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TALES OF THE TAPE: RRGB, TXRH, MCD, PFCB, JACK, CBOU, WEN, CPKI, DRI, CAKE

Notable news items and price action from the past twenty-four hours, as well as our fundamental view on select names.

  • RRGB reported EPS of $0.58 versus consensus of $0.24.  The company beat consensus on the top and bottom line.  Comps came in at +1.9% versus consensus at +0.8% and restaurant margin was 19.8% versus consensus of 17.8%.  The first four weeks of 2Q comped 0.5% higher than the same period in 2010. 
  • RRGB was raised from Neutral to Buy at Stern Agee.  The stock was also upgraded from Underperform to Buy at BofA.
  • TXRH’s Board of Directors authorized the payment of a cash dividend of $0.08 per share of common stock.  The payment will be distributed on July 1, 2011 to shareholders of record at the close of June 15, 2011.
  • MCD is digging its heels in and refusing to call time on Ronald McDonald despite campaign groups’, that link the mascot (and happy meals) to childhood obesity, requests that the fast-food company stop using the clown to market to children.
  • PFCB CEO Bert Vivian sold 20,000 shares of PF Chang’s stock on 5/19.
  • JACK traded up 5.6% on accelerating volume yesterday.  Stronger top-line performance at Jack in the Box and Qdoba in 1Q surprised investors when results were released after the close Wednesday.  Nearing completion of its refranchising program, the company is far better poised from a business perspective relative to recent times.  Commodity costs remain a concern for the foreseeable future.  See our note from yesterday for more details.
  • CBOU and WEN also gained on accelerating volume.
  • CPKI, DRI, and CAKE all gained on accelerating volume.

TALES OF THE TAPE: RRGB, TXRH, MCD, PFCB, JACK, CBOU, WEN, CPKI, DRI, CAKE - stocks 519

 

 

Howard Penney

Managing Director


THE M3: PANSY HO: MGM COTAI; APRIL CPI; SINGAPOREANS

The Macau Metro Monitor, May 20, 2011

 

 

MGM HOPEFUL OF COTAI GREEN-LIGHT THIS YEAR Macau Daily Times

Pansy Ho said, “We have been very hopeful that this [Cotai approval] obviously could happen within the year.”  Ho would like to maintain a strategic role in MGM China, saying, “I believe that to be an MVP, most valuable player, like when you are in a ball game you do not always have to be the one kicking the goals, you would like to be there to be the best assistant."

 

Asides from opening an MGM Grand hotel this year in Hainan Island, MGM wants to enter Taiwan with non-gaming and leisure projects.

 

CONSUMER PRICE INDEX FOR APRIL 2011 DSEC

Macau's Composite CPI for April 2011 increased by 4.88% YoY and 0.10% MoM.


S'PORE RESIDENTS LOST EVEN MORE ON GAMBLING LAST YEAR Today Online

Data on levies collected for entry into the casinos at Marina Bay Sands and Resorts World Sentosa suggests 5,400 Singaporeans go to the casinos every day. 


Whys and Wherefores

This note was originally published at 8am on May 17, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Faith is an island in the setting sun, but proof is the bottom line for everyone.”

-Paul Simon

 

My wife Laura and I had a wonderful time at a fundraiser in Greenwich, CT last night. Our good friends were raising money for The Bowery Mission. Founded by Albert Gleason Ruliffson in 1879, it was one of the first missions established for the homeless in America.

 

The United States of America is one of the most generous lands that our world has ever known. If you give Americans an opportunity to give, they often will. If you give them a chance to lead, many of them do so by example. There is a faith in this country that cannot be centrally planned out of our hearts.

 

Faith, accountability, and trust. While these principles may not always resonate intuitively with being “bearish” about a market price, there’s an important investment point to be made here. You have to be able to separate your patriotism, religion, and confirmation biases from the daily risk management discipline that will separate you from the flock. You either have faith in your process, or you don’t.

 

In his morning tweet, the Dalai Lama complimented this point by reminding us that, “reliable and genuine discipline comes not from repression, but from an understanding of all the whys and wherefores of our actions.”

 

The Whys and Wherefores of what gets you to buy, sell, and hold; the Whys and Wherefores of what gets you to trust, love, and give; the Whys and Wherefores of what it is that gets you out of bed every morning to do what it is that you do…

 

It’s all there.

 

No matter what we do in this profession. No matter where we go in this life. The answers to these questions define and shape not only our individual character, but our collective culture.

 

Back to the Global Macro Grind

 

Having authored the Global Macro theme of Growth Slowing As Inflation Accelerates, I know exactly why it is that I have been taking down my gross exposure and tightening my net exposure (longs minus shorts) for the last 3 weeks.

 

Last week I sold all of our Oil. This week I sold all of our Gold. We now have a zero percent allocation to Commodities in the Hedgeye Asset Allocation Model.

 

We’ve written and talked about the similarities between the US Currency Crashing to lower-lows in Q2 of 2008 and 2011 for enough time now that you know that I will not move away from my risk management discipline of respecting The Correlation Risk between US Dollars and everything that’s highly correlated to them.

 

If you are a Risk Manager, the month of May has reminded you of the following realities associated with a US Dollar arresting its decline (USD Index TRADE line of $74.41 resistance is now immediate-term support – do not be short the USD here):

  1. Stocks stop going up
  2. Commodities stop going up
  3. US Treasuries stop going down

For us, this is good. In terms of how I am positioned in May, that is.

  1. US and International Equity Exposure = 9%
  2. Commodities Exposure = 0%
  3. US Treasury Exposure = 15%

The Whys and Wherefores as to what got me into these positions are reconciled every day with the same repeatable mechanism that got us to make our US crash call of 2008 and the “May Showers” correction call that we made in April of 2010. Whether I am grumpy or glad, our research and risk management process stays the course.

 

Are the inverse correlations associated with US Dollar moves going to hold forever? Of course not – correlation risk is never perpetual. Could they matter for far longer than the biggest net long position in hedge fund history can be rationally unwound? Mr. Macro Market is going to have to tell us the answer to that – and, in the meantime, I have plenty of time to buy things back.

 

Why and Wherefore should I have faith in this process?

 

Because when it works for me, I know why – and when it doesn’t, I understand wherefore I should evolve it.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1474-1499, $93.67-$100.12, and 1327-1336, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Whys and Wherefores - Chart of the Day

 

Whys and Wherefores - Virtual Portfolio


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Intellectual Honesty

“I think we are very good at intellectual honesty.”

-Seth Klarman

 

I was flying to Kansas City from Denver last night and an outstanding interview in the Financial Analysts Journal bubbled up to the top of my pile – an interview with one of the world’s most thoughtful Risk Managers, Baupost’s Seth Klarman.

 

“We actually hire for intellectual honesty. In an interview, we work hard to see whether people can admit mistakes. We hold our people accountable to that standard.” (Klarman, “Ahead Of Print”, 2010 CFA Institute)

 

Accountability. Honesty. Standards.

 

That works for me and, from what I can tell, it works for a lot of our clients who understand that there is a difference between running a P&L and running a business. There’s a difference between rigorous research and disciplined risk management too. The best teams in this business do both.

 

“We have all our own money invested in the firm, and so we are very conservative. We have picked our poison. We would rather underperform in a huge bull market than get clobbered in a really bad bear market.” (Klarman, “Ahead Of Print”, 2010 CFA Institute)

 

Ownership. Preservation. Conviction.

 

Those principles work for me too.

 

“We ask people, what is the biggest mistake you’ve ever made? It’s a very open-ended question because it’s not solely an investment question, although prospective hires often answer it as if it were.” (Klarman, “Ahead Of Print”, 2010 CFA Institute)

 

Introspection.

 

Back to the Global Macro Morning Grind

 

In the face of awful US Economic data yesterday:

  1. CONFIDENCE: Bloomberg Weekly Consumer Comfort Index dropped to a fresh YTD low of -49.4 vs -46.9 last week.
  2. HOUSING: US Existing Home Sales  fell -0.8% for April, dropping from 5.09 million in March (seasonally adjusted annualized) to 5.05 in April.  This is a sharp divergence from the March Pending Home Sales, which increased 5.1% month-over-month.
  3. GDP GROWTH: US Leading Indicators for April were down (0.3%) sequentially vs. +0.7% in March (the sharpest decline in well over a year)

And … with the US Dollar down on the day… the inverse relationship (The Correlation Risk) between Fiat Fool policy and stocks continued to hold (USD down = stocks up). The US stock market was able to hold a +22 basis point gain. With the SP500 closing at 1343, it’s down -1.5% from its April 2011 YTD high, and down -14.2% from its October 2007 all-time high.

 

You mean, on alarmingly low-volume, the mistakes we’ve all made between late 2007 (where I got bearish too early) and early 2011 (where consensus has been too bullish on US Growth) has only equated to lower immediate-term and long-term highs in US stocks? Yep. This special case of making lower-highs in stocks has been occurring in Japan since 1992. Big Government Intervention has its perks.

 

No matter where I go this morning, the entire risk management community can see all of my mistakes. My current mistakes are attached at the bottom of every morning’s Early Look (my biggest mistake on the long side is currently Suncor (SU) at -5.3% and, on the short side, Consumer Staples (XLP) at -2.9% against me). My longer term mistakes are all time stamped on our website and on the back of my ankle.

 

Transparency. Accountability. Trust.

 

These are principles that plenty of politicians give lip service to. In real-life, they are extremely hard to achieve. I don’t think my firm is there yet, but I do know that the people I have working with me have Intellectual Honesty – and in terms of re-thinking industry standards on independent research, I think we’re well on our way.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are $1480-$1502, $95.16-$100.91, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Intellectual Honesty - Chart of the Day

 

Intellectual Honesty - Virtual Portfolio


MGM CHINA IPO VALUATION

Even at the high end of the stated range, MGM China looks like a good deal for investors.

 

 

Conclusion

 

We think MGM China is worth at least HK$16 per share.  This is higher than the HK$12.36-15.34 stated range in the prospectus.  Our valuation is based on 10x 2012 EV/EBITDA plus approximately HK$1 for a future Cotai property.  The all-in valuation at HK$16 would still put MGM China at more than a 25% discount to Wynn Macau and Sands China and a 12% discount to the average of the comp group.  The discount is predicated on the following:

  • A conflicted joint venture structure that while MGM is in control, is reliant on a 29% partner Pansy Ho who serves on the STDM board, the largest shareholder of competitor SJM in the Macau market.
  • MGM is not a primary concessionaire
  • While we think it is likely that MGM ultimately develops a Cotai property, Sands China with Lots 5/6 and Wynn Macau with Wynn Cotai are further along
  • The majority shareholder MGM Resorts International is in significantly worse financial shape than LVS and especially WYNN

MGM China is likely to price at a valuation higher than MPEL which is more of a reflection of investors underpricing MPEL rather than an overvaluation of MGM China.  At the high end of the range, MGM China would price at 10.2x our 2012 EBITDA estimate of HK$5.2 billion which looks very reasonable to us given the growth profile of the Macau market and the income tax advantages in that market.  Remember that casinos pay no income taxes on gambling profits so the tax adjusted EV/EBITDA multiple is even more attractive relative to the US and even Singapore EBITDA.

 

 

Valuation 

Since we think MGM China is worth at least the top end of the stated range, we’ve priced out the following comp table assuming MGM China at HK$15.34:

 

MGM CHINA IPO VALUATION - MGM MACAU 1

 

Again, MGM China looks very cheap next to Wynn and Sands.  To be fair to Sands, since their new properties won’t be fully open in 2012, we should also look out to 2013.  Even on this basis, MGM China still would trade at an 11% discount to the comp group, a 22% discount to Sands and an even bigger discount to Wynn.  Only SJM (slightly) and MPEL would be cheaper. 

 

On a free cash flow yield basis, the comparisons are certainly tighter.  MPEL remains the clear standout under this metric while MGM China looks reasonable, but not necessarily cheap.  However, we think as long as Macau remains as growthy as it appears, investors probably will not pay much attention to yield.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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