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Casteleyn: M&A Has Peaked – ‘The Last Bastion Of Capital Is Gone’

In this brief excerpt from The Macro Show, Hedgeye Financials analyst Jonathan Casteleyn explains the precarious setup for any investor banking on M&A hitting another all-time high this year.


The Macro Show Replay | January 27, 2016

 

 

Here is today's asset allocation:

The Macro Show Replay | January 27, 2016 - Slide2


Cartoon of the Day: Running Scared

Cartoon of the Day: Running Scared - bear cartoon 01.26.2016

 

Tomorrow is the FOMC meeting announcement. We'll see if Yellen & Co. have anything to say about the recent stock selloff.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Under 60 Seconds: MCD’s Earnings Report

 

Hedgeye highlights the three key points from McDonald's strong quarter courtesy of our veteran Hedgeye Restaurants analyst Howard Penney in under one minute.


Stock Report: Foot Locker (FL)

Takeaway: We added FL to Investing Ideas on the short side on 1/13.

Stock Report: Foot Locker (FL) - HE FL table 1 22 16

THE HEDGEYE EDGE

We are confident Foot Locker will prove to be one of the best multi-year shorts in retail. The bulls on Foot Locker are missing a huge negative fundamental turning point, while the bears are bearish for the wrong reasons. This is going to get far worse than anyone thinks. To be clear, this is not the typical ‘Internet is taking over, so short  legacy retailers!’ call and the catalyst has been in the works for a while now.

 

This change starts with Nike. Nearly a decade ago, Nike decided to shift incremental capital to build a Direct-To-Consumer (DTC) platform, and fund that with excess growth in the wholesale channel in the US. Now, with the building part largely done and the wholesale channel very full of Swooshes, the tides are turning. None of this bodes well for Foot Locker.

 

In other words, the old industry paradigm is breaking down. This change is great if you own content that consumers want — like Nike, UnderArmour and Adidas. But if you’re stuck between the all mighty Consumer and those Jordan 23s, Nike FlyKnit AirMax 180s, Yeezys or Curry 1s, then you (i.e. Foot Locker (FL), Finish Line (FINL), Hibbett Sports (HIBB) and most other traditional “brick & mortar” distributors) are in deep trouble. 

 

INTERMEDIATE TERM (TREND)

 

In the upcoming Fiscal Year 2016, FL will be working against 2 consecutive years of around 8% comparable sales growth with the economy weakening, and an SG&A rate at an all-time low of 19% (the lowest we’ve seen in a mall-based retailer). That’s how the company can comp 5%, and leverage that into a 30%+ EPS growth rate. But unfortunately, leverage works both ways.

 

We think that emerging competition from Foot Locker’s top vendor, Nike (=80% of sales), will stifle growth, and leave the company with an earnings annuity somewhere around $3.50-$3.75 per share. Is that worth $66? Not a chance. Not for a company that is Nike’s best off-balance sheet asset. And definitely not when the street is in the stratosphere approaching $6.00 in EPS (#NoWay). The company is likely to earn about $4.20 this year, which we think will prove to be the high water mark in this economic cycle. 

 

LONG TERM (TAIL)

 

It’s no secret that Nike announced last year it would grow e-commerce to $7bn by 2020, which is a huge jump from its current $1.4bn (only 4% of sales). We think Nike is sandbagging, by the way, and that it will build its e-commerce operation to about $11bn – adding $10bn in e-comm sales in the next 4-years. Now, let’s say 60% of that is in North America…we’re talking $6bn in incremental revenue to Nike. To put this into context, the entire Athletic Footwear industry is likely to add about $6bn in retail over that time period alone.

 

Our estimates for Foot Locker three years out are 30% below the street, as we think it’s at peak earnings today. Importantly, this is not the kind of story that will play out with a simple press release.

 

This is a 40-year paradigm that is unwinding over a 5-year period. We think that three out of four earnings announcements will be negative – over and over again – at least based on current expectations. Along the way, we should see significant multiple compression, and margin erosion that will cut cash flow and torpedo that argument that we hear over and over about ‘FL throwing off so much cash.” It does until it doesn’t.

ONE-YEAR TRAILING CHART

Stock Report: Foot Locker (FL) - HE FL chart 1 22 16


5 Hilarious Central Planning Cartoons

Takeaway: Sad and funny at the same time.

We love central planners here at Hedgeye... if only because they provide such amazing fodder for our cartoonist Bob Rich to lampoon. Heading into tomorrow's FOMC meeting, we've highlighted five of our favorite central planning cartoons below. If you like what you see, click here to sign up for our free Cartoon of the Day.

 

Enjoy! 

 

1. ahhh, easy money. 

5 Hilarious Central Planning Cartoons - central bankers cartoon 09.08.2015 large

 

2. The bulls loved it...

5 Hilarious Central Planning Cartoons - Central planning cartoon 03.20.2015

 

3. Currency markets? not so much...

5 Hilarious Central Planning Cartoons - currency wars large

 

4. It's just a matter of time before it all comes crashing down...

5 Hilarious Central Planning Cartoons - central banker house of cards

 

5. then again, maybe it's already happening...

5 Hilarious Central Planning Cartoons - Monetary policy cartoon 11.07.2014 large


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