The Day Ahead: Friday Thought List

 | Jul 19, 2013 | 8:00 AM EDT
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A pedal-to-the-metal mindset is great to have. Sure, you may be absent a family party or 12, but there will be ample time for those at the tender age of 80 (sigh). But the pedal occasionally snaps back due to a faulty piece of equipment that will break your leg. It's a gruesome visual, but an appropriate one as this week has beaten the mighty me up.

Between running a business, trying to maintain a self-imposed grueling earnings season regiment and playing the lead role in financial media Twitter, I am personally at a breaking point, especially considering that damn Chipotle's (CMG) stock decided to pop a bit on its earnings results (Sell rating has been in place on my end for a few months).

Amidst this kerfuffle, here are six random, but connected, thoughts from me to you.

  1. Have a healthy obsession with investing in a global industrial? Then make sure the company has found a way to reduce its cost base in Europe (which has sucked again this quarter for basically ever company I have analyzed).  Example of a company doing this: Johnson Controls (JCI). Example of a company not really doing this: Whirlpool (WHR).
  2. Snap-On (SNA) is a no-joke company, an absolute favorite of mine to follow. The strongest part of AutoNation's (AN)  business in 2Q 2013 was parts and services, which is music to the ears of Snap-On (mechanics buy diagnostic tools). Just pray that the Fed doesn't taper by year end.
  3. Supervalu (SVU) and Safeway (SWY) are investing the little profit margins they do earn into lowering prices for consumers. Wal-Mart's (WMT) increased pace of price investments throughout the store is having a profoundly negative impact on grocers. But I still hate Wal-Mart as an investment.
  4. Generac (GNRC) is up 7% in July alone, I think a function of possible heat-related blackouts spurring advanced generator sales.
  5. Bullish on stocks? Best be rooting against any more reports that look like the Philly Fed.
  6. Bernanke is gone at year end and here was my tell. Gosh, so dangerous having this balance sheet mess handed off to Tim Geithner.

The Real Deal on eBay

I rated eBay (EBAY) favorably on April 8. The stock was higher from then until the latest earnings report, though all in all it has been a disappointing recommendation (has lagged the Nasdaq and most large-cap tech names during that period). My sense is that the pullback is not yet a buying opportunity and below are three fundamental reasons why:

  1. Transaction margin -190 bps in marketplaces due to increased large merchant mix. That is something likely to continue, given eBay's increasing offsite penetration.
  2. Operating margin in PayPal -280 bps due to a lower transaction margin and investments. An issue has been shared in that new active users are younger mobile users that spend less per transaction.
  3. Increased promotions in marketplace overseas unlikely to reverse course in the near term. EBay is using these promotions to drive their sales in Europe/Korea.

Chipotle Red Flags

There were two red flags on Chipotle's earnings call. First, counter to the Street expectations, the company is not raising prices in the final two quarters of this year (despite cost creep as a percentage of total revenue). Second, Chipotle is taking the lead in its fast casual dining group by seeking to remove GMOs from its food. As a result, that will be a major cost (have to redo ingredients, which may hurt product taste) that is not backed up against higher prices.

I would not chase the stock. Early next week I have calls scheduled with both Chipotle and eBay. Send me an email today if you want to be on my company's list for any flash updates off those calls.



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