Hedgeye Best Ideas Conference Call

Transcription

1 Hedgeye Best Ideas Conference Call Friday, November 11, 2011 THIS PRESENTATION WAS PREPARED BY: THE HEDGEYE RISK MANAGEMENT RESEARCH TEAM

2 Disclaimer Hedgeye Risk Management is not a broker dealer and does not make investment recommendations. This presentation does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. For more information, including Terms of Use of our information, please go to Hedgeye Risk Management LLC All rights reserved. 2

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20 Long Marriott (MAR) Attractive/defensive fee-based business model Low capital intensity/high free cash flow Aggressive stock buyback Strong unit growth given solid pipeline, particularly in emerging markets 2012 RevPAR growth even in recessionary conditions VAC spinoff: long-term value creating transaction Compelling valuation for an almost pure fee business: <10x EV/EBITDA

21 Fee Based Business Model

22 Long Bally (BYI) Significant EPS growth beginning in CY2012 Visibility, growth, and multiple expansion of systems business a differentiating factor New markets creating a 3-5 year worldwide bull market for slots A replacement pickup not necessary but would be a big bonus Gains in ship and wallet share Improving margins and FCF growth

23 Systems Visibility Improving

24 BYI Gaining Share

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26 ZMH Position: SHORT Duration: TREND, TAIL

27 ZMH: VALUE TRAP

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30 - THE DOMESTIC KNEE MARKET IS HIGHLY PENETRATED: -PRICING PRESSURE WILL BE MORE THAN TRANSIENT - SECULAR HOSPITAL MARGIN PRESSURE WILL BE PASSED THROUGH THE SUPPLY LINE

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34 2012 ESTIMATES ARE TOO HIGH We re making aggressive assumptions to reach 3% revenue growth in Consensus ranges from 2% to 7% with a mean of 3.3%. OPERATING MARGIN DOLLARS WILL GO INTO DECLINE By geography, Americas carries the highest operating margin (50%+), with Knees the largest revenue contributor (43%) in the Americas. WE EXPECT TO SEE ACCELLERTING DECLINES IN KNEE REVENUE FOR THE FORESEEABLE FUTURE Delta between Consensus and Hedgeye estimates continue to widen 2013 and Consensus continues to assume a recovery. ACQUISITION RISK With $977M cash, $1.5B debt, 4.2X Debt/EBITDA, there is balance sheet leverage available. But with 26.8% operating margins the risk for a dilutive deal is high.

35 HSIC Position: LONG Duration: TRADE, TREND

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37 BEAR BULLED UP

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39 ..with Minimal Exposure to Gov t Payers

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42 CONSENSUS IS NOW TOO BEARISH WE EXPECT HSIC TO BEAT Q4 Sequential acceleration in North American Dental Consumables. DENTAL DESERVES A HIGHER MULTIPLE TO THE REST OF HEALTHCARE Super Committee and long term pressure on Federal Budgets will keep a consistent negative focus on Medicare and Medicaid exposure. The Dental Industry sources revenues from Private Insurance and Out of Pocket with only minimal exposure to Medicaid and no Medicare.

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52 Source: Company data. 52

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60 600 Good Ol Economics % 400 Retail EBIT Margin Sales/Inventory Spread 10% 200 5% 0 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 0% % %

61 Watch Your Numerator 10% 8% Apparel Retail Sales Apparel Retail Inventories 6% 4% 2% 0% -2% -4% -6% Inventories up 15% 3Q to date. That rate is not slowing. This industry is fragmented, cocky, and it does not do Macro. -8% -10% -12%

62 Hanesbrands (HBI) Channel restocking + legitimate market share gain + higher prices w/$2 cotton took sales growth near 10%. As it slowed, HBI did a deal. Then another deal. Then lost CFO (who wanted to delever). The company has far too much debt to build an empire. Mathematically, sales will decelerate, and cotton price increases will catch up and 7-8x EBITDA won t make sense. Below 4x and there s no equity value. 62

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64 64 LIZ has transformed from a highly levered, gradually shrinking, poorly positioned portfolio with massive management credibility issues to a fast growing, appropriately-levered focused portfolio with extremely high asset turns and far greater predictability. Liz Claiborne (LIZ) The biggest overhang (leverage) has been eliminated with Net Debt-to-EBITDA reduced to <3x from 7x after $471mm in asset sales over the last 3-months. Kate Spade (~22% of total sales) accounts for over 50% of EBIT, is growing over 35%+, and is worth $10+ per share There aren t many high growth stories with strong visibility trading at 6.9x F12 and 4.8x F13 EBITDA

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68 LONG LONG SHORT 68

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73 A safety play during economically uncertain times. Despite economic headwinds in Europe and APMEA, October comps in those geographies were running mid-single digit one- and two-year average trends. The U.S. business is also growing impressively and taking share. Going forward, the remodel program that is being carried out currently will boost sales. Other competitors struggling to get their own remodel programs started. Our visit to China earlier this year highlighted the magnitude of the opportunity facing the company in emerging markets. The company is refining its process for growth in China and will accelerate unit growth in coming years. Given the uncertain macro environment and the levels the stock is trading at, caution is merited. However, we believe that McDonald s current performance in such uncertain times underlines its past record of delivering strong results despite economic headwinds. 73

74 Given the continual disappointment that Brinker represented for investors for in the past, the skeptical tone of the sell-side community on the recent earnings call was not surprising. The company recently put up a quarter that beat on the top line but missed in terms of comps. We have confidence that the top line is heading in the right direction. Tellingly, margins improved despite average check declining; the company is executing its Plan to Win. The company is being proactive with its pricing. The $6.99 price-point at Chili s has changed the industry, causing many competitors to follow suit. Investment in the asset base will enable the company to expand its platform of offerings while its primary competitor continues to lag in this regard. Over time, we believe Chili s is a market-share gainer. 74

75 Dunkin Brands plan to expand its business west of the Mississippi is simply not viable as it stands today. It s unlikely that the company will be able to deliver the 450 annual store openings required to meet 20-year target of doubling the store base to 15k location. The hub-and-spoke model of Dunkin Donuts in existing markets is extremely expensive to replicate and the question of who pays? will loom over the logistics of the company s growth strategy. Serving frozen donuts is not how the business was built on the east coast and we do not see that as being effective in the west coast where, if anything, superior performance is needed to win over sticky customers from other concepts. We believe that the significance of K-Cups is overemphasized by some. Dunkin Donuts is a franchise business the growth of its store base is a far more significant driver of EPS. 75

76 This presentation was prepared by the Hedgeye Risk Management Research Team For more information and a complete listing of research please see: or sales@hedgeye.com 76