It’s not clear to me what the timeshare business is worth or where it’s going. It seems that it may have been one more product of the easy money era. Timeshare, securitization, contract sales, etc.; forget it all. Let’s see if we can make a valuation case for the hotel business because I wouldn’t pay a nickel for anything else.

What is the right multiple range for MAR’s hotel segment? Historically, MAR as a company has traded between 10x and 15x EBITDA. Of course, this always included the lower multiple timeshare business. Remember that MAR generates virtually all of its lodging profits from fees; management, incentive, and franchise fees. Surely, fee income should be valued higher than owned EBITDA due to the stability factor and the lack of maintenance capex associated with ownership. If you believe 2009 will be the trough, I cannot see putting a multiple below 10x on fee based EBITDA. On the high side, 15x seems reasonable due to the long-term demand for branded hotels globally.

So, if we throw away the time share business we are left with about $1bn in hotel EBITDA in 2009, per my calculation. Factoring in $400m in notes receivable and all of MAR’s year end debt yields a stock price range of $21 to $35. Other than the receivables, I’m not assuming any disposition value for the roughly $3bn in timeshare assets on the balance sheet. The valuation range leaves 11% downside and 47% upside. I sure wish I had a catalyst.

This is the first time in many quarters where I’ve felt that guidance was reasonable. I’m not saying there won’t be downside but at least estimates are reasonable. So MAR is starting to look interesting but, unfortunately, I cannot say the same thing for HOT: too much timeshare, too many owned hotels, and too much gateway city exposure.

Risk reward finally looking favorable


This week was a big week for the people at Wendy’s International, Inc.! Since 2005, the Wendy’s management team has been on a very long road of asset rationalization and speculation about the future of the company and the brand. The disruption that this has caused to the Wendy’s system has been substantial as franchisees and employees are constantly worried about their personal being and not focused on running the business. Basically, there has been no brand TLC and no new products.

The new CEO, Roland Smith, must get the organization to refocus on the Wendy’s brand. Also to the degree that Arby’s will not be lost in a corporation that did not have the focus of a pure restaurant company, it should perform better too. Roland Smith needs to get the brands off the treadmill of sameness, and provide consumers a reason to eat at Wendy’s and Arby’s.

It’s important to remember that the restaurant industry is a zero sum game. It’s not a coincidence that the mismanagement of the Wendy’s brand has coincided with outsized gains in same-store sales (market share) for both McDonald’s and Burger King. Clearly, part of the success of McDonald’s and Burger King has come on the heels of better advertising, new products and the demise of casual dining. Prior to 2004, when McDonald’s was in shambles, Wendy’s was a clear beneficiary of incremental market share. It’s a cycle that has been repeated many times in the restaurant industry. I’m betting that history repeats itself again.

The new organizational structure allows each business to be dedicated to building each brand independently, an important first step. The new vision for the organization will focus around the slogan, “Serving Fresh Ideas Daily.” According to management, the “Wendy’s/Arby’s Group, Inc. is committed to driving [its] business through fresh, innovative ideas, fresh, high quality food and a fresh, responsive approach to [its] changing business needs.”

At both brands management must be focused on taking aggressive actions to grow customer traffic, but not at the expense of margins. Currently, WEN is promoting three items at $0.99 that appears to be gaining traction in certain markets. This initiative is short sighted and will not have staying power. Over the long term, the focus should be on upgrading the breakfast offering, offering new products and providing a stronger, more relevant marketing campaign. To that end, the company has said that it plans to reformulate its coffee and retool morning-meal products; new marketing will emphasize the quality of the food.

Management has also stated that it is now focused on customers between the ages of 24 and 49. Looking at the changes in the demographic patters in the U.S., the focus on older customers could be rewarding. The trends for the 18-24 age group over the next 10 years don’t look good (please refer to my August 11 post titled “Young Adult Per Capita Meal & Snack Occasions are Declining”). Additionally, MCD and BKC are already slugging it out for that customer base.

At this point in time, I believe the franchisees system is rallying the troops behind Roland Smith and his management team. Everybody involved inside and outside the company knows there is really only one way to get the stock higher; bring back the customers!

POTASH: Cyclicality Returns

Mosaic (“MOS”), the world’s second largest fertilizer company, reported results this morning and missed consensus estimates and reduced forward production. While the “It’s Global This Time” enthusiasts have been arguing that fertilizer stocks are not global, a reduction of production by MOS seems to suggest otherwise and the stock is currently down more than 30% as a result. We have attached below a 5-year chart of POT, including our last post on the stock in which we which suggested that if “cyclicality” were to come back into play, so would gravity in POT’s stock price. It’s global this time, indeed.

Daryl G. Jones
Managing Director

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Dunkin’ Donuts said it would offer small lattes and egg and cheese sandwiches for 99 cents each at participating stores beginning today. The company is calling it “America’s Latte Break,” the promotion (which runs through November 11th) features small lattes for 99 cents on weekdays between 2 p.m. and 5 p.m. The egg and cheese sandwiches will be priced at 99 cents all day with the purchase of a medium or large hot coffee. , Dunkin' said. The chain’s lattes generally retail for between $2.59 and $2.79, depending on the size, and the egg sandwiches cost around $2. In addition to its latte promotion, Dunkin' Donuts said it was launching new advertising next month.

While I generally don’t believe there is much overlap between Dunkin’ Donuts and Starbucks, this is clearly going to eat into the marginal customer. More importantly, it will continue to put pressure on MCD’s rollout of its coffee program.

Now What?

Isn’t it inspiring to watch these partisan political speeches on the Senate and House floors? The people falling asleep in the background aren’t props – they get it. These are painful days for American Capitalism.

Bush’s SEC chief, Chris Cox, spent 17 years in those hallowed halls of said “free market capitalism.” Seventeen years in Congress! No wonder why the best thing he has going for him is his hair cut. When it comes to the intricacies of how modern American free markets trade, this guy is proving to have no idea. At the market top in 2007, he eliminated the uptick rule (paving the way for short sellers to sell stocks as they are going down), and now at the market lows of 2008, he blames those same people he empowered, calling them evil doers, and banning short selling altogether. This is both embarrassing and un-American all at the same time.

Last night, Cox and Co., moved the goal posts in the middle of the game again, pushing out the short selling ban to October 17th. This was pseudo expected by most of my contacts in the business, mind you no one had the specific date. This ridiculously random decision making by the said referee of the US stock market makes it virtually impossible for a hedge fund manager who actually manages risk to do so. As a result, my “Beware, October 3rd, 2008” call (, 9/19/08), renders itself null and void – the dates/rules are being changed so I need to change with them. One of the main drivers of that short term thesis was letting the short selling players back on the field. Instead, they may as well pull up a seat in the back benches of Congress and take a nap while this socialist circus plans its next act.

Over on the Senate floor, they finally passed the bailout vote. Hooray. Now we can slap this toxic waste on the US government’s balance sheet and really dig into what Goldman and Morgan Stanley didn’t want to show their shareholders. Isn’t this great news! Now what?

Contrary to domestically myopic economic beliefs, Asian investors have TVs and this American circus of reactive crisis management is being ‘You Tubed”… they see this emotional and alarmist behavior, and they sell into it. Regionalism is a becoming an unfortunate output as a result – expect it to continue. It remains global this time, but taking care of the locals appears to be a logical priority.

In Japan, the local mess is one of stagflation. The best thing investors can do in Japan is sell what they should have with the Nikkei 23% higher in June. Japanese stocks closed down another -1.9% overnight, despite CNBC’s fanciful notion that if they bring you a television broadcast called “Wall Street Crisis” and give you a “live” look on Asian markets reacting to a US Senate decision that Asians are dumb enough to follow the script of this compromised and perpetually bullish narrative. Japan was the worst performing market, but Taiwan, South Korea, Australia, and Indonesia all closed lower as well. Now what?

In Europe, markets opened stronger, but the “Trend” there remains broken. Markets like Ireland, that have been bludgeoned, are moving 500 basis points at a time, but Irish eyes aint smilin’ with stocks down -55% from their October 2007 peaks. Russia is not participating in the western European dead cat bounce this morning, trading down once again, taking the cumulative loss in the Russian Trading System Index to -52% since May alone. The worrisome combo of the geopolitical risk associated with “Regionalism” and economic growth slowing has former beacons of western capitalist hope (Poland, Ukraine, Romania, Czech, etc…) swooning. Now what?

In Israel, stocks are trading down over -2% this morning as reports are hitting the wires that American soldiers are being stationed “permanently” there for the first time in forever. Consider the tail risk associated with an Obama win, and an Israeli attack on Iran… now what?

I am writing this note from Canada this morning. In Minneapolis and New York yesterday, airports were as dead as I have ever seen them. Within this shameful political cycle, a nasty economic cycle is unwinding. Commodities had their largest down day this week since 1956. The 2nd largest fertilizer company, Mosaic, is trading down -20% pre open. Global travel titan, Marriott Hotels, is guiding down big. Toyota is doing the same. Asian currencies are melting down. Regionalism is challenging free trade. Socialism is challenging capitalism. Now what?

My downside targets for the S&P 500 is moving to 1109.

God Speed,


I guess Beijing isn’t satisfied with zero growth in Macau. Travel agents are reporting that visitation from Guandong to Macau is now limited to once every 3 months, down from once every 2 months. A Beijing official claims to be still evaluating the visa situation but I’m willing to believe the travel professionals.

Recent visa restrictions have had a material impact on mass market visitation to Macau, essentially removing all growth out of the market in September. Why would Beijing take it a step further and potentially throw the Macau gaming market into a recession? Beijing is a black box, no doubt, but I would surmise that the central government remains unhappy with Macau’s Chief Executive, Edmund Ho. Punishment for Mr. Ho’s public comments regarding Beijing’s continued influence? Possibly.

It could’ve been worse. Seemingly credible rumors of a 6 month visa restriction surfaced last month and pummeled the Macau gaming stocks.

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