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NSC | Working Independently

Upshot:  We continue to think that NSC offers relative upside, and would look to initiate a position in the mid-70s to low 80s as presented in our Best Ideas Black Book call above.  The rejection of CP’s low bid should come as little surprise, but the reply incorporated a list of hurdles that would need to be overcome in a new and higher bid.  NSC’s rapidly improving performance metrics create the potential for a favorable cost surprise along the lines of the 3Q 2015 beat.

 

 

NSC/Rail Black Book (9/16/2015):

 

 

 

NSC/CP | Maybe But…

NSC | Revision Inflection

 

 

 

NSC Is Worth Far More Than Discarded Bid:  Holders of NSC have been in a tough spot, we think, with risks to an improbable deal in the way of a longer-term performance opportunity.  The CP offer premium was always too low, especially given the regulatory risks and process duration.  Pursuing a merger would attract regulatory attention, the last thing an industry making use of a strong pricing leverage needs.  The offer was too low, awkwardly presented, and incompletely planned – NSC is just making that clear with its thoughtful and well-presented rejection.  For a modestly patient investor we think there is a good deal more upside for NSC.  For deal optimists (not us) the potential for a higher bid remains.

 

NSC | Working Independently - NSC 1 12 4 15

 

 

Management Is Confident For A Reason:  The longer-term outlook put forth by NSC’s newish management team was favorable and ahead the multiyear consensus estimates by our calculations.  NSC’s cost and capital improvements are in process, and performance metrics are improving markedly.  That matters.  Higher speeds and lower dwell should push cost out of the network, a key factor in NSC’s beat last quarter.  As long at NSC’s results continue to track with our long thesis (linked above), we expect to stick with the shares until at least the triple digits, all else equal.  In a weak equity market, we would expect shares of NSC to be defensive, sector relative outperformer.

 

NSC | Working Independently - NSC 2 12 4 15

 

 

For Deal Optimists:  NSC provided a transparent, thoughtful, and detailed response to the CP bid.  Management took the low bid seriously, respecting shareholder interests.  NSC’s Board also gave CP a clear roadmap of the objections that would need to be overcome to strike an agreement.  CP can now work on constructing a higher bid (perhaps >$140, stock heavy) overcoming NSC’s straightforward concerns….if CP’s management is serious about completing the transaction.

 

 

Sentiment & Weather:  4Q weather in the Northeastern U.S. has been unusually warm, hurting coal volumes for NSC and other rails.  Weather varies, and is not of the same relevance as MATS regulations and sustained lower natural gas prices.  NSC’s coal franchise has been in secular decline for pretty much the entire “rail renaissance”, with pricing helping to offset the impact on revenue.  NSC is not very popular on any side of the Street, as we see it.  The vaguely hostile Q&A on this morning’s deal rejection call made that reasonably clear.  

 

NSC | Working Independently - NSC 3 12 4 15

 

 

Upshot:  We continue to think that NSC offers relative upside, and would look to initiate a position in the mid-70s to low 80s as presented in our Best Ideas Black Book call above.  The rejection of CP’s low bid should come as little surprise, but the reply incorporated a list of hurdles that would need to be overcome in a new and higher bid.  NSC’s rapidly improving performance metrics create the potential for a cost surprise while the Street fixates on volume pressures.


RH | Black Book Before The Print

Takeaway: On Tues Dec 8th at 1:00 pm ET we're hosting a Black Book call on RH.

We're issuing an updated Black Book and will be hosting a call on Tuesday December 8th at 1pm EST to discuss how our thinking on RH has evolved since the company’s last print and what our thoughts are headed into Thursday’s earnings. A lot has happened in 13 weeks... not the least of which is the stock underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.  Over this time period, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree.

 

Nonetheless, we’re going to go through the puts and takes on a TRADE, TREND and TAIL duration. We’ll present our incremental insight, vet our case to see where we could be wrong, and share some of the pushback we’ve generally received in the meetings we’ve done in the past month.

 

Call details and full topic outline to come on Monday


Eye On China: Our Outlook for the Yuan

 

Could the Chinese government devalue the Yuan 15-20%? Hedgeye Senior Macro analyst Darius Dale responds to this subscriber question in this excerpt of The Macro Show.   


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Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII

Takeaway: People aren’t bearish enough on where GPS’ P&L could go. | 15 SIGMAs this wk. ULTA, EXPR only pos setups. AEO is the big negative one to us.

GPS - Lousy November Comp

Our Take: "Just another lousy month for Gap, Inc." At least that's what we think the sentiment on the stock is saying. There's definite complacency in its persistent ability to underperform.

But make no mistake...this story can, and likely will, get a lot worse.  Sales productivity today (blended) is in excess of $400/foot. In past recessions it's dropped down closer to $360/foot. And on a go-forward basis, with increasing competition from Uniqlo, H&M, and not to mention little ol' Primark, we think that GPS is just structurally unable to compete -- especially at a 12%+ margin structure when we're late in the economic cycle.

We're fully aware that the stock is down 40% year to date, and it looks "cheap" (whatever that means) at 10x earnings. But take sales productivity down by 15%-20% and the fixed cost deleverage takes EPS negative. Not so "cheap" on those numbers.

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart1

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart2

 

15 Retail SIGMAs This Week

We’ll have our full book of 125+ SIGMAs out shortly. But this week’s data offered up far more bad than good. And we’re not talking about what the numbers reported as much as we are what the sales/inventory/GM triangulation suggests about 1H16. Bottom line, estimates remain too high. We’re at peak margins, and there are too few dollars chasing too much inventory.

Winners: The BIG winners, where the setup augers quite well for estimate revisions even above what we just saw, are ULTA, EXPR, and that’s pretty much it.

Losers: Here’s the inverse – inventory/sales/margin setup is changing negative on the margin. Biggest Losers are: AEO (adding to our short bench), DG, PVH, FIVE, LE, GIII

 

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart3

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart4

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart8

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart5

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart6

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart7

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart16

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart9

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart10

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart11

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart12

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart13

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart14

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart15

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart17

 

AMZN - After key Amazon representatives no-showed a meeting with Robbinsville, NJ officials Wednesday, the mayor vowed to take the online retail giant to court demanding the shutdown of its 1.2 million-square-foot warehouse if the traffic problems remain unresolved.

(http://www.ecommercebytes.com/cab/abn/y15/m12/i03/s03)

 

DG - Dollar General Names John W. Garratt as Chief Financial Officer

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=945346)

 

Rossignol in Talks to Buy French Bike Maker

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=8&id=58573)

 


Where We Stand On Macau Right Now

Editor's Note: Below is a brief excerpt from a research note sent to institutional subscribers earlier this week written by our Gaming Lodging & Leisure team. 

 

Where We Stand On Macau Right Now - macau yesterday

 

We remain generally negative on the Macau stocks but acknowledge that the December optics (-25% YoY GGR decline vs November’s 32% decline) could favorably impact sentiment.

 

However, there is still no indication that fundamentals are improving – November was worse than October from a seasonally adjusted GGR perspective. Low hold wasn’t responsible for the sequential degradation but VIP volumes were ugly and, importantly, Mass revenues were below expectations.

 

Going forward, we are concerned with 2016 where our -9% GGR forecast is below the Street. Same store revenue will look worse, down 19%. Non-gaming will look bad with room rates down in the mid-teens heading into a period of 20%+ room supply growth.

 

Relative to sentiment, LVS could be most at risk in 2016 given its sizeable valuation multiple and the fact that the new supply will target Sands sweet spot – non-gaming and the Mass segment.

 

 

To read the more detailed research note ping sales@hedgeye.com.


#RateHike Expectations, #Deflation’sDominoes, EUR/USD

Client Talking Points

#RateHike Expectations

Expectations play-out every day in markets. The consensus expectation was a short commodity long USD view moving into this week (Euro-QE and a Fed funds rate cut). If and when that doesn’t happen, the currency move looks about like yesterday, a -2.2% move in the USD. With this morning’s uneventful jobs report, those expectations remain. USD consensus longs don’t capitulate on their long positioning in a day.

#Deflation’sDominoes

It’s a long road to the bottom. Low cost producers with endless reserves don’t volunteer to fight deflation. We don’t expect a bullish catalyst out of OPEC today with a production cut. Any catalyst to the end of a deflation trade looks policy driven at this point. If this morning’s NFP number was a go for Janet, the market will continue to deflate the fed-inflated commodity bubble.     

EUR/USD

One day post Draghi Disappointment Day that sent the cross rocketing higher, it’s trading -0.50% to $1.0885. Over the more immediate term we’ll take our cues on the USD from U.S. data and Fed policy (meeting Dec. 15-16) and over the intermediate term we maintain a bearish bias as we think there’s an increased likelihood that the ECB has to act (as growth and inflation disappoint to the downside) by expanding the size of its QE program (to €75-95B/month), likely within the first quarter of 2016.

Asset Allocation

CASH 69% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 14% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe 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 see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

The US Stock market has only been up 6 days in the last 21 - it was oversold yesterday, that is all

@KeithMcCullough

QUOTE OF THE DAY

“Whoever said, ‘it’s not whether you win or lose that counts,’ probably lost."

 -Martina Navratilova                   

STAT OF THE DAY

Wade Boggs had a career batting average of .328.


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