MorningWord 11/30/12: $YUM May Have A Slight Guidance Credibility Problem

by Dan November 30, 2012 9:24 am • Commentary

MorningWord 11/30/12:  On a daily basis we do our best to look at the markets from both qualitative and quantitative standpoints and provide readers with non-consensus views, sometimes we even hit the trifecta and nail some witty headlines for our posts, like for a bearish trade on YUM back in early Aug, “YUM: Likely to Succumb to Weak China Nums“.  YUM has been a stock that we have just not “gotten” so to speak, as MCD, SBUX & CMG’s sales have decelerated at home and more importantly in big growth areas like China for the better part of 2012, it just hasn’t made sense that YUM has been able to avoid similar negative trends.  On 2 occasions since early August I have initiated bearish trades on YUM (put spreads with defined risk here and here) as I just couldn’t see how MCD first quarter of sales declines since 2004 in all 3 major regions (North America, Europe & Asia) and CMG fairly dramatic sales deceleration in the U.S. could not be extrapolated to YUM. Both trades were losers as the company as recently as Oct 10th reported Q3 results (my take in Oct here) that were better than expected and the stock gapped on massive volume to 4 month highs.  I gave up at that point, there was obviously something going on that was beyond my limited skill-set to comprehend the divergent performance.

Which brings me to last night’s press release from YUM in front of their Dec 6th analyst day, reiterating their 2012 EPS growth forecast of at least 13% and put forward guidance of at least 10% EPS growth in 2013.  Here is the hitch, consensus growth forecast has been ~14% for both 2012 and 2013.  What investors will be most concerned with is YUM’s Q4 China comp guidance of -4%, well below consensus and their previous guidance given in early Oct of plus 2.5%.

This is total crap in my opinion, these guys either lied outright 2 months ago when they gave Q4 guidance – a full month into Q4 – or they suck at forecasting sales in a region that accounts for 45% of their sales.  We’ve expected Chinese weakness for a while, because every other company, regardless of sector, has mentioned Chinese slowing over the past 6 months.  Lo and behold, YUM might actually be joining the world of actual facts and figures, instead of the fantasy world they seemed to have created in their own results.

There are already some who are saying that it’s simply a case of conservative guidance in the case of YUM.  But the stock has already more than tripled in the past 3.5 years.  At these levels, it only takes one or two missteps, and a 10% pullback becomes a 30% pullback.  At 22x, this stock is too rich for my blood, but the company has pulled the wool over the eyes of investors many times in the last year.  Maybe investors will finally wake up from YUM’s fantasy world.

 

 

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MorningWord 11/29/12:  The discussion about the potential outcomes of the “fiscal cliff” has of late left Wall Street and is now finding its way to Main Street.  This was fairly evident at President Obama’s speech yesterday at the White House on the topic as he was flanked by 30 “avg Americans” who fear the impending tax increases.  My sense would be that avg to lower end earners will make out ok in any compromise, but the President and the Dems are unlikely to waiver much as it relates to higher end earners.  I am not going to get into the politics of potential compromises, as I find it amazingly boring, but I will hit on one theme that we have been discussing on the site for some time – caution as it relates to high-end retail.

Tiffany’s weaker than expected results and lowered guidance just this morning highlight the challenges many retailers face in this environment with high input costs and weak demand.  Global demand ex-U.S. has been the major headwind for most of the year, and Tiffany’s singled out “softness” in China on its conference call this morning.  However, U.S. focused high-end retail is starting to show signs of fatigue as well.  Tiffany mentioned “weak consumer demand” overall for the 3rd quarter, including the U.S.

Putting all the overhyped fiscal cliff headlines aside, what matters is that high-end consumers will bear the brunt of the impact in the U.S.  Given that they’re not feeling too peachy in the rest of the world, luxury brands look like they’re in for a serious struggle in 2013 to get those consumers to reach into their pocketbooks.

For the balance of the month, politically posturing may bounce the SPX around, up 2% down 1%, it’s all just noise, our inclination is to focus on the micro, look for divergences and extrapolate themes.  We obviously think a cautious stance towards high end global retailers is in the cards for quarters to come in what appears to be a growth strained global economy, regardless of the outcome of the “fiscal cliff” discussions at home.

 

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MorningWord 11/28/12:  Yesterday we took a hard look at GMCR prior to their fiscal Q4 report, and our conclusion after completing the preview was:

Long premium options trades will not be easy to make money UNLESS you get an out-sized move. Just because the stock has moved 30% plus over the last 4 qtrs, does not exactly mean that the stock’s 20% implied move is cheap, the 4 qtrs prior to moving 34% on avg, the stock avg about 15%, which still puts the 8 qtr avg move above the implied move.

No matter what your inclination is from a directional standpoint, selling the Nov30th weekly expiration at the money options with IV above 200 are a SALE. Calendars make sense!

GMCR has been one of the most controversial stocks in the entire U.S. equity markets for more than a year now, while the stock has been a roller-coaster ride for shareholders, it has provided a ton of fodder for the financial press.  The story has a little something for everyone, corporate intrigue, accusations of accounting improprieties, dramatic 2 way price action, a high profile activist digging in on the short side, and now the hire of a high profile CEO from Coca Cola.  

After a lot of thought, I decided not to play, but my final thoughts were the following (as posted in “Quick Hits” yesterday afternoon):

Couple points to make here, with the stock near $35 in the pre-market, basically up in line with the implied move, this trade idea that I detailed would have been a home-run.  Am I coming back to it to pat myself on the back, not at all, I didn’t trade it, and last I checked my PnL doesn’t get points for all the great ideas that I almost traded.  I guess the main point is to highlight the thought process that goes into an event trade.  In this instance, given the sky high implied vol, long premium trades were near impossible to make money, and without solid conviction on direction, most trades that we looked at would have been losers with stock at $35.  So without a great feel for the fundamentals and the options being fairly challenged, sometimes we have to rely on gut when trading.  This example above was the perfect situation, high short interest, very controversial name where sentiment is all over the place, and then the last point about the new CEO surely having a look at the books prior to accepting the job.   In hindsight there was a chance that the agreement btwn the company and the new CEO would have been that the company lower expectations again so he is set up to beat dampened expectations after he took the helm in Dec, but the former scenario was far more likely in my opinion.

Which brings us to the point of trading just to trade.  We are certainly not gonna get every trade right, and we are not gonna get all of our what end up being all of our best trades on the sheets, we are kind of the camp that less can often be more when it comes to trading.  Trading is expensive sometimes, and their are unforeseen opportunity costs, but in hindsight, the risk/reward of the Dec/Jan 35 call spread for only .42 when the stock was about $29.23 should have been a trade that made it on our sheets given the massive vol differential and our gut feel.  I sincerely hope that readers benefited from our analysis and thought process about the direction and the trade that I would have done with a gun to my head, and that you guys made your own gut trades.

 

 

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MorningWord 11/27/12: RIMM shares have rallied nearly 100% since making new 8 year lows in late Sept.  For those who bought the stock near the lows as a “trade”, that’s one heck of a trade, but for anyone who bought the stock btwn late 2003 and late may of this year, currently still have losses.  Looking at the stock from a purely technical perspective, and backing out to it’s inception in the late 90s (below), RIMM shares have plenty of room overhead, with $20 likely to serve as very serious long term resistance at the intersection of the prior long term support line and the long term downtrend line that has been in place since the euphoric all time highs made in 2008. I am not suggesting the stock will go to $20 anytime soon, which would represent further gains of nearly 65%, but I certainly don’t think the stock is a “layup” short here either.  Charts like this offer great opportunity and great risk all at once and I would suggest that the easy money has likely been made off of the bottom.

RIMM 13 year chart from Bloomberg

 

Aside from the technicals, what is fascinating about the RIMM tragedy over the last 10 years is that this company was a very real pioneer in one of the biggest technology trends in the last 100 years, mobile telecommunications.  Their epic fall from innovator, with a near monopoly of their space in a little under 5 years, is breathtaking. But rarely in this business do you see a situation where a once giant can resurrect themselves. It just hasn’t been done, except for AAPL of course.  RIMM will not do this, They have been playing catch up for years and ironically the stocks undoing can be traced back to AAPL’s introduction of the iPhone back in 2007, RIMM’s reluctance to  acknowledge the potential for full-screen touchscreens, and ultimately their failed entrance into said category with the Blackberry bold in 2008.

I have heard many reasons for RIMM’s recent strength, the most prevalent being the impending launch of new phones on their new BB10 operating system.  These phones will be dead on arrival, so any excitement built into the stock at current levels will likely be unfounded.  I would suggest the recent rally has little to do with fundamentals, and a lot to do with very negative sentiment towards the stock among investors and Wall Street analysts.  For instance, short interest sits at about 23% of the float, at a time where the stock was widely hated by almost every analyst who covers the stock. As of yesterday’s close the stock had only 6 Buy ratings (3 of which have come in the last week), 28 Holds and 16 Sells, with an avg 12 month price target of $9.14, almost 24% lower than current levels.

So what to do with it here? If you own it here, there is definite potential for disappointment as we get closer to the BB10 phone launch in Q1, but the technical set up could lend itself to further short-squeezy action, I contend the stock in no man’s land, but if it moves higher into the teens, the sum of the parts valuation argument becomes far less compelling than when the stock was a hat size.  We are monitoring the story closely, while we weren’t willing to stick our necks out when the stock was apparently overdone on the downside as there was no foreseeable catalyst, RIMM could set up as a great short in front of BB10 launch if the stock continues this parabolic move, but of course we would do so with defined risk as a take-out could always happen.

 

 

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MorningWord 11/26/12:  I have to assume that I am not the only one, but all this talk of Grey Thursday Eve, Black Friday and Cyber Monday makes me a bit ill.  I get it, people want deals and maybe for some who already have 40 inch flat panel TVs, they choose to keep their sanity and pass on “door-busters”, but the truth is, who needs all the commotion when Amazon.com is at your fingertips 365 /24-7.  Amazon is truly the amazing equalizer to the bricks and mortar sales when you consider the avoidance of crowds, logistics of getting gifts to their locations, savings on gas and I am sure there are plenty of other reasons I am not listing.  

Now you have heard us say this before, and I’ll say it again, even despite AMZN’s 38% ytd gains, it is a truly great company for its customers, but the company’s course of sacrificing near-term profits for market share & unprofitable sales (see Kindle Fire) will ultimately cause a massive reset in its eye-popping valuation.  In our view, Amazon is the best not-for-profit company in the world.

Trying to get in front of this has been a costly endeavor for most investors/traders, and we will choose to make defined risk bearish bets when the stock looks and feels extended.  The stock is up 10% in just the last 5 trading days since bouncing off its 200 day moving avg, now banging up against some decent resistance at $240.  Looking at the 1 year chart below, it is evident the stock has traded in a fairly wide uptrend since the Dec 2011 lows, and while the recent move looks a tad steep, a test to the upper end of the channel could be in the cards in the weeks to come.

[caption id="attachment_19749" align="aligncenter" width="490" caption="AMZN 1 yr chart from Bloomberg"][/caption]

 

I would also add that while many consumers and investors fully expect AMZN to increase sales during Q4, analysts have modeled expected year over year Q4 sales growth at the slowest pace since 2008 (expectations are for Q4 sales to grow 28%, after 40% for 2009 and 2010, which were up from the 18% growth in Q4 2008).

As we head into the new year, AMZN price action will become of increasing interest for a trade as the company has disappointed investors over the past 2 years with earnings, margins and sales disappointments for the all important Q4, and the stock has reacted accordingly, with avg declines of about 7.5% following the prints.

For shareholders of AMZN, the next few weeks could be a volatile one as investors get bombarded with reports of winners and losers in the holiday selling seasons.  But also as we get deeper into the “fiscal cliff” compromise discussions, could a stock like AMZN become vulnerable to tax selling?  If I were long I would consider collaring the stock for little cost (as a % of the underlying) through Jan expiration (the company will report in Feb, but not listed yet).

For instance with the stock at ~$240, you could sell the Jan13 260 call at ~3.10 and buy the Jan13 230/200 Put Spread for ~5.00.  This structure would cost about $2, or a little less than 1% of the underlying stock price, but offer participation to the upside of about 7.5%, which brings you very close to the recent highs, but offer protection from 228 down to 200 btwn now and Jan13 expiration. If the stock is btwn 242 and 230, you lose the 2.00 in premium that you spent for the protective structure, and would suffer the losses of the stock btwn 240 and 228.   This sort of strategy is for relatively sophisticated investors, but worth considering for those with gains who actually don’t want to sell for tax reasons.

While I am cautious on the stock, and feel there will be a day of reckoning at some point, it has not been prudent to be outright short the stock.  For those who have been fortunate to ride the AMZN train, tactically protecting gains could make a ton of sense as we enter what will likely be a controversial period for the stock for a handful of reasons.