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What About ISM Manufacturing? Still Falling

Takeaway: In case you missed it, today's ISM Manufacturing index fell yet again both from its cycle peak and month-over-month.

Here's an abridged transcript and chart on the ISM data from this morning's Real-Time Alerts Live via Hedgeye CEO Keith McCullough: 


"That damn data just won’t go up. The ISM data came in at 50.8. That's down versus 51.8 last month. So, to be clear, global growth and industrial growth has not bottomed. All the bottom calling was just a story.


A lot of people hoped that these ISM numbers were better, inasmuch as they hoped for better numbers out of Friday’s Consumer Confidence number and Chicago PMI. These indices are not just missing they’re hitting new lows."


Click the image below to enlarge


GIS: We Are Removing General Mills From Investing Ideas

Takeaway: Please note we are removing General Mills from Investing Ideas (long side) today.

This morning, Hedgeye CEO Keith McCullough wrote in Real-Time Alerts:


"While I like GIS from a Style Factor perspective (it did its job last week, closing up in a down tape - doing its job again this a.m. +1%), it's:


A) Signaling a series of lower-highs from a long-term perspective

B) Not as well loved by my analyst team (Penney and Laidlaw)


So I'll take it off here on the overbought signal. We can always come back to it, lower.




GIS: We Are Removing General Mills From Investing Ideas - general mills


Hedgeye Consumer Staples analysts Howard Penney and Shayne Laidlaw sum it up below:


"We added General Mills (GIS) to Investing Ideas on May 26, 2015. During that time, the stock price has risen +10% versus the S&P 500, which is down -2.6%.  While we still like the long-term story, the stock’s performance in 2016 has been nothing short of spectacular.  Year-to-date GIS is up +7.8% versus +1.3% for the S&P 500.  The company’s 3Q15 performance was mixed with the company missing on revenues and beating on EPS with the benefit of cost cutting. 


That being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17.  GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company.


Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group.  We maintain our long-term bullish stance on GIS, but given the rapid acceleration to all-time highs in the YTD period, a correction is inevitable."

5 CHARTS: A Global #GrowthSlowing Checkup

Takeaway: Investors who avoided #GrowthSlowing equity markets nailed it in the past year.

5 CHARTS: A Global #GrowthSlowing Checkup - World Market No 12.16.14 large


Still don't believe U.S. growth is slowing? Nasdaq investors do...



Meanwhile in Japan, growth has been neutered for decades. Despite the best efforts of BOJ central planners, macro markets continue to crash.


Check out the ramp in the Yen...


The Nikkei is still in crash mode, even though the BOJ instituted its negative interest rate policy in January



Speaking of negative interest rates...  


Italy's bank-heavy FTSE MIB index remains in crash mode.


And finally, peeling back the onion on the recent reflation trade, take a look at a longer-term chart of much-watched Dr. Copper.


Does that look bullish for global growth?


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RTA Live: May 2, 2016


YELP | Thoughts into the Print (1Q16)

Takeaway: We may sound like a broken record, but mgmt keeps making the same mistake (guidance). Expecting another 2H blowup, but mild near-term risk


  1. FLUFFING LOCAL? As a reminder, YELP is serving Google AdSense ads adjacent to its search results (Google pays YELP to display ads on its site).  We're not sure if the economics will be material, but it's something we can't just ignore given YELP's ~75M desktop UVs (4Q15).  Since YELP shuttered its Brand Advertising segment, those revenue will likely be reported in its Local Advertising segment.  Even if AdSense is immaterial to total revenues, it could be the difference b/w a beat/miss on 1Q results and/or 2Q guidance for no other reason than the sell-side isn't looking for it.  That said, there could be near-term, but temporary risk to staying short the 1Q release.  The key is to focus on YELP's ARPA, which will essentially tell us if AdSense is material.  
  2. 2016 ≈ 2015: We've kept the short on since it appears mgmt has repeated its mistake from 2015 by guiding to street expectations for 2016.  We suspect the inline guide was a panic move in response to LNKD's earnings release, which drove YELP down almost 20% in the following +12 hrs of trading before YELP's mid-day earnings release.  Post 4Q15 results, YELP now needs accelerating new account growth on historically low attrition rates to hit consensus Local Ad revenue estimates.  That also implies accelerating salesforce productivity since its guided revenue growth is exceeding its 2016 saleforce growth target (20%-30%).  In short, this is pretty much the same setup as this time last year; we're expecting another 2H blow-up on 3Q guidance (2Q print), if not 2Q guidance depending on how its other segments perform in 1Q.
  3. BUT IT'S SO CHEAP: It is, but we heard the same thing at various points along its slide from a forward 15x P/S multiple.  Granted, YELP might be in an asymmetric setup to the upside, but this is likely only a risk to the upcoming release; after that we're just getting closer to what we expect to be another full-year guidance cut.  The other implication is that YELP will be acquired.  We don't believe YELP's price is expanding the market of potential suitors simply because there are only a handful of companies that would be willing (large enough) to absorb YELP's model into its financials without taking a material hit.  As a reminder, the only way to fix that model is to improve ROI (i.e. lower price), which would result in down y/y revenues given YELP's attrition issues.    


Let us know if you have questions, or would like to discuss in more detail.


Hesham Shaaban, CFA
Managing Director



YELP | Thoughts into the Print (1Q16) - YELP   New Acct vs. Sales rep 4Q15

YELP | Thoughts into the Print (1Q16) - YELP   2016 Scenario Analysis

WAB | No Bridge, Silence As Deception

Faiveley Deal In Current Form Is Probably Dead


WAB’s 1Q 16 earnings release and call were notable because of what they did not contain: a clear explanation the favorable decremental margin (materials are likely to prove mean reverting) and a disclosure that Faiveley was under significant scrutiny by antitrust regulators.  Given those omissions, we are interested to hear more about the Siemens PTC suit.  A failure to be forthcoming is deceptive, in our view.  We have met with several larger longs in WAB that place significant faith in this management team, and we wonder if those holders noticed those omissions.


Should Have Been Discussed: Given reports of DoJ concern that the Faiveley merger would reduce the number of passenger-train brake systems manufacturers from three to two, some management commentary was due on the call.  It is now increasingly clear that divestitures may be needed for LEY FP & WAB US to close.  Faiveley’s Braking & Safety Systems – the area most likely to generate overlap concern as we understand it – is about a quarter of LEY sales.  Divestitures would almost certainly undermine at least part of the strategic rationale for the transaction. 


Is The Faiveley Deal dead?  Probably, or at least the good part of it. Various obligations in the Exclusivity Agreement cease to apply 15 months after the agreement was signed, as we read it, and closing is likely to drag out longer than that now. We have yet to hear about DoJ concerns, which raised the initial flags in the press.  Agreement modifications should follow, particularly if divestitures enter the picture. Fees on break-up are minor, and we suspect the Faiveley family is unhappy about the public discount anyway.


When A French Manufacturing Acquisition Is Your Bull Story:  When a bull story hinges on the acquisitions of a French manufacturing company, we think investors should recognize a problem.  When undue investor faith is placed in a management team that, we think, is aggressively spinning a bullish narrative by leaving out bad news, investors should look to the exits. After Wabtec reported last week, investors were likely hoping that favorable decrementals would bridge profitability to the Faiveley merger, allowing for a new narrative and focus for the shares. Of course, this view is already a thesis drift from the “Freight will be fine” reply.  The revelation that the 1Q WAB EPS print was due to lower materials costs and a debt funded buyback leaves that bridge rickety at best.  Now that bridge would need to hold up all the way until fourth quarter to reach a likely different merger deal, if the deal happens at all.  Realistically, that is not much of a bull story in the face of 16.5% organic sales declines at the unit that represented 76% of 2015 operating profit. 


What about buybacks?  Can WAB offset the failure of Faiveley with a huge repurchase?  Sure, but levering up at a major cyclical inflection point is incredibly risky, we think, and would leave us more optimistic about our short view. Investors don’t usually pay a big multiple for debt fueled financial engineering. Covenants restrict them to a bit over $2 billion in debt at current profitability – capacity the company likely needed to fund the cash portion of Faiveley.  We should expect a big repurchase or similar move if Faiveley fails more formally.  It would likely be a good opportunity to fade a rally.


WAB | No Bridge, Silence As Deception - WAB 1 5 2 2016



Important Questions For Large Longs To Answer:  Was the favorable decremental from “[management’s] ability to respond to changing marketing conditions, with actions to decrease cost and increase efficiencies” per the chart below?  Will Faiveley really close in its current form by 4Q? 


WAB | No Bridge, Silence As Deception - WAB 2 5 2 2016



Upshot:  We continue to see WAB as a promising short, and expect 2016 EPS ex-Faiveley below $4/share as the company’s core freight market enters a multi-year downturn.


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