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TALES OF THE TAPE: DPZ, WEN, PZZA, MCD, COSI

Notable news items/price action over the last twenty-four hours.

  • DPZ reported EPS ex-items of $0.40 cents versus the street at $0.40.   Domestic, company-operated comparable restaurant sales came in at 5.4%, implying a sequential slowdown in two-year average quarterly trends of 175 basis points.
  • WEN’s for-sale concept, Arby’s, has introduced an Angus beef sandwich, the first in what the chain expects to be in a line of premium offerings.  I maintain my positive outlook on WEN, and view the sale of Arby’s as a positive move for the company.
  • PZZA announced that David Flanery is retiring as CEO and Lance Tucker will take over following a transitional period.  The stock traded up 60 basis points on strong volume yesterday.
  • An article on CNNmoney.com published yesterday discussed the increase in weatlhy consumers frequenting low-cost, fast food restaurants.
  • An article on the New York Times’ online “opinionator” blog shed some light on MCD’s oatmeal and the ingredients therein.  According to the article, “Incredibly, the McDonald’s product contains more sugar than a Snickers bar and only 10 fewer calories than a McDonald’s cheeseburger or Egg McMuffin.”
  • COSI outperformed the space yesterday, gaining 2.1% on the day.  I believe this stock price will gain further in the coming months.
  • In general, yesterday, restaurant stocks traded very thinly with volume down across the board.

TALES OF THE TAPE: DPZ, WEN, PZZA, MCD, COSI - stocks 31

 

Howard Penney

Managing Director


THE M3: LVS SUBPOENA; AMAX; GGR; S'PORE CASINO LEVY; CHINA PROPERTY PRICES

The Macau Metro Monitor, March 1, 2011

 

LVS FCPA SUBPOENA LVS 10-K

On 2/9/2011, LVS received a subpoena from the SEC "requesting that the Company produce documents relating to its compliance with the FCPA (Foreign Corrupt Practices Act). The Company has also been advised by the Department of Justice that it is conducting a similar investigation.  It is the Company’s belief that the subpoena emanated from allegations contained in the lawsuit filed by Steven C. Jacobs described above." 

 

The FCPA "generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business."  LVS said any FCPA violation would have a material adverse effect on their financial condition.


AMAX TO REVAMP CASINO TARGETING VIP BUSINESS Macau Daily News

Greek Mythology Casino in Taipa may complete a revamp by end of the year and will prioritize the development of VIP business to drive high‐end players.  The company expects monthly turnover will grow to MOP70 billion from the current
MOP15 billion.


MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DICJ

February GGR came in at 19.28BN HKD (19.863BN MOP, 2.48BN USD).  This represents 47.7% YoY growth.

 

CALL FOR TRIPLING CASINO LEVY Strait Times, TodayOnline

A Singapore Parliament member, Denise Phua, argued that over-reliance on gaming revenue would hurt Singapore over time.  She suggested that the casino entry levy (S$100) be tripled, the S$2,000 annual levy be abolished, and that a permanent a cap of 2 be placed on the on IRs.

 

CHINA FEBRUARY RESIDENTIAL PROPERTY PRICES UP 0.48% VS JANUARY WSJ

According to the China Real Estate Index System, residential property prices in 100 major Chinese cities rose 0.48% MoM in February, slowing from January's 0.95% MoM growth data provider.


SINGAPORE PROPERTY PRICES CONTINUE TO FIRM DESPITE COOLING MEASURES Channel News Asia

Flash estimates compiled by the National University of Singapore Institute of Real Estate Studies show the overall Singapore Residential Price Index rising by 2.6% MoM.  This is more than double the 1% MoM increase in December.


Mr. Money Man

This note was originally published at 8am on February 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If history is any guide, this scenario will develop not gradually but abruptly.”

-Barry Eichengreen, (“Exorbitant Privilege” page 165)

 

Evidently a lot of investors didn’t prepare their portfolios for The Inflation. Some reconciled this mother of all inflation shocks in food prices as “supply and demand” imbalances. Some said everything was going to be fine because The Ber-nank said so. Some even said $4-5 at the pump is fine.

 

We’ve said that as Global inflation Accelerates, Global Growth Decelerates. This might be a little easier to see when you have a $100 handle on the price of oil per barrel. Inflation is both a policy and a consumption tax. Global inflation is also priced in US Dollars.

 

Sadly, with stock markets around the world getting rocked this week, the US Dollar continues to be debauched. There was a time when America’s independent price stabilizer (Paul Volcker) treated the US Dollar with respect. Today, our Almighty Central Planners are willing to watch the Buck Burn.

 

The math doesn’t lie here folks; professional US politicians do. For the week-to-date, here’s your US Dollar/Commodity Inflation score:

  1. US Dollar Index DOWN -0.33% for the week-to-date (down for 7 out of the last 9 weeks)
  2. CRB Commodities Index UP +1.7% to 347 (making a series of fresh weekly closing highs all the while)

Sure, there’s a nut-job out there in Libya, but there’s also a very blunt instrument that can take his grandstanding on “fighting to the last drop of blood” away – a STRONG US DOLLAR policy.

 

Most American stock market fans definitely don’t want the short-term tough love associated with that. If anything, the perma-bulls are already cheering The Ber-nank on to implement Quantitative Guessing III (QG3) as a weapon against Gaddafi’s self-destruction.

 

The reality is that if The Ber-nank and Timmy Geithner woke up this morning and unilaterally raised interest rates and took a whack out of this Disaster Deficit, the US Dollar would strengthen and the price of oil would drop in a straight line.

 

This, of course, isn’t going to happen. Instead we are fostering a finger pointing and unaccountable political leadership class that continues to frustrate Americans to the core.

 

While Timmy Geithner was self-aggrandizing himself yesterday with his banking cronies from Dollar Destruction Inc., someone asked him what he thought about the price of oil’s impact on the US economy – and I couldn’t make this up if I tried, but he said that the economy that he helped put into crisis (before he helped saved us all from it) “can handle it.”

 

The Twitter-sphere lit up like a Christmas tree after Timmy said that – and The Rest of The World erupted in laughter. He must have been joking, but Bloomberg reporter Rich Miller didn’t seem to think so - and I couldn’t make this one up if I tried either – as Miller recapped the Geithner Groupthink session yesterday with this morning’s Bloomberg headline:

 

“GEITHNER BUTT OF JOKES NO MORE AS OBAMA’S MONEY MAN NOW ON TOP”

 

On top of what? The Disaster Deficit, The Burning Buck, or the resume pile to go join the Pandit Bandit at Citigroup? The manic media pandering to the political winds of Washington, DC access is both frightening and sad. Arianna Huffington, nice sale!

 

Don’t worry, I can answer the Wall Street question on, “how do you make money on this”? I laid this out in Friday morning’s Early Look note titled “Hawkish Winds” and my Global Macro positioning in being bullish on The Inflation remains the same:

  1. LONG - Dollar denominated food and energy Inflation
  2. LONG - Currencies of countries with hawkish central banks
  3. LONG - Financials in socialized countries that have made banks too big to fail
  4. SHORT - Sovereign Bonds of countries with deficit and currency devaluation central planners
  5. SHORT - Currencies of countries with dovish central banks
  6. SHORT - Emerging Markets

As for managing around the implied mean-reversion risks associated with the institutional investment community in America chasing the “flows” rather than the Global Macro fundamentals, my strategy on US Equities is this – trade them like the Price Volatility Casino that your central bankers sponsor.

 

After all, as Timmy reminded his fans at the “Bloomberg Breakfast” in Washington, DC yesterday, “central bankers have a lot of experience in managing these things”!

 

Indeed they do Mr. “Money Man”, indeed.

 

My immediate term support and resistance levels for the SP500 are 1306 and 1330, respectively. If 1306 in the SP500 doesn’t hold on a closing basis, I think this -3% correction in US stocks starts to resemble a February 2008 like crack. That wasn’t a good crack.

 

Best of luck out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mr. Money Man - oo1

 

Mr. Money Man - oo2


Early Look

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CHART OF THE DAY: The "Flowwwzzz" Work Both Ways (see: 2008)

 

 

CHART OF THE DAY: The "Flowwwzzz" Work Both Ways (see: 2008) -  chart


The Flows

“The quality of the imagination is to flow and not to freeze.”

-Ralph Waldo Emerson

 

For those of you who dial into the Hedgeye Morning Macro Call every morning at 830AM EST, you know that the title and topic of this Early Look note is dear to my Canadian heart – The Flows.

 

In institutional investor speak, The Flows are where the fees are. For bulls, they foster the imagination. For bears, they focus the mind. The Flows represent your moneys. In a world “awash with liquidity” and sovereign debt, we don’t think you should trust. Bernanke Bubbles beware.

 

Last year, they flowed you into US Treasury Bonds and Emerging Markets. This year, outflow-you-go into the “safe havens” of US and Japanese stocks. Like the promise of Bernanke “buying bonds” in 2010, the promise of not “fighting the Fed” bears US stock market fruits from the heavens. Do not freeze men and women of the risk management gridiron. The chase for the last Dollar Debauched drop of equity returns is on.

 

The problem, of course, arises when The Flows run into these little critters called The Fundamentals. Understanding full well that our view of The Fundamentals is often 3-6 months ahead of Wall Street/Washington consensus (yes, sadly, they are now one and the same) is what it is – since October, our Global Macro view of the fundamentals remains Global Growth Slowing as Global Inflation Accelerates.

 

Thankfully, not every institutional investor understood the repercussions of Quantitative Guessing II (QG2) on Global Inflation Accelerating back then. Now those who bought US Treasury Bonds and Emerging Markets are being reminded that what flows into a said haven, flows out…

 

From EPFR Global, here’s the latest on The Flows (per their February 18th report):

  1. USA/Japan/Europe (Equities)  - “Investors pumped $47 billion into equity funds in the U.S., Europe and Japan this year after pulling $17 billion in 2010 and $28 billion in 2009.”
  2. Bonds Funds - “Investors added $2.44 billion to bond funds globally this year as of Feb. 16, down from $11.1 billion during the same period in 2010.”
  3. Emerging Markets - “Investors pulled $1.9 billion from developing nation stock mutual funds in the week to Feb. 23, the fifth week of outflows.”

Now, as we like to say at Hedgeye, what happens on the margin in Global Macro matters most. And on the margin, The Flows into the stock markets of Developed Economies have been huge. The most important risk management part of that last sentence is “have been.”

 

How long can The Flows trump The Fundamentals? How much risk gets entrenched into an asset class when the storytelling starts to follow the natural confirmation bias of positive price momentum? How many times do we need to see this movie before we learn the lesson?

 

These are all questions that have a much clearer answer now versus then. Whether you look at the opportunities to short US and Emerging Market Equities into the peaks of fund flows of 2007 or shorting the mountain tops of a bond market bubble in 2010, history writes itself as of last price.

 

As a risk manager who is shorting things almost every day, I need to be really sharp on timing and price. While many institutional marketing messages preface their buy-and-hold strategy with “you can’t time markets”, we should all be very thankful for that – many of them can’t. What we’re doing is preserving capital and making probability-weighted decisions, daily, with a fundamental Global Macro research overlay.

 

On the scoring of Growth and Inflation, this morning’s Global Macro Grind has some positives, but more negatives:

 

POSITIVES

  1. Germany – unemployment fell to another new low of 7.4% and German Equities continued higher to +6% YTD (we’re long EWG)
  2. Canada – unlike US growth which was revised down again last week, Q4 GDP growth surprised to the upside (we’re long FXC)
  3. India – the government cut taxes and sent the stock market up +3.5% (we covered our short position in IFN at last week’s low)

NEGATIVES

  1. China – Producer Manufacturing Index (PMI) hit a new 6-month low of 52 last night (we’re long CYB as China continues to tighten)
  2. Mexico – Unemployment continued higher sequentially to +5.4% versus 4.9% last month (we’re short EWZ on Latin American inflation)
  3. Iran – Consumer price inflation (CPI) was up to +15.8% in JAN vs 12.8% in DEC (that’s before this massive oil spike and is instigating tensions)
  4. Japan – Industrial Production slowed again sequentially in JAN to +2.4% y/y vs 3.3% DEC (we covered our short position in EWJ last week)
  5. Spain – Consumer price inflation (CPI) was up again sequentially in FEB to +3.4% versus +3.0% in JAN (we have no position in Spain)
  6. USA – US Consumption in JAN, adjusted for inflation, was negative for the 1st month in a year (we’re short MCD, TGT, and XHB)

But there is no but in The Flows. They are what they are until they stop. All the while, I’m most certainly not going to freeze with a strategy to short-and-hold. For the last decade, that hasn’t worked inasmuch as buy-and-hold hasn’t . Not in a market where professional politicians are sponsoring a Burning Buck, The Inflation, and Price Volatility… We have America’s sad State of political leadership to thank for that.

 

My immediate-term lines of support and resistance for the SP500 are now 1311 and 1343, respectively. The US stock market should make another lower-high today – one that you should outflow from, provided that US Dollar Debauchery continues to sponsor Global Inflation.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Flows - flo1

 

The Flows - flo2


GENTING SING: GOOD>BAD

The receivable balance doesn't concern us. Mass slowdown does but we can't overlook the huge VIP volume growth and impressive operating cost control. 

 

 

We think Genting's Resorts World Singapore (RWS) may be in a better spot relative to expectations and valuation than LVS's Marina Bay Sands (MBS).  The valuation disparity is obvious but the higher VIP growth profile, particularly with junkets coming online, could allow RWS to continue to grow its market share.  On the negative side, the market appears to be focused on the growth in receivables but we'll tell you why we don't think this is an issue. 

 

The recent quarter was solid and the outlook is pretty favorable.  We've got a lot of detail in this note because we think the company and financials are very misunderstood by the analysts.  For instance, the Street seems to be assuming that all the tax revenue was accounted for in expenses.  In fact, Genting Singapore actually deducts Goods and Services Tax (GST: 6.54%) from revenues which is the correct methodology according to IFRS.  The incremental gaming tax (5% for VIP and 15% Mass) is accounted for in expenses.  For this reason, on an apples-to-apples basis, RWS revenues will be lower than MBS's with EBITDA unaffected, thus resulting in higher margins for RWS.

 

 

Details & thoughts:

  • On the topic of Genting’s rather large receivable, we are less concerned than our sell-side brethren.  The S$450MM credit receivable (approx 75% of the trade & other receivables balance) is no doubt large.  However, it’s important to put the receivable in context of the massive amount of direct VIP business that RWS does every quarter.  RWS did almost 6x the direct play volume of Wynn Macau.  Wynn Macau’s quarterly receivable has ranged from 2.1-2.7% of direct RC volume – in comparison, RWS’s receivable of 2% quarterly RC doesn’t seem so out of whack.  Once the filings come out for the Macau names, we will spend more time analyzing the receivable issue. On the surface though, growing the receivable in-line with RC growth doesn’t seem to raise any red flags.
  • On the call, management said that RWS’s share of gross gaming revenues was 58%, which given what MBS reported, implies that the property produced about S$1BN.  According to our estimates gross gaming receipts were S$982MM, with gross VIP receipts closer to 65% than the 60% management stated on the call.
    • VIP gross win of S$639MM
      • Drop of S$22.8BN. Mgmt said volumes were up 40% QoQ
        • On the 3Q call management sited that they had at least 53% market share of RC volume – which implies that 3Q had at least S$16.3BN RC volume
      • Hold of 2.8%. Management sited that hold was on the low end of 2.8-3.0%.
    • Net VIP win of S$331MM
      • Rebate rate of 1.25%. While on the call, management sited that rebate rates had not changed sequentially, offline they elaborated that they had a large mix of “high rollers” which earn a higher rebates (rebates are based on volumes) and stated that the rebate rate in the quarter was between 1.2-1.3%
      • GST of S$23MM
    • Net VIP was 51% of total net gaming revenues – in-line with management commentary
  • Gross Mass Revenue of S$343MM and net mass revenues of S$321MM
    • Gross slot win of S$120MM and gross mass table win of S$223.4MM
    • Mass revenues declined in the single digit range sequentially according to management – primarily due to weaker holder comparisons on mass play
    • We also understand that Slot handle was flattish sequentially and that win per device was down
    • We assume that Mass tables held at 16% compared to guidance of 16-18% for last quarter. As an aside, RWS will typically have lower hold then MBS given that only 60% of their table games are baccarat – a much lower mix than MBS.  They are adjusting that mix this quarter, so hopefully there will be some improvement.
  • We estimate that net gaming revenue was S$652MM or 84% of total net revenues, which is in-line with the 80-85% number that management sited on the call
  • For the other nerds out there – the correct tax calculations are as follows:
    • GST (contra revenue):  (Gross gaming revenues – Rebates)* (7/107)
    • Gaming taxes (expense): (Gross gaming revenues – GST)* appropriate mass or VIP tax rate
  • As we’ve written about in the past, it does appear that almost all the gaming growth has come from VIP market while Mass volumes appear to have barely budged since 2Q2010. This is obviously not ideal since the VIP business has lower margins (rebates) and carries more credit risk – which is definitely the topic of concern and focus in the analyst community with the 40% increase in Genting’s trade and other receivables balance.
  • Despite having a cap of 8,000 daily visitors, Universal’s average daily visitation exceeded the cap since there were many open dated tickets issued to travel agents that were expiring by year end and were therefore redeemed. On February 21st, concurrent with the opening of Battlestar Galactica, Genting removed the visitation cap completely – so the visitations numbers going forward should reflect true demand.  The company expects that average daily visitation will exceed 10,000 per day in 2011. 
  • On the hotel side, this past quarter saw a shift in business focus from travels agents to FIT.  Going forward, RWS will continue to focus on growing their FIT business, and therefore, we should see rates and ADRs go up a bit.  When the West Zone rooms open in the later part of 2011, they will be largely focused on the VIP customers and growing the VIP business.
  • Total costs remained flat at $390MM, despite a 6% sequential net revenue
    • We estimate that fixed costs declined sequentially due to some one-time provisions that were made in the third quarter.
    • Gaming taxes and other variable expenses should have all increased given the increase in volumes.
  • Other stats:
    • Gross casino revenues per day: S$10.7MM
    • EBITDA per day: S$4.2MM

 

Outlook:

  • While management concedes that the focus was on VIP this quarter, they insist that they are catching up on Mass and that we should see nice sequential growth in Mass drop in 1Q2011.
  • Management also alluded to both volumes and luck being better in 1Q2011
  • Currently, RWS has 1,400 slots but plans to get to 1,600-1,700 slots by year-end with roughly 500 Electronic Table Games
  • Junkets are now expected to come online in the 2H2011 vs previous guidance of end of 1Q2011. The holdup in approval is related to the upcoming elections in Singapore, which are expected to occur in May.  Typically, the government avoids any controversial decisions during the election period.
  • 1Q2011 preliminary projections:
    • Net Revenues: S$890MM
    • EBITDA: S$482MM
  • 2011 preliminary projections:
    • Net Revenues: S$3,581MM
    • EBITDA: S$1,850MM

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