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Safeway (SWY) Q3 Results Stable – Sales Continue to Improve

October 13, 2011
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safewaySafeway (SWY) results continued to strengthen modestly in the recent quarter. While store traffic trends remained challenged the core identical store sale result improved from +0.5% in Q2 to +1.5% in Q3. The CEO, Steven Burd, highlighted that this metric has improved for 6 quarters in a row. Gross Margin was flat on the quarter and there was very modest expansion of the operating margins based on solid expense control. Expenses were tightly managed in the areas of shrink (less spoilage and stolen goods), labor costs, and depreciation. Interest expense was down year-over-year as the borrowing rates declined 40 bps and the debt outstanding was reduced from $5.3B to $5.0B. Even with a higher tax rate (34%) Safeway was able to grow earnings per share by 15%.

Safeway shares have drifted to the high-end of the recent range and opened up 6% this morning. The shares gave up the gains during the conference call and traded off 2%. Quite an intra-day turnaround but the fundamentals appear pretty sound and the volatility today looks like some profit taking, not an inflection point in any of the fundamentals. Steven Burd mentioned that the promotional environment is pretty stable which is a positive for the industry which includes Wal-Mart, Kroger, and the dollar stores. An interesting note from the q&a session, Burd said that through his talks with the consumer packaged goods CEOs there really isn’t much if any growth in the US and Canada and almost all of the growth is coming from emerging markets. The consumer products company which is most geared towards emerging markets is Colgate (CL) and the US food company which is most geared towards emerging markets is Heinz (HNZ).

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Pepsi (PEP) – A Constructive Quarter with Snacks and Emerging Markets Drving Growth

October 12, 2011
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pepsiPepsi (PEP) is one of the first companies to report Q3 earnings. While the carbonated beverage business in North American is essentially a flat business (volumes grew 1% ex-acquisitions) the rest of Pepsi’s business showed some resiliency.  The non-US business, particularly in emerging markets is doing exceptionally well and the snack business (Frito-Lay) is also leading growth from both higher volumes and pricing power. Some growth rates which were discussed on the conference call for the international snack business:

EM Snack business volume growth:

  • China: +31%
  • India: +26%
  • Saudi Arabia: +24%
  • Egypt: +15%
  • Turkey: +22%
  • Russia: over 35%

EM beverage business is growing volumes between high single digit and double digits, and Gatorade volumes grew 9% around the world.

While Alcoa was disappointing, the materials sector is one of the worst positioned for the near term dynamics of strong dollar, lower commodity pricing, and slowing growth.

Pepsi had a very constructive call and the near-term technicals for the stock now look good. There are many stocks similarly positioned as we head into Q3 earnings.

 

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Slovakia is NOT going to take down the Eurozone

October 11, 2011
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st paulie girlThe talk going around of a doomsday scenario where Slovakia takes down the Eurozone by failing to approve an increase to the EFSF is ridiculous. Perhaps there are many valid reasons to be bearish but this isn’t one of them. The Slovakian government may get over-hauled through this process but in the end, there will be a vote to go along with the rest of the 16 EU states that have voted to expand the EFSF.

For perspective, Slovakia has about 5.5M people. Slovakia has been talking tough because they only comprise about 0.7% of the EU-17 GDP yet are contributing 1.0% of the capital to the EFSF. This gives them a say but it isn’t reasonable to expect a Eurozone crisis because of any votes which take place in Slovakia for political gains.

In a worst case scenario I could see two options:

One: The rest of the EU-17 fund Slovakia’s 1% and they simply don’t contribute to a new restructured EFSF. Of course there would be a blackballing consequence and Slovakia’s economy would surely suffer.

Two: This derails the EFSF and leads to expanded powers at the ECB. The ECB doesn’t want a greater direct role but would take one to avoid a crisis.

I don’t think either of the above are necessary because ultimately whether on the first vote or the second vote Slovakia will come around and support an expanded EFSF. For now there are some political semantics going on.

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Zuoan Fashion (ZA) – Shares Jump 25%

October 10, 2011
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I keep an eye on a lot of the Chinese ADRs in order to gauge market sentiment. The sector has been hammered (perhaps I need a stronger tool for my description) based on dual fears of corporate governance issues and a China hard landing.

While not invested in the space, I’ve pondered that the stocks can’t all be frauds. Listing via reverse merger transactions is certainly a major red flag but recently even the companies that went through actual IPOs and have real auditors have been demolished.

Zuoan Fashion (ZA) shares IPO’d at $7 last year and subsequently traded down to the $2s. The company operates high ROIC apparel concessions in Chinese department stores. Same store sales have been healthy and I take note today that the shares are up 25% today.

Last week, I highlighted budget hotel operator Home Inns (HMIN) when the shares sold off to $24. With the market rally they are trading at $28.50 today (+19% in seven trading days)

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Employment Report Observations

October 7, 2011
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  • Unemployment rate stable at 9.1%
  • Solid private sector job creation: 137k jobs
  • Government sector contracting: 34k net job losses
  • Temp workers, which are forward looking: +48k
  • Household Survey job creations: +398k (though this includes part time)
  • Growth in average hourly earnings: +1.9%
  • Employment-Population ratio: improved by one tenth to 58.3
  • Hours worked improved by one tenth to: 34.3 hours per week

No evidence we are in a recession

 

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Russell (RTY) Small Cap Index up 12% in 3 days

October 6, 2011
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This is a potential sign for a change in sentiment. If investors start to react to the real economic data again, which has been much better than what has been feared, small caps stand to benefit the most from valuation re-rating as many less liquid stocks have been demolished as of three days ago. Short squeezes are more likely in this area as well – the ax swings both ways with less liquidity.

The next segment to focus on is EM which has also been crushed. Both EM and small cap rallying would be strong confirmation of the rally. Watch the H-Shares overnight.

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Costco Raising Membership Fees – Business Results Strong

October 5, 2011
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costcoCostco just reported a strong 8% comp sales result excluding the FX impact and excluding gasoline inflation. On their quarterly conference call they are detailing the first membership fee increase in 5-years. Regular Gold Star memberships will go up by $5 to $55 effective November 1st. Gross margins at Costco were down slightly but were flat when you look at core merchandising gross margins ex gasoline.

Costco (COST) stock price is down 2% but with sales this strong and growth around the world the sell-off may be short lived. Costco is doing an incredible job opening highly productive units in Australia, Taiwan and Japan as the warehouse retail concept resonates around the world.

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BUY PANIC! – The Coveted Inside Reversal Day Just Happened

October 4, 2011
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DOW up 152
S&P up 25 (2.2%)
Russell up 6.5%
XRT up 5.4%
Berkshire up 4.3%

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Macau Gambling Revenues Grow 39%

October 4, 2011
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china modelThe Macau gaming sector has been demolished as fears of credit tightening and distress amongst the junket operators mounts. Macau’s Gaming Inspection and Coordination Bureau just released that revenues for the month of September grew at a 39% rate. This is another data point which demonstrates that China Hard Landing fears are just that, fears. Contrast the strong growth to the Macau geared gaming stocks which have seen rapid declines as investors lost confidence in the space. Here are number of leaders and what the stock prices have sold off since September 1st. This may be an opportunity for investors willing to make a wager.

Wynn Resorts (WYNN) down 24%
Wynn Macau (1128.HK) down 35%
Las Vegas Sands (LVS) down 18%
Melco (200.HK) down 49%
Shun Tak Holdings (242.HK) down 40%
Galaxy Entertainment (27.HK) down 53%

*note that Shun Tak is the Macau ferry operator and also involved in Macau real estate

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China Xiniya Fashions ADR – Trading Sub Cash

October 3, 2011
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The route in all things related China has created a number of anomalous investment situations. Hong Kong listed stocks have been pulverized over China hard landing fears but any China stock that has been US listed and subject to less corporate governance scrutiny has been annihilated. There are many stocks in this space where to go down from here; the stocks must be a fraud. That isn’t to say that there are not many other Chinese ADR frauds. I would speculate that there are for companies that have not gone through the IPO process. For stocks that have IPO’d and are not reverse mergers it may be far-fetched to believe that all the stocks are frauds.
Here is just one example among many. China Xinya Fashion is a small cap Chinese ADR. The stock has a USD market capitalization of $85M. The cash on the balance sheet is $121M. The company is free cash flow positive the past five years and generating cash. There is no debt on the balance sheet. My conclusion is that there must be fraud going on for this stock to trader lower from here. Interesting situations that the market crisis has created.

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