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WEN - SUM OF THE PARTS

I love this quote from Nelson Peltz, Chairman of Wendy’s/Arby’s Group, in the company’s press release today, “We believe the way to maximize shareholder value is to focus all of our management and financial resources on continuing to build the Wendy's® brand.” 

 

Although I would tend to agree with this statement, the first thing I thought of was the company’s initial rational for the transaction…. I thought putting the two brands under one roof was the best way to maximize shareholder value?  Just over two years ago when the company announced the completion of its merger, Roland Smith, President and Chief Executive Officer of Wendy's/Arby's Group said, “As one company, we are well-positioned to deliver long-term value to our stockholders through enhanced operational efficiencies, improved product offerings, shared services and strong human capital.”

 

So what has changed over the last two years?  Wendy’s business has improved with restaurant level margins moving higher YOY almost every quarter since the merger (3Q10 margins were impacted by higher commodity costs) while Arby’s trends have continued to decelerate with margins down every quarter.

 

On May 19, 2010, we published a note titled, “WEN - Undervalued Yes, Where is the Opportunity?” that discussed WEN’s stock and provided a sum-of-the-parts analysis that suggested that the company’s stock was trading below its intrinsic value.  Specifically, we highlighted the fact that the Wendy’s brand alone accounted for more than 100% of the value of the company, which implied not only that investors were seemingly getting Arby’s for free but also that the significant erosion of the Arby’s brand was overshadowing Wendy’s value as a standalone concept.  Our sum of the parts analysis (shown below) shows that the Wendy’s brand continues to be undervalued. 

 

Given Trian Partners’ past success in creating value from mispriced securities, WEN management must recognize that they can unlock value by spinning off Arby’s.  And, it is likely not a coincidence that management is putting Arby’s up for sale after 4Q10 company same-store sales trends improved to +3.1% from -9.5% in 3Q10, implying a 325 bp acceleration in two-year average trends and the first quarter of positive comp growth in at least 15 quarters.

 

WEN - SUM OF THE PARTS  - wen sotp

 

Howard Penney

Managing Director

 

 


INITIAL JOBLESS CLAIMS DROP 41K

The headline initial claims number fell 41k WoW to 404k (37k after a 4k downward revision to last week’s data).  Rolling claims fell 4.5k to 411.5k. On a non-seasonally-adjusted basis, reported claims fell 212.5k WoW.  As the third chart below shows, claims usually fall sequentially in this week of the year.

 

We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.

 

INITIAL JOBLESS CLAIMS DROP 41K - 1

 

INITIAL JOBLESS CLAIMS DROP 41K - 2

 

INITIAL JOBLESS CLAIMS DROP 41K - 3

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL JOBLESS CLAIMS DROP 41K - 4

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: CHANGHI DEC RESULTS; RESORTS WORLD; VISITATION; CHINESE LENDING

The Macau Metro Monitor, January 20, 2011


DECEMBER PASSENGER DATA Changhi Airport Group

The number of passengers arriving into Singapore's Changhi airport rose 6.0% to 4,063,874 in December. Even though it is a new monthly record, it is a sequential slowdown from November's 7.7% YoY growth in number of passengers.

 

RESORTS WORLD SET TO BUY SINGAPORE TECH BUILDING Business Times 

Singapore Technologies is said to be close to selling its office block in the Tanjong Pagar area for nearly $150 million to Resorts World at Sentosa Pte Ltd--nearly $1,500 per square foot on the current net lettable area (NLA) of 98,906 sq ft.  Tanjong Pagar is slated to be transformed into a new bustling waterfront district after the container terminals in the vicinity eventually move out.

 

MORE VISITORS, MORE MONEY, MORE WISHING Intelligence Macau

Tourism chief Joao Manuel Costa Antunes, Director of the Macau Government Tourist Office, says his conservative forecast for Macau visitation is 10% growth.  IM believes the 10% target is not conservative but more realistic.

For visitation to reach double-digit growth rates, IM says Lot 5&6 needs to get back on track and a short timeline is needed for Wynn, SJM and MGM Cotai projects.  They think it's wishful thinking.

 

CHINESE BANKS LENT OUT RMB 1 TRILLION 21st Century Herald

According to sources, Chinese banks lent out more than RMB 1 trillion by Jan. 19.  The report comes even as Chinese Premier Wen Jiabao said yesterday that his government will work to avoid "abnormal" loan growth during the current quarter.  Chinese banks tend to front-load their lending during the year to earn more interest income, so January and Q1 are usually the peak lending periods.  In January 2010, lending stood at RMB 1.39 trillion, by far the highest total of any month during the year.  In addition, China Development Bank had stopped lending for the rest of the month, having reached its quota.


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INITIAL JOBLESS CLAIMS DROP 41K

The headline initial claims number fell 41k WoW to 404k (37k after a 4k downward revision to last week’s data).  Rolling claims fell 4.5k to 411.5k. On a non-seasonally-adjusted basis, reported claims fell 212.5k WoW.  As the third chart below shows, claims usually fall sequentially in this week of the year.

 

We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.

 

INITIAL JOBLESS CLAIMS DROP 41K - rolling

 

INITIAL JOBLESS CLAIMS DROP 41K - raw

 

INITIAL JOBLESS CLAIMS DROP 41K - claims NSA

 

Yield Curve

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 38 bps wider than 4Q.  The current level of 277 bps is flat versus last week.

 

INITIAL JOBLESS CLAIMS DROP 41K - spreads

 

INITIAL JOBLESS CLAIMS DROP 41K - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS DROP 41K - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: MCD, WEN, EAT, CHUX, PFCB, BJRI, RT, SONC, COSI

Some interesting news items and price action over the last 24 hours.

  • MCD will introduce a fourth Angus burger flavor on February 1st MCD: the Chipotle Angus Third Pounder.  The newest member of the Angus Third Pounder line will not only come in sandwich form, but also in the not-as-good Snack Wrap form (but only for a limited time). 

Hedgeye Thought: MCD need to be more focused on burgers.  A few years from now, after month over month of flat same store sales, someone in Oak Brook will come up with the idea of simplifying the McDonald's menu to make the operation more efficient and faster. This person will be hailed as a “genius and a visionary”

  • WEN management today announced that it is exploring strategic alternatives for Arby’s restaurant group.  Nelson Peltz, Chairman of Wendy’s/Arby’s Group, said, “We believe the way to maximize shareholder value is to focus all of our management and financial resources on continuing to build the Wendy’s brand.”

Hedgeye thought - But I thought putting the two brands under one roof was the best way to maximize shareholder value?

  • Casual dining (EAT, CHUX, PFCB BJRI and RT) down on accelerating volume.

Hedgeye thought - December and January sales have slowed and the weather continues to have an impact in January.  The biggest losers are the chains with a heavy concentration in the southeast. 

  • SONC declined on accelerating volume. CEO Hudson Clifford acquired common stock earlier this month.
  • COSI underperformed yesterday on accelerating volume.  I remain positive on this stock as management continues their shrink-to-grow strategy.

TALES OF THE TAPE: MCD, WEN, EAT, CHUX, PFCB, BJRI, RT, SONC, COSI - stocks 120

 

Howard Penney

Managing Director


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