The Macau Metro Monitor, March 4, 2011
GOVT AND MITSUBISHI SIGN LRT CONTRACT macaubusiness.com
Mitsubishi Heavy Industries (MHI) and the Macau government yesterday signed the contract for MHI to supply the system for the 1st phase of Macau's light rail transit. MHI must be able to deliver within just 47 months, plus two months for trials. The LRT project will create 4,000 jobs.
IRs SET TO BOOST S'PORE ECONOMY Channel News Asia
According to Senior Minister of State for Trade and Industry S. Iswaran, Singapore is on track to receive S$2.7BN annually from each Integrated Resort. However, Iswaran cautioned that the government should expect the novelty of the integrated resorts to "diminish even as the IRs continue to roll out new attractions."
Meanwhile, the government said it expects 12-13MM visitor arrivals this year with tourism receipts hitting between S$22 BN and S$24 BN.
TODAY’S S&P 500 SET-UP - March 4, 2011
Equity futures are trading above fair value in a follow-through from yesterday, which saw the Dow post its largest one-day gain since December 2010. Today's non-farm payroll number is the key catalyst, with consensus at +190K for February. April crude futures climbed back above $102 a barrel overnight as tension in the Middle East remains heightened and hopes fade for negotiated peace deal in Libya. As we look at today’s set up for the S&P 500, the range is 24 points or -0.97% downside to 1318 and 0.83% upside to 1342.
MACRO DATA POINTS:
EARNINGS/WHAT TO WATCH:
We have 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. XLF is the only sector broken on TRADE.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries were weaker with the better global risk backdrop, upbeat economic data, rally in stocks and lingering inflation concerns.
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Wendy’s is following the template for restaurant company turnaround success.
Following the Wendy’s Investor Day on January 27th, my view on this stock changed and I became more convinced of the long term prospects of the company’s stock. The primary reason for that was the assurance management gave me during the Q&A session that Arby’s would be sold and the company would remain focused on one brand, Wendy’s. Another crucial reason was the company’s renewed focus on revitalizing, not complicating, the menu in 2011. The company’s focus on selling burgers and cokes will, in my view, yield significant results in terms of sales, labor efficiency, and – ultimately – earnings.
WEN 4Q10 earnings came in at $0.01 ex-items, in line with expectations and guidance. Comparable restaurant sales at Wendy’s were slightly disappointing given that comparisons were easy due to the terrible performance in 4Q09. Going forward, comparisons become more difficult, particularly in 1Q11. While weather is not a factor to which we allot too much importance, management commented that company-operated same-store sales in January were negative but estimates that weather negatively impacted North America comps by between 1.5% and 2%. Additionally, management did reveal that comps were positive at Wendy’s in February and guided to “flat-to-positive same-store sales for the first quarter.”
Specifically, the company highlighted that if it can just maintain trends seen in February in the March timeframe, then this 1Q11 comp guidance is achievable. For the year, management guided to comparable restaurant sales of 1-3% at Wendy’s, complemented by an improvement of 30 to 60 basis points in company-operated restaurant margin.
In terms of EBITDA guidance, the company anticipates pro-forma EBITDA between $345 million and $355 million, inclusive of a G&A reduction that occurred as of the beginning of fiscal 2011 (related to the assumed sale of Arby’s). The EBITDA guidance is also inclusive of the sales guidance described above. In terms of stock repurchasing, the company stated that it intends on buying back shares pending market conditions and the current authorization stands at $250 million.
Management struck a careful but confident tone on the earnings call when discussing its outlook for 2011, describing it as a “transitional year”. Management, as previously announced, is exploring a potential sale of Arby’s and describes the benefits of this sale as being accretive to both Net Income and Free Cash Flow. Of the company’s current $1.1 billion in net debt, roughly $200 million is attributable to Arby’s. The company’s healthy cash balance, of $512.5 million, will be used to fund ongoing initiatives including the remodeling program and technology enhancements. The national rollout of Wendy’s new burger in 2H11 will require incremental capital spending of approximately $13,000 to $23,000 per store. Without the burden that Arby’s represented for the company, there is more dry powder to be spent on the Wendy’s brand and management has a clear, formulaic plan for Wendy’s going forward.
The seven initiatives the company is outlining for the Wendy’s brand for 2011 are as follows:
The company’s focus on improving their core products is anathema to the issues I see in MCD’s current business in North America. While MCD’s overly-complicated menu is overwhelming for staff and customers alike, WEN is focusing on improving their core offerings with select, non-disruptive, new menu items being rolled out this year. Among the new items being rolled out include a “fish and chips” offering coming in March and a new seasonal salad in the second quarter.
In terms of remodels, the company is also intent on pursuing an aggressive path and will reveal its new restaurant design on a future call. Unit expansion is the final major focus for WEN. Management envisions 1,000 stores in North America and plans to add more than 60 new restaurants to its system in 2011 and to increase the pace of development in 2012. In terms of international expansion, development agreements have been signed in Singapore, the Middle East, Russia, the Caribbean and Argentina over the past couple of years. Over the long term, management sees 8,000 stores as being possible in international markets with China, Russia and Japan representing 40% of that number.
Commodity exposure is, of course, a key headwind for the company and management provided frank commentary around this issue both in terms of Wendy’s and the broader industry. Regarding beef costs at Wendy’s, management stated that “Wendy’s food costs will reach a higher level in Q2 and Q3 because of the timing of when we will recognize those increases. Arby’s will also be facing very high beef prices…15% or more increase year-over-year.”
There was some skepticism on the earnings call this morning that margins would actually grow at Wendy’s but management confidently responded to questions on this subject, pointing out that a combination of same-stores sales increases, driven by mix and traffic gains, will help make the margin growth possible. Despite this, Steven Hare did concede that, “like everyone else, we are nervous about the pressures we are seeing on commodity costs”.
The growing sales mix of Wendy’s value menu since the launch of its My 99 everyday value menu will put increased pressure on the company’s margins, but during this turnaround, investors will likely be more focused on the concept’s ability to gain market share. To that end, management noted that this new value menu has helped to drive transaction trends and enabled Wendy’s to outperform its competitors in November, when it launched My 99, on a share of value traffic basis. Nevertheless, in terms of factors within management’s control, it is clear that the Wendy’s brand is gaining traction and management has the plan and the capital to execute through 2011 and into 2012.
With sales day becoming less relevant due to fewer companies reporting, there are still a handful callouts from today’s reports. Overall, 16 of 22 (73%) companies reported better than expected results while just six fell shy of Street expectations. Valentine’s Day was a success, which certainly puts some pause in questioning the propensity of the consumer to shop for purely discretionary goods. Februrary marks the second month a row of accelerating results on one, two, and three year basis. Despite the noteworthy strength, it’s important to realize that the bulk of the first quarter’s volume is still very back half weighted due to this year’s three week Easter shift. As a reminder, most retailers will be reporting negative comps in March followed by sharply positive results in April (based solely on the calendar).
As always, here the notable callouts from February sales results:
Positions: Long Germany (EWG); Short Italy (EWI), short Eastern Europe (ESR)
Below we recap the important policy decisions and data points out of Europe this week:
In a Q&A session after the ECB announced no change to its key interest rates this morning, ECB President Jean-ClaudeTrichet said that an “increase of interest rates in the next meeting is possible… but not certain.” Despite all attempts by Trichet to be close-lipped on future actions by the governing council, the sentence was largely interpreted by the market as proof that the ECB will hike in the near-term.
And both the EUR and European equity markets cheered on the news. The EUR-USD rose to an intraday high of $1.3966 and European equity indices gained to close up +50 to 150bps today.
Trichet also made it clear that today’s decision was based on data taken from mid-February, and therefore did not include the recent move in crude prices, which created further speculation that greater inflationary readings next month may boost the probability of an interest rate hike.
Our position remains that both the ECB and BOE will act to address their respective inflation pressures well before Ben Bernanke does, as The Bernank chooses to ignore the looming pressures of domestic and global inflation. On this basis we’d also expect the broader US market to underperform many of its European peers.
In comments today, Trichet said the range for Eurozone inflation (CPI) has shifted upwards to between 2.0% and 2.6% in 2011 and between 1.0% and 2.4% in 2012, mainly due to “the considerable rise in energy and food prices.”
This week we received new monthly Eurozone CPI and PPI numbers that confirm the rising tide of inflation. CPI rose 2.4% in February year-over-year versus 2.4% in January; and PPI increased 6.1% in January Y/Y versus 5.3% in December. The PPI report showed that energy prices jumped 13% from a year earlier.
European PMI Slowing?
European February Manufacturing and Services PMI reported this week show mixed signals. As we chart below, we believe the 60 level is a heavy resistance line for PMI numbers going back historically. If we look at the Manufacturing data, we largely see an improving trend for Europe’s largest economies, but caution that both Germany and the UK should slow on the margin in the coming months as they’re already well through the 60 line.
Services PMI show that Germany failed at the 60 line this month, as France improved just short of 60. Importantly there’s a clear spread in the Services readings between the UK and Germany. We continue to see fundamental drags in the UK economy due to its austerity programs and rising inflation, both of which are choking off real growth.
Germany’s Bullish Strut
German retail sales were released today and showed an improvement of +2.6% in January year-over-year versus -0.5% in December, or +1.4% in January month-over-month. Also, the German unemployment rate, reported earlier in the week, fell 10bps month-on-month to 7.3% in February. We remain bullish on Germany and are currently long the country via the etf EWG in the Hedgeye Virtual Portfolio. The DAX remains broken on a TRADE basis (3 weeks or less), however it is trading comfortably above its TREND (3 months or more) line at 7,016.
For another week we see attention shift away from Europe’s sovereign debt contagion to uprising in MENA and therein the implications for crude prices. On a bullish note, in an auction today Spain saw solid demand for €1.15 Billion of bonds due 2014 and 2016, with yields coming in considerably lower versus a previous auction of similar maturity. However, risk still loom large in Portugal, with sentiment rising this week that the country will require a bailout in the next weeks. We continue to monitor government yields as a proxy for this risk (see chart below). Stay tuned.
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