The Economic Data calendar for the week of the 9th of May through the 13th of May 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: DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, ZROZ, XLU, MCD, TLT
Below are our analysts’ new updates on our fourteen 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.
Note that we removed General Mills (GIS) from the long side of Investing Ideas. Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:
The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back.
How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?
We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."
Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.
To view our analyst's original report on McDonald's click here.
McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.
The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.
McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.
To view our analyst's original report on Wabtec click here.
Wabtech's (WAB) 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. 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.
To view our analyst's original report on Hanesbrands click here.
Hanesbrands' (HBI) recent actions give us even greater confidence in our short call.
The recent acquisitions at HBI bothers us. At this point late in the cycle, the deals are getting more and more expensive. HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA (Pacific Brands was actually 10x on the company's adjusted NTM number, using the proper measure its actually closer to 12x). Basically, though still expensive, HBI is trading at a 20% lower multiple, but it’s deal multiples are 20% higher. Why?
Also, if HBI was interested in buying Pacific, why didn’t they do it a year ago at half the price? That’s kind of a rhetorical question. It is a public company … so it’s not like it ‘wasn’t for sale,’ and it’s also not like ‘HBI wasn’t a buyer.’ Just strange to pay nearly $400mm more for the same asset.
When a company behaves this badly, no one wins.
To view our analyst's original report on Nu Skin click here.
As we reported last week Nu Skin (NUS) reported earnings that beat expectations (which were deflated by prior guidance). An important thing to note is the YoY decline in VitaMeal sales, which fell -8% YoY. We are under the impression that a big driver of distributor growth is provided by contributing to charity. As VitaMeal sales have eroded so have the number of sales leaders.
We continue to like NUS on the SHORT side, as the company boasts inconsequential market share in the global personal care landscape, and operates a business model that will likely not be sustainable in the long-run.
To view our analyst's original report on Zimmer Biomet click here.
Zimmer-Biomet (ZBH) is now priced for the recovery, with the EV/EBITDA multiple moving back over 10X after touching 8.75X, a multi-year low, in February 2016. ZBH had a good quarter in the US, although we think the leap day, a mild winter, and weak flu season all played positive rolls. The weak flu season helps because patient surgeries are often delayed if a patient is sick and running a fever, or can’t get to the OR because of deep snow. An extra day of surgeries helps as well.
As the multiple has recovered, however, estimates have remained consistent. We still believe there are far more risks to the stock from here compared to the upside fundamentally. The price certainly disagrees with us, and we hate to be as wrong on the price as we have been recently. But we still like the short.
We’ll keep digging, talking to surgeons and our policy team, and watching our #ACATaper data. On the ACA, the employment update for healthcare showed that trends continue to slow for healthcare. We think the pent-up demand created by millions of newly insured (and a 6.2-fold increase in knee replacement surgery) is beginning to unwind to the downside.
To view our analyst's original report on Allscripts click here. Below is an research note on Allscripts (MDRX) written by our Healthcare analysts Tom Tobin and Andrew Freedman.
Allscripts reported a lackluster 1Q16 with sales of $345.6 million and Non-GAAP EPS of $0.13 coming inline with consensus and our expectations. Recurring software delivery, support and maintenance revenue declined -1.5% YoY, while recurring managed services grew +22.3% YoY. Total bookings were up +7% YoY to $252 million, but missed consensus estimates of $257 million. While we were expecting Software Delivery bookings to slow YoY, we were surprised by the -25.7% YoY decline. To provide "context", this was the weakest Software Delivery bookings quarter since 1Q13, and the third consecutive quarter where the 2-year average growth rate has been negative. We also view this as confirmation that the incremental revenue from the University Hospitals contract expansion was mostly maintenance, and therefore had little impact on reported bookings. Allscripts also did not close any new Sunrise deals in 1Q16 despite positive reported deal flow at competing vendors, which supports our negative view of Allscripts weak position in the market.
Offsetting the -25.7% decline in software delivery, Allscripts reported a large mix shift toward Client Services bookings in 1Q16, which were up +61.4% YoY and represents a continuation of a trend that began in 3Q15. While we acknowledge that Allscripts has been able to execute on their strategy to cross-sell hosting and outsourcing solutions to current customers, we don't view this as a sustainable growth alternative to new system software sales. We expect the downside of this strategy to become more evident as we head into the 2H16 and begin to run up against the large hosting and outsourcing agreements Allscripts signed with some of their largest customers. Additionally, it is important to note that Client Services (34% of sales; 14.8% GM 1Q16) at full potential (20% GM) has only a third of the gross margin of software and maintenance (66% of sales; 63% GM 1Q16). 2H16 and 2017 profitability will be challenged as the mix shift results in lower gross margins while at the same time Allscripts anniversaries the cost cutting and restructuring that occurred in 2015.
Allscripts management has made reclassification routine, and 1Q16 was no exception, further reducing transparency for investors. With the addition of the recent Netsmart joint venture, investors will have an increasingly difficult time understanding underlying business trends. After pulling Maintenance backlog last year, management has decided to no longer break out 'Support and Maintenance' and 'System Sales' revenue separately. It was only a year ago that management thought that these were the right metrics to report. Instead, they now believe investors need even less transparency and are grouping everything into two buckets 1) Recurring 2) Non-recurring. Needless to say this is a red flag as we no longer have transparency into support and maintenance, which provided the cleanest read on attrition and accounted for 33% of 2015 revenue and approximately 25% of total backlog.
We are reducing our estimates for the upcoming quarters to further reflect our expectation for lower software delivery bookings and a faster than anticipated sales mix-shift toward client services. This shift will put increasingly negative pressure on gross margin in 2017. We also increased our R&D expense estimate to reflect additional costs associated with having to bring three EHR solutions in compliance with the new MIPS quality reporting standards by 2017. With respect to bookings, we continue to believe that the consensus estimate for +2.5% bookings growth in 2H16 is too high as the prior year contains deals that we don't view as repeatable. We are modeling 2H16 bookings growth of -12.4% YoY. Note that our estimates do not reflect any impact from Netsmart.
To view our analyst's original report on Tiffany click here.
During its analyst day, Tiffany (TIF) announced a partnership with Net-a-Porter which would allow the online retailer to sell select Tiffany designs for limited periods of time. Those designs hit the website about a week and a half ago.
We find this partnership to be interesting for several reasons, but ultimately it seems to be a move of desperation on the side of TIF.
To view our analyst's original report on Lazard click here. Below is an analyst from Financials analyst Jonathan Casteleyn.
No update on Lazard (LAZ) this week but Financials analyst Jonathan Castelyn reiterates his short call. Below are a few key takeaways from Castelyn's original stock report:
To view our analyst's original report on Foot Locker click here.
The first of the athletic retailers reported earnings last night, with the Big Five printing a comp and EPS miss. Sales trends are increasingly negative. After reporting high single digits comps in January, trends slowed to low single digit comps through January and February, and finished 1Q at -1.9%. Comps in 2Q to date are down low to mid single digits.
Foot Locker (FL) points to the highly promotional environment as the driver of comp weakness. Also, in the face of two recent athletic retail bankruptcies (The Sports Authority & Sport Chalet), the company noted that 60% of their stores overlap with these retailers. Investors in the likes of DKS, BGFV, HIBB, and FL are expecting a sales lift from the reduction of competition. But the Big 5 result indicates that there will be more pain before any gain.
So, for FL, it looks doubtful that any TSA bankruptcy benefit will hit in 1Q. We would argue that the upside is minimal. Sales started slowing at BGFV and FL before the bankruptcy liquidation commenced (TSA closures are running March-May). And as it relates to FL, there is only a very small portion of TSA revenue that FL could steal, given the 30% footwear penetration rate at TSA, the closing of only ~30% of the stores, and 30% shopper overlap. That puts the total revenue upside for FL around $85mm, or just over 1% growth assuming they take all of the relevant revenue, which competitors won’t allow.
We added Deere & Company (DE) to the short side of Investing Ideas. Click here to read our Industrials analyst Jay Van Sciver's full stock report.
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: We added DE to Investing Ideas on the short side on 4/19.
We see DE as a highly cyclical, capital equipment supplier to a mature, zero growth industry. Deere’s key, high margin franchise is large, North American ag equipment. Prior to 2014 or so, that market experienced a decade long surge in equipment sales, driven by soaring crop prices, increasing land values, and comparatively easy credit. Since peak, these factors have begun to roll over. We expect the hangover – elevated new & used equipment inventories, excess manufacturing capacity, tightening farm credit, and declines in farmer equity – to be a prolonged affair that gradually takes equipment sales below ‘normalized’ demand.
We expect total North American agricultural equipment sales to drop roughly 2/3s peak to trough, and FY15 results are only about half way there. Newer downside drivers appear likely to come from tightening credit, decreasing land values, declining farm equity, and lower crop prices. As those factors influence equipment sales, we expect FY17 estimates to move to <$3.00 vs. current consensus of about $4.10. As investors price in the reflexive unwind in this commodity-related capital equipment industry, we expect to see another 30%-50% relative downside in shares of DE.
While most of FY16 is baked into the share price, there are a couple of noteworthy items concerning DE and its customers. New and used inventories, dealer sentiment and credit metrics are deteriorating. Further credit tightening can pressure residual equipment values and Deere’s Finance subsidiary which has seen an uptick in past due loans. These indicators show that the Ag downturn is still underway and not approaching ‘trough’ levels as consensus believes in 2016.
We agree that FY16 is about right, give or take ~10%. But the differentiator versus consensus is for FY17. We think that FY17 estimates are far too high and expect an FY17 reset as a downside catalyst. We do not think that a 60%+ NA Ag equipment spending decline peak to trough is what the market is expecting. Bullish analysts still think that FY16 is roughly trough, and is well below ‘normalized’ demand. As a result, some see DE as a relatively defensive machinery name. We expect that optimism to fade, just as it has for other commodity production capital equipment shares (e.g, CAT, JOY).
Takeaway: U.S. jobs growth peaked in Febraury 2015. It's been all downhill ever since.
Despite financial media headlines trumpeting "Everything You Need To Know" about today's jobs report, the Old Wall media missed the most obvious story of all. Digging a tiny bit deeper reveals the real story. Job growth peaked in Febraury 2015. It's been all downhill ever since.
Sure, we all know job growth slowed to 160,000, well below the 200,000 number Wall Street economists were predicting.
Blah, blah, blah...
Job growth peaked in Febraury 2015. It's been all downhill ever since.
And finally, a message from our outspoken CEO Keith McCullough. What you should have owned heading into today's #LateCycle Jobs Report.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.