There has been a lot of talk that "things are getting better" at Chipotle (CMG). Hedgeye Restaurants analyst Howard Penney remains deeply skeptical.
Earlier today, Hedgeye Director of Research Daryl Jones discussed the incoming Trump administration and its investing implications on BNN.
Here's a quick look at what Jones had to say.
“[Trump] has definitely increased confidence. We’ve seen consumer confidence go up. More importantly, we’ve seen small business confidence go up. There’s still a lot to be unraveled in terms of what his policies will look like, what impact they’ll have on the economy and the stock market.”
“Lower taxes and less regulation have spurred confidence.“
“I’m a small business owner. My partners and I—when we think about investing—lower taxes means more money we can put into our business and more money we can hire with. We’re talking about corporate rates that can go from 35% to 15%. That's a very meaningful decline.”
Click image below to watch interview
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Two weeks before Thanksgiving, our Restaurants analyst Howard Penney added US Foods Holding Corp. (USFD) to his Best Ideas list as a long. Just a couple days before, Barron's wrote a feature story on Penney and some of his more vocal calls on high-profile stocks including Chipotle (CMG).
His outspoken and successful call on Chipotle was obviously a bearish one. But his latest call on USFD is bullish.
Penney recently wrote:
"As we quickly realized how great this company is, we couldn’t wait to do a Black Book in order to make the move. Fortunately or unfortunately, depending how you look at it, we were right and the stock is up over 13% since then, and we are just now announcing a Black Book presentation. The stock has received a number of upgrades and rightfully so, fortunately for us we see upside to the tune of ~30% from current levels."
His key points on US Foods include:
Pruning low margin distribution agreements and growing their private label sales have been two major initiatives to improve the profitability of the Company. Strategic national chain exits occurred from 2Q14 through 2Q16, while at the same time they have been growing the penetration of private brands which have expanded from 30% of sales in 2010 to 33% in 2016. These core initiatives coupled with further penetration of customers’ menu and technological enhancements to improve USFD operations as well as those of their customers are meaningful contributors to the growth in profitability.
One of USFD’s biggest advantages is their positioning within the restaurant industry, dedicating themselves heavily to the independent and regional operators versus large/lower margin national chains. In addition to the profitability difference, the independents are faring better from a sales growth perspective than national chains, making it a stronger customer base. USFD’s growth in the healthcare segment is also notable, with the recent signing of a deal with Brookdale Senior Living, they continue to expand in this channel.
Pre-IPO net debt/EBITDA was 5.3x, USFD used all of their $1.1 billion in IPO proceeds to lower their leverage, and have renegotiated many of their terms putting them in a much better financial position. As of the latest quarter they are down to a leverage multiple of 3.8x. Tuck in acquisitions are going to continue to be a major factor for both top line growth and profitability, of which they have done five in the last ten months with a combined run rate of $450-$500 million in net sales. In our opinion a major deal looms in the industry, that will create a more formidable #2.
Target shares are down more than 6% today after announcing updated sales guidance that disappointed investors. We think there's additional downside.
In an interview with the Wall Street Journal on Friday, Donald Trump said the U.S. dollar was “too strong," in part because China artificially holds down the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us,” he says. On the news, the U.S. dollar index is down more than -1% today.
However, like most things our Tweeter-in-Chief has been talking about lately, if you were brave enough to buy the dip in Boeing and Lockheed Martin, you've profited nicely from the short-term selloffs.
Here's a brief recap.
The $98 billion aircraft manufacturer's stock fell more than -1% intraday on December 6th (following Trump's tweet below)... but, from the lows, shares are up 4.7%.
The $75 billion defense contractor's stock fell -2% on December 12th (following Trump's tweet below). From the lows, shares are up +2.7%.
Shares of the subsector were down more than -3% on January 11th, after Trump offered up the statement below during his first press conference since the President-elect's Election Day victory:
"We have to get our drug industry coming back. Our drug industry has been disastrous. They're leaving left and right. They supply our drugs but they don't make them here, to a large extent. And the other thing we have to do is create new bidding procedures for the drug industry, because they're getting away with murder."
Shares of IBB have bounced back and are about flat from the January 11th lows.
#Exports #Economy #Trump
We think Trump is wrong to say the U.S. Dollar is "too strong." Contrary to Trump's statement, a stronger U.S. dollar is actually quite positive for the U.S. economy. Exports account for just 9% to 10% of U.S. GDP. Sure, a stronger dollar hurts exporters because companies are forced to sell their goods to foreigners whose currencies are relatively weaker against the dollar.
But, conversely, U.S. consumers can buy more goods with their stronger currency. Since consumption makes up roughly 70% of GDP, a strengthening dollar gives American consumers and the U.S. economy a boost, as imported goods are cheaper to consume.
The U.S. also exports capital goods. About 50% of American exports are heavy machinery and equipment. So essentially, we export production. This means that if U.S. consumers are flush with cash, foreign exporters will need to buy more machinery to meet American demand. This is a feedback loop that ultimately helps, not hurts, U.S. exporters.
We think the U.S. dollar reverberations today are overdone. In addition to recent Trump statement recoveries, the U.S. economy is growing once again. That should underpin further strength in the U.S. dollar.