After all the optimistic talk about a Vegas recovery, MGM reported a weak Q4. However, all eyes are on Q1 which is off to a good start.
We have to admit that MGM’s Q4 was pretty disappointing on the Strip. MGM Macau produced a fantastic bottom line that even exceeded our Street high estimate. However, we thought we would’ve seen a progressively better performance on the Strip. Instead, RevPAR trends actually worsened a little from Q3. MGM missed our EBITDA projections at most of their Strip properties.
Alas, the stock market is a forward looking entity and investors have collectively decided to judge MGM on Q1 trends. That is why the stock was only down 3% yesterday. We’ve also been focused on Q1 and management commentary was very positive about January trends. 1Q RevPAR is going to be up at least 10% and January was up double digits. Management will also be meeting with investors this week and their ability to promote their stock should not be underestimated. Apparently, as we heard on the call last night, MGM as an inflation hedge may be part of that pitch.
Notable news items/price action from the past twenty-four hours.
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TODAY’S S&P 500 SET-UP - February 15, 2011
Equity futures are trading narrowly below fair value following another inconclusive performance on Monday as markets struggle for direction. As we look at today’s set up for the S&P 500, the range is 14 points or -1.07% downside to 1318 and zero upside to 1332.
MACRO DATA POINTS:
EARNINGS/WHAT TO WATCH:
The XLU broke TRADE - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Two-yr treasury yield is near highest in > 8 months before U.S. retail sales data expected to show recovery is gathering pace.
Yesterday, Reuters wrote a late day story on the SBUX/GMCR saga. The Reuters story completely goes against my theory. I’m sticking with my theory!
Reuters, citing a source close to the talks, said that “Starbucks Corp and Green Mountain Coffee Roasters are in partnership negotiations, a source close to the talks told Reuters on Monday, sending Green Mountain shares surging." The really odd line in the story was this one: “The person close to the partnership talks would not say if the pending announcement would involve Green Mountain." Are you kidding me?
Have SBUX and GMCR talked? I’m sure they have. As the company has told me “they are exploring all their options.” From where I sit, SBUX holds all the cards. The single serve segment is important to SBUX but it's not really that important. The U.S. coffee market is $34billion and the U.S. Grocery Coffee segment makes up $3.3 billion in sales. The single serve segment represents $1.2B of the the U.S. Grocery sales. It’s a big deal, but it means more to GMCR that it does to SBUX.
What is fascinating is that GMCR's market capitalization is 2x the entire U.S. Grocery coffee category and represent 50% of the entire US “specialty” coffee market. Whether or not GMCR and SBUX make a deal (I'd be very, very surprised), the valuation of the company almost approaches that of its entire addressable market.
Some additional thoughts:
Maybe as SBUX and Kraft exit their agreement, a plan can be formulated involving the Tassimo technology? After all, the Tassimo brewer is the preferred brewer of Hedgeye Risk Management! The Tassimo technology was first introduced in France in 2004 and is now available in several countries in Western Europe as well as the U.S. and Canada. The machines were developed by Kraft Foods, Inc. New versions are now being manufactured by Bosch.
The battle for single serve coffee is brewing. As I said before, the best analogy I can use to describe my prediction of what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players.
Casual Dining results have been fairly mixed so far this earnings season. Knapp Track data shows that 4Q saw a period of sequentially slowing monthly same store sales trends. From 3Q to 4Q also, comparable restaurant trends slowed by 30 basis points. By contrast, a simple average of casual dining comparable restaurant sales reported for 4Q thus far shows a marginal improvement from 3Q. It will be interesting to see if 4Q results reported from here follow more of a negative sequential direction from 3Q.
In October, during the 3Q10 earnings call, CEO Bert Vivian effectively threw in the towel on the target of $2 in EPS for 2010. The more likely scenario, according to Vivian, is EPS of $0.57, which would imply EPS for the year approximately “a nickel less” than the prior $2 guidance. The Street is expecting $0.57 cents and while some casual dining companies have surprised to the upside, I think there is some downside risk to forward guidance given the drastic changes in the commodity markets since the last quarter. See my note, “THEY SEE INFLATION”, from last night for more details. Below I offer a quick run through of forward-looking statements from the October earnings call:
“We believe that both concepts are well positioned for the fourth quarter and we have our fingers crossed that the holiday season will be a good one.”
“We've been paddling pretty hard since our less than stellar first quarter to achieve our annual earnings goal of $2. While $2 is still possible, I would not assign a high probability to that outcome. The more likely scenario is about a nickel less.”
“New unit development will be very modest at the Bistro. We would like to allocate more capital to that brand. However the development landscape has only provided about three to five opportunities for next year. At Pei Wei, we expect to open 25 to 30 new restaurants over the next two years, roughly 10 to 12 next year with the balance in 2012.”
“EPS growth should be around 10% as a result of slightly better restaurant margins, improved profitability at our global brands division and a smaller share count.”
“Right now, we have 200 domestic Bistros and we continue to play with a target number of about 250. And now again, we won't be exactly correct with that. It may be a little bit more, may be a little bit less.”
“Having Christmas on Saturday at the margin is probably not helpful to us. However, I will say that the last two weeks of the year in particular the last 10 days or so, every day is busy, almost regardless of when Christmas falls. So to a degree the calendar shift is negative, but I don't think it's that big of an impact.”
“As we look forward into next year, we do think there's going to be a little bit of cost pressure.”
“From then on, I think it's going to be a little bit of a battle for us. We do intend to take a little bit of price in the first part of next year to help offset increases where we think we'll see increases in labor as well as a slight increase in our cost of goods sold basket. As we push forward into some of the non-operating lines, we are anticipating as much as $0.10 of additional pressure related to our equity incentive comp program. So that's holding it back just a little bit in terms of where I would guide you today.”
“We thought about the back half of the year this year, we felt like we would see positive traffic and positive comps at the Bistro. We're early on in the fourth quarter, we remain positive. I think as we move into the holiday season, I think that strength will continue to grow.”
“The biggest wildcard unknown that we had last time we talked to you was on beef. We began to lock some of that into 2011 now. That's coming in a little bit higher than 2010. So obviously our overall commodity basket will probably be up slightly next year.” [see beef chart below]
“Our thoughts with respect to pricing, I'm estimating and guestimating that it's going to be similar to what we did this year, which means roughly 1% to 2% at both concepts.”
“We expect to see higher utilities that's been running a little bit higher for us, property taxes and so forth, which just brings it slightly lower than we saw in 2009.”
“We shifted the spend to October, primarily along the lines of Bert's thought that September is not necessarily the best month in the restaurant industry that we might get a greater impact by shifting the spend to October, which is traditionally a better month”
“So with that learning, we will craft our next LTO launch, which will happen sometime in the middle to the end of the first quarter next year.”
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