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The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB

The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB - wab email

 

Editor's Note: Wabtec (WAB) is currently on our Industrials analyst Jay Van Sciver's Best Ideas List as a short. He is hosting a call today to update his thesis and preview their upcoming quarterly report. Send an email to sales@hedgeye.com for access or for additional information about our institutional research.

KEY DISCUSSION POINTS:

 

  • A Look At Freight Decremental Sustainability: WAB's report and guidance will test the sustainability of 1Q 2016's Freight segment decremental margin, which the 10-Q indicates was driven by lower Material costs. These favorable decremental margin expectations are now imbedded in 2H 2016 consensus estimates, and we expect the recent snap back in steel prices to have a significant 2H16 impact. While Materials costs went unmentioned in both the press release and earnings call, the company has apparently subsequently claimed mix as a factor; we do not find that claim credible. 
  • Consideration of Faiveley Deal Structure, Remedies: Investors should receive an update on the Faiveley acquisition, a deal we think management wanted to close by mid-year amid Freight segment pressure. Management has previously left no ambiguity that they expected to close the deal, but the information from regulators indicate to us that divestitures or other remedies will be required to close. Given the dearth of appropriate buyers for divested assets and not-so-minimal business overlap between WAB and LEY FP, comments should be interesting. The Faiveley merger remains a long thesis element for several large WAB holders.
  • Our Take On Management: We have observed thesis drift among WAB longs. While initially embracing freight aftermarket and regulation-driven demand, the focus shifted to international Transit growth and Faiveley. Now, discussions typically end with how this management team will execute through the downturn. If management is not able to deliver, further thesis drift may lack a new port.

 

What Levers Are Next? This management will not ride the downturn quietly, in our view. Wabtec still has substantial balance sheet capacity, and we would expect disappointing headlines to be offset with positive ones. Results last quarter should have seen pressure, but management was able to pull a Materials cost rabbit out of the hat. We will consider some options and the associated risks.

 

The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB - wab call

 

**Email sales@hedgeye.com for access.


Earnings Season Update: The Soft Bigotry of Low Expectations

Takeaway: So far, 43 of 500 companies have reported an aggregate year-over-year EPS decline of -7.1%.

Earnings Season Update: The Soft Bigotry of Low Expectations - earnings q2

 

Everyone beats Wall Street's beaten down earnings expectations. But what really matters is the year-over-year change.

 

"So far, 43 of 500 companies have officially printed their GAAP and non-GAAP stories for an aggregate year-over-year EPS decline of -7.1%," Hedgeye CEO Keith McCullough wrote earlier today. "Financials EPS are currently -8.3% y/y and allegedly they all “beat”; I’d still sell them on bounces from here."


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Tuesday - equity markets 7 19

 

Daily Market Data Dump: Tuesday - sector performance 7 19

 

Daily Market Data Dump: Tuesday - volume 7 19

 

Daily Market Data Dump: Tuesday - rates and spreads 7 19

 

Daily Market Data Dump: Tuesday - currencies 7 19

 

Daily Market Data Dump: Tuesday - commodities 7 19


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NFLX | Closing Long (2Q16)

Takeaway: We got too cute trading around our thesis. 2Q16 was so bad that we suspect our thesis may play out much sooner than we originally expected.

KEY POINTS

  1. 2Q16 = JUST AWFUL: Both the print and our long call into it.  We bought NFLX as trade on expected upside to int’l net sub adds for both the 2Q print/3Q guide.  NFLX reported int’l net adds of 1.54M (-36% y/y decline) vs. consensus of 2.1M and issued 3Q guidance of 2M vs. our expectation of 3.5M.  US was much worse, with net adds at historical lows of 160K and 300K in the 2Q print/3Q guide, respectively.  Mgmt suggested its gross adds were inline with its expectations, but heighted churn preempting the price increases from the ungrandfathering of its plans led to the shortfall vs. its expectations.  Regardless of the reason, its int’l net subs adds are a big concern given that NFLX hadn’t annualized past many of its 2015 country launches, and it just launched to ROW in 1Q16.  The fact that net adds are down on a y/y basis despite these tailwinds casts new doubt on the longer-term int’l story.
  2. DEMAND = ELASTIC? We clearly underestimated the magnitude of churn in our two trackers this quarter; largely because we didn’t think a $1-$2 increase in the monthly rate would be a big deal for most of its subs.  The sub adds miss vs. guidance was the worst in NFLX’s reported history (both US and int’l on a % basis); suggesting mgmt was really caught off guard as well.  It’s too early to tell if churn will become a prolonged issue since over half of NFLX domestic subs are in grandfathered plans, and NFLX will be staggering the price increases.  But the 2Q16 churn issue casts new doubt over one of NFLX’s assumed levers to cover its longer-term content costs; demand may be more elastic than many of us had assumed.  Granted, we could be overreacting to the print, but given the backlash to such a relatively small monthly rate increase, we have to question NFLX’s pricing power. 
  3. THESIS REFRESH: The first two bullets suggest that NFLX may have a shorter runway on both int’l growth and its ability to take price down the road.  In the context of our thesis, it appears even less likely that NFLX’s model will survive in its current form, and more importantly, that the street will actually figure that out over the 2016-2017 period following its ROW launch.  NFLX's mounting contractual obligations aren't a secret; if int'l user growth sputters out further despite its ROW launch, the specifics of its content costs will likely receive more attention (first note below) as the street realizes that int'l can't compensate for waning US demand (second note).  We're actually shocked that the stock isn’t down more pre-market and that we haven't seen any downgrades on one of NFLX’s worst prints in recent memory.  That basically suggests that the street still has hope and/or is in denial about NFLX’s longer-term prospects, which also means that we may get another shot on the short side this year.

 

See the notes below for supporting detail around our thesis.  Let us know if you have any questions, or would like to discuss further.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

 

 

NFLX | Breaking Down Content Costs
05/26/16 08:14 AM EDT
[click here

 

NFLX | Good vs. Bad (US User Survey)
06/09/16 10:41 AM EDT
[click here

 

 


Another new all-time closing high for the SP500 as European Equities resume their crash...

Client Talking Points

Japan

The Heli-Ben $$ Copter rumoring has done a week of wonder for the Nikkei, ramping it +10.6% in the last 6 trading days; sadly it’s still -20% from the chart many chased at the 2015 peak … and economic growth continues to slow.

Earnings

43 of 500 companies have officially printed their GAAP and non-GAAP stories for an aggregate year-over-year EPS decline of -7.1%. Financials EPS are currently -8.3% y/y and allegedly they all “beat”; we'd still sell them on bounces from here.

Volume

Continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume (including dark pool) was down -20% and -24%, respectively vs. its 1 month and 1year averages; this cannot be bullish for active vs. passive flows (in June, active saw its biggest monthly outflow since Oct 2008).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/18/16 50% 0% 0% 13% 30% 7%
7/19/16 50% 0% 0% 13% 30% 7%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/18/16 50% 0% 0% 39% 91% 21%
7/19/16 50% 0% 0% 39% 91% 21%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
TLT

Long Bonds (TLT) = #GrowthSlowing, yield curve compression.

GLD

Gold (GLD) = Protection from global currency devaluation and inflation/down USD – You can travel anywhere on earth and get a quote in local currency .

TIP

Treasury Inflation-Protected Securities (TIP) = Combination of the above exposures.

Three for the Road

TWEET OF THE DAY

Buy the all-time high? No thank you. app.hedgeye.com/insights/52414… via @KeithMcCullough $SPY #stocks #markets pic.twitter.com/7WKBaFXhfh

@Hedgeye

QUOTE OF THE DAY

“The only way to be number one is to be number one.”

-Anonymous

STAT OF THE DAY

Derek Jeter's career batting average is .310


The Troubling Truth Behind The Rally To All-Time Highs

Takeaway: Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume was down -20% versus its 1-month average.

The Troubling Truth Behind The Rally To All-Time Highs - volume cartoon

 

The no-volume rally to all-time highs in the S&P 500 is disconcerting to say the least. Why?

 

No Volume = No Conviction

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:

 

"Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume (including dark pool) was down -20% and -24%, respectively versus its 1-month and 1-year averages; this cannot be bullish for active vs. passive flows (in June, active saw its biggest monthly outflow since Oct 2008)"

 


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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