalyst on the horizon is its 2016 guidance release in February. We’re not 100% sure we want to stay long into that event simply because this management team is notoriously cautious with its guidance, particularly the initial release.
Stay tuned for an update.
To view our analyst's original note on Wabtec click here.
The downcycle in freight rolling stock is just getting started. Wabtec (WAB) pretty much confirmed that on the earnings call last week.
For those who have listened to WAB earnings calls since Executive Chairman Albert Neupaver took over, the change in tone is immediately apparent. In generating the sales miss this quarter, WAB actually drained the order backlog, with a book-to-bill of 0.84. The freight book-to-bill was a minor train wreck – worse than what was posted in a quarter during the financial crisis.
We continue to expect 2016 EPS to move sub $4.00. This past earnings announcement is only the first minor readjustment.
To view our analyst's original report on Wayfair click here.
The common perception with Wayfair (W) is that it is a play on the millennial furnishings shopper. Millennial consumers are defined as the 15-34 age bracket. These shoppers grew up with a smartphone in tow, i.e. they are more comfortable shopping online. Based on the e-commerce visitation trends, however, it doesn’t appear that Wayfair.com has a particular advantage with this subset.
The chart below shows how Wayfair stacks up against Amazon.com and pier1 on weighting of visitation by age and compared to the internet average. Wayfair skews high in the 55 to 65+ demographic, and is right in line with pier1 in the 18 to 34 age range. To get to the 60mm+ household addressable market, Wayfair will have to spend aggressively on ad cost to get eyeballs since it has zero physical presence in this market.
To view our analyst's original report on Tiffany click here.
The common perception seems to be that “just because Tiffany (TIF) blew up earlier this year, it can’t blow up again.” We disagree. It actually blew up twice this year. And we think there will be another. We didn’t like TIF into the last 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.'
Tiffany's quarter is just ending and ecommerce traffic trends have not looked strong in the quarter. YY Traffic Rank (which measures unique visitation and page visits/user) has deteriorated since mid-August. E-commerce only accounts for 6% of sales at TIF, but it’s a good barometer for brand relevance. And, the trends headed out of 3Q look particularly weak.
To view our analyst's original report on Restoration Hardware click here.
Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins are sitting below 10% today, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).
In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion.
Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.
To view our analyst's original report on Zimmer Biomet click here.
Zimmer Biomet Holdings (ZBH) reported numbers and calmed the concerns across the Street with positive commentary about 2016 growth. We did not hear any questions from largely bulge bracket sellside firms that called into question the consistent deceleration in their US Knee growth.
Management reported -1.8% growth in America’s knee growth, largely driven by the very small percentage of sales in Latin America seeing substantial declines, and a flat US market. Our view is that ZBH is heading into a very tough operating environment where the tailwinds from the Affordable Care Act wane (#ACATaper) and growth slows materially.
The added headwind of the new Medicare global payment model (CCJR) which will hurt pricing and volume, will only make matters worse. Our view is that $90 was too low for ZBH, declining recently along with the rest of the healthcare equity market, dubbed #Reformaggon stocks. $105 is probably where $ZBH belongs given the deterioration in the fundamentals so far in 2015.
However, the reflation in the equity price from a disaster-low is not an “All Clear” signal. It’s an opportunity to re-assess (we still like the short) for both the longs and the shorts.
We’re continuing to speak to surgeons about case volumes and device pricing through the remainder of the year. We’ll continue to update our #ACATaper charts, looking for signs that we remain on course with the thesis.
Click below to view an update from our Healthcare team this week.
To view our analyst's original report on Junk Bonds click here.
You got your chance to buy long-term bonds again at the end of the week as the “rate hike in 2015” was teased yet again from Janet Yellen on Wednesday. Interest rates moved higher on the week and gold was tagged for a loss after reaching week-to-date highs pre-meeting. Bottom Line: The market took the statement as hawkish and the language put global deflation back on the table.
Looking at the statements side-by-side, they removed the sentence that “global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.”
Don’t buy the central planner's failed attempt at arresting economic gravity. Let’s dissect an important week of economic data.
Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).
General Mills (GIS) continues to be one of our top ideas in the Consumer Staples sector. Sector head Howard Penney loves the name for its characteristics during the current 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. This week they did provide an update, as part of a previously announced project, that they will be closing manufacturing facilities in the UK and New Zealand. If completed these actions will eliminate 285 positions and incur restructuring charges of $47 million to $52 million. Management expects these actions to be completed by the end of FY2017.
Again, this was a pre-announced project so it was only a matter of time until this actually hit the newswire. GIS pruning its manufacturing footprint is a critical step in their effort to become more nimble globally.
Nothing has changed at Zoës Kitchen (ZOES). 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.
Are you prepared for a deepening of the global earnings and industrial recessions? Hedgeye Macro analysts Christian Drake and Darius Dale sent a detailed note to institutional subscribers on Thursday afternoon laying out our #SlowerForLonger (growth) thesis. Here's the key takeaway:
"Our forecasts for domestic economic growth continue to be proven most accurate and we continue to anticipate things will get a lot worse from here."
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Takeaway: 2 of 3 categories remain in contraction Y/Y although we expect futures to turn to positive territory soon as the Grexit marked last October.
Weekly Activity Wrap Up
All three categories remain in negative growth territory Q/Q, although cash equities, with a 7.1 billion 4Q15TD ADV, are positive Y/Y at +2%. Options activity is averaging 16.5 million contracts per day so far in the quarter, a -5% contraction year-over-year and a -9% contraction versus 3Q15. Futures had their best week so far this quarter, coming in with 19.4 million contracts per day, however, the 17.5 million 4Q15TD ADV is -6% lower than last quarter and -9% lower than 4Q14. In October of last year, the potential Greek exit from the European Union drove outsized activity which will have normalized by mid-November. We expect both ICE and CME to have better comps at that point and think that CME especially will finish 2015 strongly (see our most recent CME note here).
U.S. Cash Equity Detail
U.S. cash equity trading came in at 7.4 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -3% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +3% year-over-year increase, while NASDAQ is taking a 19% share, a -8% year-over-year decline.
U.S. Options Detail
U.S. options activity came in at a 17.1 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -5% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -9% of its share year-over-year settling at just 18% of options trading currently. Additionally, CBOE's market share has been falling recently and now sits at 26%, -14% lower than 4Q14. NASDAQ, on the other hand, is starting the quarter strongly, increasing its market share by +13% compared to 3Q15, bringing itself only -2% lower than the 24% share it held a year ago. BATS' share has been falling recently but at 8% in 4Q15TD it remains +27% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +10% Y/Y growth.
U.S. Futures Detail
CME Group volume came in this week at 14.1 million contracts per day and is averaging 12.8 million for the fourth quarter, a -14% Y/Y and -11% Q/Q contraction. However, CME open interest, the most important beacon of forward activity, currently tallies 101.7 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +7%.
ICE had its best week so far in 4Q15TD with 5.3 million contracts traded per day. Additionally, at 4.7 million contracts traded per day in 4Q15TD, activity has grown +7% Y/Y and +10% Q/Q. ICE open interest this week tallied 67.5 million contracts, a +14% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with the prior week.
Monthly Historical View
Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.
Sector Revenue Exposure
The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
SBUX is a juggernaut!
The company reported a very strong end to FY15 quarter and looks like FY2016 will be another strong year. In the US, food sales are accelerating and Mobil Order & Pay is driving incremental transactions. Globally, the company is growing same-store sales and adding more stores to the base.
The bar was set high coming into this quarter and now has been set even higher going into 1Q16. Despite the company providing EPS guidance slightly below street estimates, the trend in transaction growth, which is the most important metric, points to continuing growth.
The quote by CEO Howard Schultz says it all “Starbucks occupies a front-row seat at the intersection of the physical and digital worlds like no other company anywhere in or out of retail.” Mobile Order & Pay is the key to driving future growth at SBUX. On the other side of the coin, I do not believe that the trends we are seeing in food sales have long-term sustainability.
Currently the stock is trading at 18.13x EV/NTM EBITDA, which puts SBUX at a significant premium to its global peer group. While it may deserve the premium, the stock is priced for perfection and nothing lasts forever.
4Q15 CALL - MANAGEMENT COMMENTARY
NEXT-GENERATION OF FEATURES AND MOBILE PAYMENT
Kevin R. Johnson, President and Chief Operating Officer, Starbucks Corp.
REVENUES, BEVERAGE PROGRAM AND SALES
CHINA ASIA-PACIFIC SEGMENT
CHANNEL DEVELOPMENT REVENUE GROWTH
Scott Harlan Maw Executive Vice President and Chief Financial Officer, Starbucks Corp.
IMPORTANT COMMENTS FROM Q&A
“And I think if you go back a year ago, we were at 5% and 1%. And if you look at 9% and 4% in the U.S. and what we’ve done sequentially throughout the year and you couple that with the inherent momentum and attachment that we’re seeing from mobile payment, Mobile Order & Pay, and specifically the integration, as Kevin talked about, and the attachment of loyalty, we have enough visibility in the business to be transparent with you that we believe that we’re going to see some incrementality in our overall comp.”
“we’re seeing incremental transactions from Mobile Order & Pay, particularly in our busiest stores. We’re pleased with the results across all the tiers of our stores. You know, ticket right now is holding steady and is doing quite well consistent with our other MSR ticket, and we haven’t even added the feature of suggested selling and suggested pairing, which we’re going to do in H1. So, we expect to see that increase on top of the incremental transactions that we’re seeing.”
“In fact, if you look at the comps, three points of our comp growth came from food. Our breakfast sandwich business has doubled in the past three years. Lunch is accelerating.”
“We now have evenings program deployed in 100 stores, so it’s early days on evenings, but we’ve seen growth in every day part as a result.”
“On the beverage side, that accounted for 6% – six points of comp growth.”
“We know that MSR customers on average spend three times as much as non-MSR customers, and we’ve grown the number of active MSR customers by 28% year-on-year.”
“let me just be very clear that our business in China and across CAP remains very, very strong. We’ve seen no systemic slowdown in our business in China. In addition, what we saw during the quarter was that comps actually accelerated month to month. And in China, we see that comps are continuing to accelerate into the month of October”
“And when you break down the total growth across CAP and really across China, 75% of our revenue growth is being driven by new stores, 25% is being driven by comp, and what we continue to do is focus”
“The strength of breakfast sandwiches, as Kevin mentioned earlier, we’ve seen that business double over the last three years.”
“We’ve seen food grow through that 3% comp to 20% of the mix in U.S. stores, and we see that increasing over time to the mid-20%s, but obviously beverage will still drive it. And we’ll just keep investing, keep learning, and keep growing it.”
“Mobile payment is not going to become obsolete. Although mobile ordering is a form of mobile payment and we are going to see a significant number of transactions morph over.”
“In terms of data on percent of transactions or percent of tender that’s Mobile Order & Pay, since we just finished the rollout in the U.S. late in the quarter, we don’t have a full run-rate of quarter, so we’re still watching that advance. I think Adam gave you some color on some of the locations that are seeing high usage of that. But each wave of deployment we have made has been adopted faster than the prior wave.”
“This is Adam. Howard mentioned that we’re seeing a five million mobile order per month run-rate already. And while we’re not breaking out specific percentages, there is a range of mobile order numbers across a number of store tiers particularly in our busiest tiers and we are seeing significantly more incremental transactions, incrementality in our busiest stores. We are seeing, internationally, our latest wave that went out for Canada and U.K. saw even a faster adoption than the New York wave, which was faster than the previous wave. So we’re getting better at getting faster customer adoption and it bodes well for Mobile Order & Pay globally.”
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