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Ex-Energy S&P 500 Earnings Still Stink

Takeaway: So far in 2Q16, 367 of 500 S&P 500 companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%.

Ex-Energy S&P 500 Earnings Still Stink - earnings 8 3


For Q2 Earnings Season to-date:


  1. 367 of 500 S&P 500 companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%
  2. 6 of 10 S&P 500 sectors have reported year-over-year EPS declines.
  3. 27 of the 367 companies that have reported are “Energy” companies – and no you can’t “ex-that-out”
  4. 79 of the 367 companies are called Financials, and their aggregate y/y EPS decline is -5.4% 


Bottom Line: The whole "ex-Energy earnings are great" narrative is as illusory as it is dishonest.


Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On

Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On - aca signing

This is an institutional research note written by Health Policy Sector Head Emily Evans on President Obama's Affordable Care Act. "As a jobs program, the ACA was a soaring success. As a health care reform effort, there was still much work to be done and the tools were there to finish the job," Evans writes. To access our institutional research email sales@hedgeye.com.

HBI | Press the Short

Takeaway: This quarter gave us an unadulterated peak into the underlying issues we have been highlighting. Short thesis is just starting to play out.

Conclusion: HBI remains our top short, and despite the after hours weakness in the stock and 17% decline since announcing the Pacific Brands acquisition, we’d press the position here. To be clear, this is a company that has no (and perhaps negative) organic growth opportunity, as it is facing increased competition from both the high and low end and at the same time it is staring down the barrel of an over-inventoried US wholesale channel. As such HBI turned into a serial acquirer and is buying companies in jurisdictions where it has neither scale, brand, expertise, nor competitive advantage. Importantly, HBI is sitting at peak margins due in large part to unsustainable capacity utilization levels, which we think will give way and expose the operating leverage inherent to this model that most retail investors don’t acknowledge. And to boot, HBI has the most egregious spread between GAAP and ‘adjusted’ earnings than any company in its class – and is backed by a board and a compensation structure that encourages management to act in a way that we think is inconsistent with long-term shareholder interests.  All in, we think that HBI has another 40% downside until the risk/reward looks more balanced in our model, with the possibility of yet a bigger move in the worst case scenario.

HBI | Press the Short - 8 3 2016 HBI chart1B 




HBI’s salesmanship was on another level this quarter as Richard Knoll took his 10yr victory lap before officially handing the reins over to Gerald Evans. But, salesmanship on the conference call can't mask lack of sales dollars on the P&L, as HBI missed sales expectations for the 8th time in 10 quarters, and posted the 3rd worst organic growth rate since the company became a serial acquirer. Margins showed the first crack we’ve seen in over 2 years -- down 75bps YY as competition and the effects of bloated inventories began to rear their heads.  Despite all the talk about inventory reduction actions, core inventory grew 11% on -3% sales growth – even more troubling when we consider the tepid demand from the company’s wholesale partners. The flexibility to financially engineer earnings growth is all but done now that the two new acquisitions have closed and HBI has added $1.2bn in long term debt. And oh by the way the two combined will add 14% of growth to the top line but only $0.07 (+4%) in annualized adjusted earnings accretion to the bottom line.


Organic & Acquired Growth:

We got a look behind the kimono this quarter as HBI was in a unique position where it had zero benefit from acquisitions for the first time in 3 years. And the trend was less than inspiring. Champion Europe and Pacific Brands will be consolidated into the P&L next year, and will give the illusion of growth, but we think the trend in the underlying business is perfectly clear, without acquisitions 2Q growth was -3%, and has now been negative for 5 of the last 6 quarters. 

HBI's core Innerwear business slowed to -2.5% from 1.3% in 1Q. As we outlined in our note last week HBI | Gildan A Thorn In Its Side (LINK: CLICK HERE) we think an outlier threat to organic growth for HBI has been the pressure applied at the low end by Gildan within Innerwear.  Gildan has climbed to 9% share in units within the US men's underwear space in just 3 years after its launch of Gildan branded. And not only is Gildan taking share, but share gains accelerated in 1H16 which means we don’t see this headwind waning for a long time. Competition is rising on the high end as well with dozens of new brands playing in the higher priced performance underwear space along with the lineup of heavy hitters of Nike, UnderArmour, and Lululemon continuing to invest in their underwear businesses.

HBI | Press the Short - 8 3 2016 HBI chart2


The two new acquisitions that closed over the last month will add about $800mm to the top line over the next year. Management sees about $350mm in flowing through in 2016, our math suggests the number may end up closer to $400mm.

We have broken out our estimate of the benefit by quarter and the corresponding growth contribution below. 3Q should see about 12% growth from the new businesses, which HBI will need as it will be facing one of its toughest "core" organic growth compares of the last 3 years at 3% as reported by the company last year.

HBI | Press the Short - 8 3 2016 HBI chart3


High Inventory:

HBI spent an incremental $12mm in inventory reduction initiatives, but hey the inventory clean-up plan is tracking to plan…right? Nah, not even close as the sales to inventory spread only went from -16%  to -14% after adjusting for the $51mm increase created by the closing of Champion Europe around quarter end.  When asked about how Pacific inventory might end up impacting 3Q inventory, management chose not to give an estimate.  This would leave room for underlying inventory to remain in the fog of acquisition for at least another quarter.

HBI | Press the Short - 8 3 2016 HBI chart4


The elevated inventory is bearish for margins on two levels:  First being the need to spend or cut price to bring levels back to normal, and the second being the utilization impact of slowing production.  To review, HBI currently sits at peak utilization while at the same time we are seeing organic growth slowing, and the sales to inventory spread around the worst levels in nearly 5 years. 

Referring back to our Black Book, the cashflow & margin risk is significantly higher at peak utilization for a company that owns a majority of production like HBI.  Negative moves in demand can have exponential flow through implications for profitability.

HBI | Press the Short - 8 3 2016 HBI chart5


Pacific Brands is a Potential Disaster:

One common pushback for our HBI short is that there are still plenty of brands out there to buy and plenty of charges to be taken.  However HBI may have already overstepped its bounds in this area. Not only have the multiples gotten desperately high, but we think the macro risk associated with Pacific Brands is immense.

Hedgeye Financials and Retail teams have done some deep dive work on the Australian economy.  Simply put, our work suggests that Australia is currently at the tail end of a housing/property bubble that is worse than what the US saw in 2007/2008. Given the role home equity withdrawal has played in discretionary spending, the consumption impact is likely to be much greater than what was experienced in the US.

Pacific has about 15% share in the Australasia underwear market (#1), and it will undoubtedly be significantly impacted by the impending financial crisis/recession in Australia.  HBI is already paying 12.5x EBITDA for the Pacific assets, which now make up about 10% of sales post acquisition.  When all is said and done the real multiple paid could end up being 20x plus.  We think this has the potential to be the straw that breaks the camel's back as it relates to HBI stock should the economic situation down under play out as we expect.

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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.

Daily Market Data Dump: Wednesday

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




Daily Market Data Dump: Wednesday - style factor 8 3


Daily Market Data Dump: Wednesday - sector performance 8 3


Daily Market Data Dump: Wednesday - volume 8 3


Daily Market Data Dump: Wednesday - rates and spreads 8 3

August 3, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.60 1.45 1.55
S&P 500
2,142 2,177 2,157
Russell 2000
1,190 1,220 1,199
NASDAQ Composite
5,060 5,197 5,137
Nikkei 225 Index
16,003 16,576 16,391
German DAX Composite
9,955 10,350 10,144
Volatility Index
11.86 15.38 13.37
U.S. Dollar Index
94.75 96.50 94.99
1.09 1.12 1.11
Japanese Yen
100.19 104.31 100.90
Light Crude Oil Spot Price
38.78 42.24 39.51
Natural Gas Spot Price
2.55 2.92 2.73
Gold Spot Price
1,330 1,377 1,372
Copper Spot Price
2.16 2.28 2.20
Apple Inc.
99.62 108.04 104.48
Amazon.com Inc.
725 770 760
Netflix Inc.
84.01 95.08 93.56
J.P. Morgan Chase & Co.
62.17 64.38 63.65
Facebook Inc.
119.75 125.81 123.09
Ford Motor Company
11.70 12.99 11.94

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

So far 367 of 500 S&P companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%...

Client Talking Points


The central-market-planning + Big Fiscal Helicopter #BeliefSystem (i.e. hope) took another blow overnight with the Nikkei down another -1.9% = down -3.5% since the 28.1T “stimulus” was approved; Nikkei -23.1% from 2015s high.


Every time I refresh my immediate-term risk range model (price/volume/volatility) I get a lower-high and a lower-low; currently that risk range for WTI = $38.71-42.24 with bearish TREND overhead at $47.55; how does this problem go away?


Buying front-month equity volatility has been a layup whenever you’ve had the chance < 12 going all the way back to the summer of 2014 when cross-asset-volatility put in an all-time low; it’s not different this time.

Asset Allocation

8/2/16 60% 3% 5% 6% 13% 13%
8/3/16 57% 5% 6% 6% 13% 13%

Asset Allocation as a % of Max Preferred Exposure

8/2/16 60% 9% 15% 18% 39% 39%
8/3/16 57% 15% 18% 18% 39% 39%
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

To summarize our active ideas, long Gold (GLD) and long U.S. Dollar position (via PowerShares DB US Dollar Index Bullish Fund (UUP), netted out Friday, with gold catching a bid against a USD that got crushed on the report. (Part of the reason we added UUP to Investing Ideas was the expectation of a GDP print that may have sent a hawkish message to the market.) Think of Gold and the USD as a position against a basket of other currencies.


The good news for #GrowthSlowing bulls is that the Treasury rate curve will likely get pushed lower over the coming days as investors take stock of this week’s ugly data. That's good for Treasury Inflation-Protected Securities (TIP) and Long Bonds (TLT).


See update on GLD.

Three for the Road


[UNLOCKED] Fund Flow Survey | Another Week Of Record Outflows app.hedgeye.com/insights/52813… cc @KeithMcCullough pic.twitter.com/fGkI8QYceP



” Losers quit when they’re tired. Winners quit when they’ve won.” 



Greg Maddux had 109 complete games over his 23 year career.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%