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SBUX - Free Coffee Wednesdays in July!

You know where I stand on the debate, but SBUX is not going to let MCD off without a fight!

This Aussi Central Banker Gets It...

Overnight, the head of the Reserve Bank of Australia, Glenn Stevens, did the right thing in signaling that he is done raising rates for now. Since he has been aggressively raising interest rates to address the inflation levels that he proactively predicted, he has earned the objective right to pause, and focus on worrying some about decelerating economic growth in Asia.

Unlike Bernanke's deflated cheap money 2% Fed Funds rate, the Aussi rate is 7.25%, and earning the Australian population who soberly saves a respectable return on cash.

KM

VFC: Great Selling Opportunity

We've had a multi-year run where strong consumer demand in addition to portfolio optimization (trade out of junk and into better brands), sourcing benefits, and prudent cost control have driven above-average profit and cash flow growth. Now margins are at peak, the cost of growth is headed higher, capex and working capital are trending up, and my sense is that free cash flow margins are just about topping out.

The quarter just preannounced should be taken into context. Not only does it only account for only about 14% of annual earnings, it also represents the easiest compare of the year. Starting in 3Q, both revenue and capital intensity metrics get much more challenging on a year/year basis. This ignores FX risk, which is noteworthy in that over 30% of sales are outside the US.

Also, VFC previously guided to a down 10% quarter. Now guidance is to beat this by 10-12%, including a tax benefit. Not exactly a solid high-quality beat.

VFC Guidance: Expect strong revenue comparisons and a resumption of double-digit earnings per share growth in the second half of 2008, driven by the exceptional profitability in our growing international businesses, continued growth in our retail revenues and profits, the seasonal benefit to revenues from our fast-growing Outdoor business and improved results across our coalitions.

Now we face promise of an EPS growth ramp in 2H that is baked into estimates (consensus calls for 14% growth), which also coincides with VFC having to anniversary recent acquisitions.

At the same time, only 2.3% of the shares are held short, and VFC has been a perennial favorite among the sell side. In fact, there are no sell ratings, and the 'buy rating ratio' of 67% is as high as it has been in over 5 years.

While it may not seem expensive at 7-8x EBITDA, it's tough to ignore that it has seen 4-5x in the past. Granted, it was a more asset-based and commodity-driven model during those periods. But even high quality names like Ralph Lauren are at 8x EBITDA. Others in the space are much much cheaper.

From a quantitative standpoint, my Partner Keith McCullough like the risk/reward to the downside to the extent it holds $75. Fundamentally, I can't point to any datapoints on the horizon that will accelerate this business model above and beyond hurdles already set in place.

Early Look

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Vietnam prints a better than bad GDP report...

Vietnam's GDP growth rate has slowed appreciably from its double digit highs, coming in at +6.5% year over year for the 1st half of 2008.

The problem, of course, is local stagflation. With reported inflation running close to +27% year over year, the real growth in this country is getting harder and harder to find.

The best thing central bankers can do is raise interest rates, and finally, they are.

KM

Eye on Transparency: What's In Your Wallet?

While my morning macro research process entails going through private equity deals and/or deals being speculated upon, the proverbial well on this front has been running cyclically dry as of late. In order to fill the void, investment banks and asset managers have been friendly enough to replenish my notebook.

The problem is, of course, that these data points continue to be alarming. Consider the top 2 from this morning's news run:

1. UBS and Swiss bankers being issued a "John Doe Summons" in order to unearth Americans with "secret" banking accounts (i.e. Tax Fraud)??

2. Legg Mason "entering agreements to protect 3 money market funds"??

Without wasting any more keystrokes, I think you can come to your own conclusions on how dire the state of affairs has become in this country.

KM

The June ISM: Another Stagflating Report ...

No change in new orders; No change in the absolute level of 50 versus the May report. Prices paid inflated another +5.2% month over month however. Slowing growth as inflation accelerates = Stagflation.

You don't need a PhD in Economics from Yale to figure this out.
KM

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