This is part of our SALT 2016 Conference coverage stay tuned for more coming!
SALT 2016 Conference – Stock Pitch Panel: Richard Chilton, John Lykouretzos (Hoplite), John Burbank, Jim Chanos
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Chilton: Sherwin Williams (SHW)
· Paint is a fundamentally good business. There’s 134 million homes in the US. The TAM for newbuilders and remodels etc is highest of any dollar amount in GDP.
· “Every night I know when I go to bed… those 134m homes, their paint is going to peel.”
· Tremendous FCF generation and share count reduction, also consistent 8% dividend growth.
· Transformational deal in Valspar acquisition about a month and a half ago. Valspar = leaders in international global coatings. This deal has been talked about for 10 years ever since they lost in a transaction to them. SHW has kept leverage low for this exact reason – to acquire Valspar. Huge margin opportunity on both sides (paints and coatings). Hugely accretive because there was no share issuance.
· Secular tailwinds: the average house in the US is 41 years old. Consumer in good shape but don’t need strenuous assumptions for stock to work. Consumer debt to GDP is down to low 70’s. Household formations are growing. Don’t juxtapose this with the Macy’s announcement yesterday. Consumer spending is in good shape, just in different places. Also Amazon-proof: you can’t buy paint online. It’s outlawed for various reasons and also it’s heavy.
· We think stock is worth ~$650. 5 year compounder at 18%.
Lykouretzos: Short airlines and particularly AAL.
· “It’s not different this time.”
· Margins are going higher so bulls are getting sucked into thinking that consolidation has led to structural margin change. This is NOT an oligopoly. Often face prisoners dilemma. Labor will continue to extract economic rents away from shareholders. Trade also is a put option on rising oil.
· AAL just gave wage increases. Profit margins ex-fuel already peaked. Out of all the airlines, AAL has structurally highest operating costs. More employees per plane. Most exposed to rising oil costs but management is philosophically opposed to hedging. Weakest FCF generation and highest leverage versus comps. We don’t believe they can raise price and bulls are in for a rude awakening.
Burbank: Long Tencent, short FXI.
· I can’t recommend most longs here. Political risk, China risk, Trump risk, and now Hillary risk. I also can’t recommend outright shorts given Fed easing. We were stunned to see China choosing stimulus instead of reform and were also surprised by the Fed’s dovishness.
· I like long Tencent and short FXI. Hedges out ‘Old China’ country-specific risk. Works regardless of what China or Fed does.
· Tencent belongs in FANG but has underperformed. Dramatic separation. Not yet at new highs.
· Valuation not as demanding and has $24 revenue/MAU vs. FB at $16.
· Has 10% of market cap in listed securities.
· Analysts don’t get the upside from monetizing mobile ads. Our numbers for Tencent earnings are 30% ahead of the street.
· Tencent owns 6 of 10 top smartphone apps in China vs. FB at 3 of 10.
· 95% of FB revs are advertising. For Tencent it’s 17%. Gaming and consumer is 78%. That 17% can grow. Free call option on payments space.
· We’re in the early innings on China consumption growth – China’s consumption per capita is where the US was in 1968.
· FXI short: ‘Old Economy’ suffers more in currency devaluation – financials are 52% of FXI, industrials are 20%.
· Crowdedness of trade – we measure FB has a .75 crowdedness factor on HF VIP lists – Tencent is not going to be a forced selling candidate for HF deleverage.
Chanos: Short LNG.
· The three rules of Vegas:
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