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Flying a solo mission, for now...

Warren Buffet famously said: “The best way to become a millionaire is to start as a billionaire and buy an airline.” We fully understand the issues that any “investor” has with the airline industry, especially when it comes to applying Porter’s Five Forces to the industry and coming out with a favorable view. That doesn’t mean airlines can’t be good “stocks”, for a “Trade” - look at their outperformance today!

While Keith was giving me the gears this morning and last night when I mentioned airlines as a potential long, like any Portfolio Manager with a process should, and we are not there yet, the chart below does depict an interesting story. In the last few months, the historical inverse correlation between airline stocks and jet fuel has broken down. For many airlines jet fuel is currently ~40% of sales versus 20 – 25% a year ago, if oil, and thus jet fuel, stay at or below currently levels, the y-o-y cost comparisons all of sudden start to look very interesting.

Daryl G. Jones
Managing Director

HSY – Key Takeaways from the Earnings Call

Some of the main concerns for FY09 stem from the company’s significant price increase in August (up an average of 10% in U.S. business). In FY09, HSY is raising both its everyday price points and its promotional price points. In the past, when HSY has raised its prices, it has typically not raised its promotion price points. Management’s lowered FY09 2%-3% revenue growth (from long-term 3%-5% range) is based primarily on the fact that they could see lower volumes as a result of the higher prices and some shift in mix between products sold at everyday price points versus promotion price points. Management is also expecting revenues to be hurt slightly by currency in FY09, but HSY does not have much emerging market exposure, which they said is a good and bad thing (only good because they won’t be as hurt by FX YOY).
There were also a lot of questions around commodity costs in 2009 because the company recently hedged a lot of its costs (management won’t specify what % of costs are hedged), and cocoa and sweetener prices have since come down. Commodity cost increases are expected to be higher in FY09 versus FY08. Management really won’t give too many details on this front except to say that from where they sit they are comfortable having greater visibility on 2009 as a result of their hedging strategy.

HSY is seeing improvements in volumes in the core brands it has increased advertising behind. Hershey’s Milk, Kit-Kat, Reese’s, Twizzlers were all up mid single digits. Refreshment, snacks and the Kisses brand are still all underperforming.

In FDM, ex convenience, market share was flat for the quarter. In the last 4 weeks (first month of 4Q), HSY gained share in the c-store category for the first time in 2 years. Management attributes these improved share trends to HSY’s increased retail coverage efforts.

HSY is seeing some slowdown in the overall premium chocolate category, but the company has little exposure so although it is bad for the category, it is somewhat of a positive for HSY’s overall core brands.


Are These Jobless #'s A Signal For the Bulls?

For the 2nd week in a row, US weekly jobless claims came in better than I expected. On balance, this is bullish for the market’s immediate term “Trade”. Incorporating this morning’s selloff in my math, I think we are within 3% of another short term low in the SP500.

This week’s jobless # came in at 461,000. This was lower than last week’s print of 477,000. Remember, everything in our economic model that matters occurs on the margin. If next week’s jobless report comes in better yet again, I am bullish on the October employment report. Yes, bullish, as in it will be better than market expectations which are ostensibly deteriorating by the minute.

All the while, the intermediate “Trend” will remain bearish. See the chart below – what a difference a year makes.
KM

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WEST and the JBX Exchange Offer

Following up on my post from October 6th, Western Sizzlin Corporation (WEST) announced yesterday that it has commenced an exchange offer for up to 680,500 shares of JBX. The exchange ratio for the offer is 1.607 shares of WEST common stock for one share of JBX common stock and is set to expire at 5 p.m. ET on November 13. WEST already owns 100 shares of JBX so based on the exchange ratio for the offer, if the maximum 680,500 JBX shares are exchanged, WEST would own about 1.2% of JBX’s shares outstanding.
As I mentioned in my past post, the CEO and controlling shareholder of WEST is Sardar Biglari. Mr. Biglari holds a 35% interest in WEST through The Lion Fund L.P., a private investment partnership. Mr. Biglari is the general partner of The Lion Fund L.P., which is an activist hedge fund. WEST and The Lion Fund have bought positions in several public restaurant companies that were perceived to be value plays. In the past, Mr. Biglari has been very public about putting pressure on senior management of these public companies to unlock shareholder value. JBX, however, is already a value stock trading below 5x NTM EV/EBITDA.

Mr. Biglari’s intentions are still widely unknown. Based on the prospectus, following the offer, WEST “intends to evaluate its investment in the Jack in the Box common stock on a continual basis and may, from time to time, communicate with Jack in the Box management, members of Jack in the Box’s board of directors and other stockholders of Jack in the Box. Following the consummation of the offer, Western may, from time to time, acquire additional shares of Jack in the Box common stock, dispose of shares of Jack in the Box common stock or formulate other purposes, plans or proposals regarding Jack in the Box or the Jack in the Box common stock, to the extent deemed advisable in light of its general investment policies, market conditions or other factors… Except as indicated in this prospectus, neither Western nor any of Western’s subsidiaries or affiliates has any current plans or proposals which relate to or would result in (1) any extraordinary transaction, such as a merger, reorganization or liquidation of Jack in the Box or any of its subsidiaries, (2) any purchase, sale or transfer of a material amount of assets of Jack in the Box or any of its subsidiaries, (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of Jack in the Box or any of its subsidiaries, (4) any change in the current board of directors or management of Jack in the Box, (5) any other material change in Jack in the Box’s corporate structure or business, (6) any class of equity security of Jack in the Box ceasing to be authorized to be quoted in an automated quotation system operated by a national securities association or (7) any class of equity securities of Jack in the Box becoming eligible for termination of registration under the Exchange Act.”

To be clear, WEST is an illiquid, holding company with no real brands. Its revenues have declined for the last 3.5 years, resulting in a net loss of $0.13 per share in FY07 and a net loss of $2.14 in the 6 months ended June 30. JBX, on the other hand, has experienced revenue growth over the same timeframe (and longer), leading to increased operating income growth (growth only slowed 0.3% in the forty weeks ended July 6).

On October 3, the last full trading day before WEST announced its intention to commence this offer, the closing price of WEST was $14.10 and the closing price of JBX $19.37. Based on these closing prices and the exchange ratio in the offer, the WEST offer had a value of $22.66 per share of JBX, which represented a 17% premium over JBX’s $19.37 closing price.

Since then, however, WEST’s stock price has declined rather significantly and closed on October 14 (the last full trading day before date of the prospectus) at $10.50 relative to JBX’s $18.49 closing price. Based on these more current prices, the WEST offer has a value of $16.87, which represents an 8.7% discount to JBX’s price. If JBX shareholders really wanted to own WEST at those prices, which I would be hard-pressed to understand, they would be better off selling their shares on the open market for $18.49 and buying 1.8 shares of WEST on the open market versus the offer of 1.607 shares. My guess is that no shares will be tendered.




HSY Quarterly Conf.Call just ended: Key Takeaways

I just got off the HSY call. Some of the main concerns for FY09 stem from the company’s significant price increase in August (up an average of 10% in U.S. business). In FY09, HSY is raising both its everyday price points and its promotional price points. In the past, when HSY has raised its prices, it has typically not raised its promotion price points. Management’s lowered FY09 2%-3% revenue growth (from long-term 3%-5% range) is based primarily on the fact that they could see lower volumes as a result of the higher prices and some shift in mix between products sold at everyday price points vs. promotion price pts. They are also expecting revenues to be hurt slightly by currency in FY09, but they don’t have much emerging mkt exposure, which they said is a good and bad thing (only good b/c they won’t be as hurt by FX YOY).

There were also a lot of questions around commodity costs in 2009 because the company recently hedged a lot of their costs (management won’t specify what % of costs are hedged) and cocoa and sweetener prices have since come down. Commodity cost increases are expected to be higher in FY09 vs. FY08. Management really won’t give too many details on this front except to say that from where they sit they are comfortable having greater visibility on 2009 as a result of their hedging strategy.

They are seeing improvements in volumes on the core brands they have increased advertising behind. Hershey Milk, Reese’s, Twizzlers were all up mid sd. Refreshment, snacks and Kisses brand are still all underperforming.

In FDM, ex convenience, market share was flat for the quarter. In the last 4 weeks (first month of 4Q), HSY gained share in the c-store category for the first time in 2 years. Company attributes these improved share trends to their increased retail coverage efforts.

They are seeing some slowdown in the overall premium chocolate category, but they have little exposure so although it is bad for the category, they think is somewhat of a positive for their overall core brands.

Kerry Bauman
Senior Analyst

Eye On Obamerica, Part 1: Unionization and Wage Inflation

We watched the final Presidential debate last night and we won’t bore you with our interpretation, but the facts suggest that Obama increased his lead this morning as he is now trading at 84.6 on Intrade (www.intrade.com) versus McCain at 15.3. As we hammered home in some detail yesterday, it is likely the Obama and the Democrats will win on November 4th and win big. As part of our Obamerica theme, Tood Jordan posted yesterday on his portal about the potential union and wage implications of an Obama presidency, which we have reprinted below. This is a key theme that you should be focused on going into the next four years of Obamerica.

FREE EMPLOYEES, NIX THE SECRET BALLOT

Every consumer analyst needs to start preparing for a pro-union Senate, House, and President. Start by analyzing HOT’s margins.
“We will pass the Employee Free Choice Act. It’s not a matter of if, it’s a matter of when.” – Barack Obama

“Madam Speaker, I rise today in support of the Employee Free Choice Act, because the right to organize is essential to the path to prosperity for all Americans.” – Speaker of the House Nancy Pelosi

“Every single Senator ought to support this bill.” – Senate Majority Leader Harry Reid

These quotes should remove any doubt. If Obama is elected President, the Employee Free Choice Act will become law. Whether or not the removal of secret ballots in deciding union elections makes employees more free is not important. Since 1989, unions have contributed almost $500 million to political campaigns. Over 90% of that cash has gone to Democrats. The favor will be paid back by an Obama administration and a Democratic congress.

So what does this mean? The elimination of secret ballots will make it much easier to unionize. Secret ballots are the cornerstone of any modern democracy for a reason. People can vote without the pressure that an open petition would apply. More unions = higher wages and benefits for hotel, casino, and leisure companies to name just a few.

Margins are going down over the next few years and not just because the top line is under pressure. Sorry to pick on Starwood but the hotel industry is pretty easy to analyze in this regard. The consensus EBITDA margin estimate for HOT declines only 80 basis points in 2009. With likely RevPAR declines of at least low to mid single digits, this projection is laughable.

A note to analysts: labor costs are going up not down.

Daryl G. Jones
Managing Director

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