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About Everything | Q&A with Neil Howe: The Bullish Case for Life Insurance

 

In this complimentary edition of About Everything, Hedgeye Managing Director Neil Howe discusses why life insurance company shares have been beaten down since the Great Recession, but makes the case for their comeback. "Looking forward, there are a lot of positive trends at play. Gen Xers are waking up late to save for retirement, while risk-averse Millennials are trying to prepare early, promising to drive demand steadily upward for decades to come," Howe writes.

 

Click here to read Howe’s associated About Everything piece.

 

Click here to access the associated slides.


Today 11am ET | Don Kohn Previews the FOMC Meeting

Takeaway: Join us for this call!

Don Kohn Previews the FOMC Meeting

Thursday, June 9 at 11:00 a.m. ET

 

Please join us TODAY for a call with former Fed Vice Chairman Don Kohn on the June 14-15 FOMC meeting. Don will offer his outlook on the jobs report, consumer spending, personal consumption, GDP growth, and other factors expected to influence the Fed's rate hike calculus. 

 

Participating Dialing Instructions

Toll Free:

Toll:

UK: 0

Confirmation Number: 13638657


RH | Ignore The Funeral Music

Takeaway: This is what happens when you merge a 37 year old brand with an 8 year old company.

When you’re crushing your business plan, the piano overdub on the earnings video sounds pretty cool.  But when it’s your second meaningful guide-down in two quarters, it sounds kind of like a funeral.

 

That’s especially the case in that there’s very little in this release that we’d consider new. The boom was lowered last quarter when problems with Modern, Energy/FX markets, and Promo Cadence change/Grey Card introduction sent the stock from $80 to $35 over four torturous months.

 

Are there any new issues hurting numbers? Not really. Same items. Knowing nothing else we’d say that the issues at the start of the year were entirely operational in nature. While this time around, its more about the forecast accuracy related to those issues. (i.e. this is one big ‘event’ but the quarters are split between ops and finance).

 

When we point to forecast accuracy, however, we have to first look in the mirror. At the end of last year, we were carrying a 2016 estimate of $4.50, and yet it appears that RH will come in less than half of that. To be clear, we move our numbers when our research says to, not when a management team says so. I’m taking flack here and I deserve it.

 

All of that said, we’ve all seen analysts pull the plug on a stock at the bottom – sometimes because their mandate requires them to downgrade on a miss, sometimes because their credibility is blown, or they simply lose confidence.

 

As it relates to RH, I have round-tripped this sucker – from $29 to $105 and back again. Do I think about bailing everytime the stock blows up?  Yes – for a moment. But the truth is that none of the mayhem – and it IS mayhem – affects the earnings power that our research suggests will be near $8.00+ in 5 years. With the stock at $100, people hardly questioned our logic. Now they snicker. “You’re telling me that this is trading at 3x earnings?” Yes. I am.

 

But duration matters. It always does. We’ve been saying since the end of February that we’d buy the stock all day – but only if you can look nine months out or more due to 2016 uncertainty. We still think that’s the case.

 

The Triple Standard

It’s funny…with companies like Lululemon and UnderArmour I so often say that a Great Brand ≠ a Great Company ≠ a Great Stock. The biggest mistake I’ve made with RH is missing the fact that the company is simply not as great as the Brand. The company is far younger (8 years) than the brand (37 years). That gap will never go away. But over the next year we think that RH Inc. will go from being a sub-par company – appropriate for the sales base when it went public – to a great organization that will drive one of the premier brands in retail, and fuel what we think will prove to be a financial model in the top 2% of Retail.

 

Think about it, would you rather this be a company like Wolverine Worldwide – a great company with mediocre brands (and a permanently low valuation)? That’s pretty hard, if not impossible to fix. With RH, we’ll see this company fixed in a year’s time, and results exceeding expectations well before then.

 

We’ll be back with more details.

 

Below is our previous note on RH from this morning:

 

RH | Then and Now and Tonight

We have an upside bias to tonight’s print. But at this valuation, the market thinks RH is broken across any duration.

 

We’re roughly in-line on both comp (+5%) and EPS (+$0.06) for RH this quarter.  Our bias is to the upside on both metrics, but we think there are other things that matter a lot more. Let’s face it, this is a seasonally weak quarter for a company in the midst of a well-telegraphed yet painful transition period. The way the stock is trading, the market thinks that virtually no part of our long term bullish view is going to happen. On our numbers, RH is trading at less than 8.0x earnings, and at 4.0x EBITDA – and that’s on NEXT YEAR’s numbers – it’s not like we’re telling you to look out to 2018 or ’19.  So clearly, the market simply lost massive faith in this story and in the management team’s ability to deliver. We have not. Are we worried about the back half? Yes, particularly as the switch to the new promotional cadence (Grey Card ‘club’ as opposed to ‘in your face’ episodic promos) takes place.  Most people generally get the revenue volatility that’s likely coming down the pike. But very very few people we talk to actually want to take the plunge and own it through this year.  And there you have a 4.0x EBITDA multiple.

 

Also consider the following comparison of RH today to RH on its IPO. The table below tells it all, but here are some callouts. Enterprise Value is now a mere 14.5% higher, and yet…

1) Revenue has doubled to $2.1bn

2) Margins have more than doubled to 9.7%

3) Productivity went up by over $1,000 per foot, which is simply an astonishing statistic.

4) Net Debt/Total Cap went from 38% to 5%

5) P/E went from 30x to 13x

 

And keep in mind that at the time of the IPO, the ‘growth’ was in 20k foot Design Galleries, but we’ve since learned that landlords are giving RH preferential terms on 40k-60k sq ft properties, and they’re working as it relates to gaining outsized share of each of those markets.

 

Our point here is that the valuation has been decimated over this time period, and yet the growth story has expanded if anything, and been de-risked from a funding perspective. Is it in a pretty ugly pivot period right now? Yes. Might the company need to invest more capital to facilitate growth? Perhaps – worst case. But for a long term investor (ie you can look out 9 months or more), this name is as appealing as they come.

RH | Ignore The Funeral Music - RH then now


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LNKD | Tracker Update (Hiring Solutions)

Takeaway: Tracker suggests stable, but slightly waning selling environment. We expect 2Q/3Q upside, but asymmetric setup, so remain on the sidelines.

KEY POINTS 

  1. WANING, BUT STABLE: At face value the tracker looks really good, but April is seasonally the strongest month in 1H for hiring intensity, making the q/q comparison less effective.  That said, we’re deferring to the y/y trend, which is showing a mild deceleration vs. 1Q16, suggesting that the selling environment remains stable, but losing steam in April.  As a reminder, our LNKD Hiring Solutions TAM analysis suggests that the bulk of that opportunity is in the upsell (ARPA) vs. new account volume.  Note that LNKD stopped reporting its Talent/Hiring Solutions customer counts, so we will not be able to calculate its ARPA anymore, but we'll continue to provide tracker updates.
  2. ASYMMETRIC SETUP: LNKD’s stock has been grinding higher following uneventual trading off its 1Q16 release; some of that may just beta, but optimism is still building in the name.  We suspect that buyside consensus for LNKD is that its disaster 2016 guidance release was egregiously sandbagged, making it tougher to play LNKD on the long side since the expectation may be for recurring beats/raises through 2016.  As we’ve seen in the past, a beat/raise isn’t always enough to drive the stock higher, especially if there is any sort of wrinkle in the numbers and/or mgmt commentary (e.g. 2Q15).  So even though we currently see upside to the 2Q print/3Q guidance (see table below), we don't expect the street to chase it unless the print/call is largely flawless; but even then the upside is debatable (e.g. 1Q16).  But on the other end, if mgmt introduces any new red flags, the stock could easily give up its recent gains.  We remain on the sidelines for now.

 

See the notes below for additional detail on LNKD's last two releases.  Let us know if you would like to discuss further.  

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet 

 

LNKD | Tracker Update (Hiring Solutions) - LNKD   ARPA vs. JOLTS 2Q16 Apr v2

LNKD | Tracker Update (Hiring Solutions) - LNKD   y y JOLTS 2Q16 Apr

LNKD | Tracker Update (Hiring Solutions) - LNKD   TS Scen 2Q16   3Q16

 

LNKD | Good Print, No Chase (1Q16)
04/29/16 10:34 AM EDT
[click here]

 

LNKD: Guidance = Recession
02/05/16 09:50 AM EST
[click here]


Cartoon of the Day: Squirrelly

Cartoon of the Day: Squirrelly - S P 500 cartoon 06.08.2016

 

This one speaks for itself.


Capital Brief: What Clinton's California Win Means For The Democratic Party

Takeaway: Golden State Warrior, Bernie Weakened; A Better Way

Capital Brief: What Clinton's California Win Means For The Democratic Party - capital brief

 

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

GOLDEN STATE WARRIOR

Capital Brief: What Clinton's California Win Means For The Democratic Party - hillary lates

 

With wins in CA, NJ, SD and NM last night, Hillary Clinton has now fully assumed the mantle of presumptive Democratic nominee. She has been victorious in a majority of the primaries, garnered three million more votes than her opponents, has 2,497 pledged delegates to Bernie Sanders’ 1,663, and has 571 superdelegates to Sanders’ 48. The party will now begin to unify around her with a popular president by her side as she moves into the next phase of her campaign. She and her allies will continue to define and dismantle Donald Trump and his policies.

 

Priorities USA, a pro-Clinton super PAC, has allocated $20 million for an ad buy against Trump – building on her effective foreign policy speech last week pegging him as unfit to be president. Clinton will also need to reassess her trust and likeability factors – repairing and retooling her image will be critical - it will become her advantage when voters decide the “lesser of two evils.”

WEAKENED AT BERNIE’S

 

Bernie Sanders is all but out of the race – but that doesn’t mean he’s dropping out...In order to be viable for the nomination at this juncture - Sanders’ only option is to flip superdelegates – something that remains completely unrealistic (he’s flipped one in six months). He and some in his inner circle have been hard-pressed to accept his fate, but nonetheless he says he will not relent until the convention. With Minority Leader Nancy Pelosi’s endorsement of Clinton and President Obama’s expected soon, Sanders risks becoming a pariah in his party the longer he holds out.

“A BETTER WAY”

Speaker Ryan rolled out a wide-ranging conservative agenda just a few weeks ahead of the Republican convention in July. The product of several task forces and dozens of meetings with House members outlines conservative proposals for jobs and the economy, taxes, health care, national security, constitutional authority, and poverty. The plan is a byproduct  of the autopsy of the failed 2012 Romney campaign as well as Ryan’s vision for an optimistic agenda for his Congressional colleagues and the party writ large. Ultimately, in the face of Trump terrorizing the party – the proposal gives Republicans a platform to run on in the fall, trying to put the Republican party back on track.


Daily Trading Ranges

20 Proprietary Risk Ranges

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.

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