- Prior to today’s call, I thought SONC’s FY09 EPS expectations were aggressive, and although they still seem to be, I did not realize before today that half of this growth is expected to come from refranchising gains. So really only 6%-7% of SONC’s EPS growth relies on operations and those targeted 155-165 franchise drive-in openings. Instead, SONC’s ability to achieve 12%-14% EPS growth focuses largely on the timing of partner drive-in sales to franchisees. Despite management’s assurances that so far no transaction has been impacted by the current credit markets, this remains a real risk for the company.
- I am also less than confident in SONC’s ability to return to flat partner drive-in same-store sales growth for FY09 following the 3.9% and 6.3% declines in 3Q08 and 4Q08, respectively. Although the company will be lapping easier comparisons in the back half of the year, if current trends continue into 1Q09 and 2Q09, SONC would need to generate 5%-plus numbers in 2H09, which would be a significant improvement from current trends. SONC’s partner drive-in’s average check has been hurt by the introduction of its Happy Hour promotion, which drives increased traffic at the expense of average check and margins. The company will be lapping this introduction in November so that should benefit numbers on a year-over-year basis.
- SONC’s 1Q09 results should continue to be hurt by lagging sales results because although the company is seeing improved customer service scores, I don’t think SONC will see a quick turnaround in trends in this environment. Additionally, SONC expects its commodity cost to be up high single digits in the first quarter as it is currently experiencing beef prices (12% of SONC’s costs) up in the 30%-35% range.
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According to PFC Energy, the breakeven point is for many members of OPEC is just below $70. The higher cost producers break even points are as follows: Saudi Arabia’s break-even point is $49, Venezuela’s is $58, Nigeria’s is $65. While the OPEC producers break-even at prices below $70, the price is obviously perilously close to levels where the higher cost producers do not break even, so it is a line that is need of protection.
More important than OPEC, as it relates to $70 oil, is Russia. According to the Russian Finance Ministry, the nation’s budget for 2009 breaks even at a price of $70 oil per barrel. Per the International Energy Agency, Russia was the world’s largest producer of crude oil in 2007 (at 12.4% of the world’s total) and the second largest exporter, just behind Saudi Arabia. As a result, this price of $70 becomes a very important number to watch.
The French constructed the “Maginot Line”, which was a long line of concrete fortifications, tank obstacles, and machine gun posts along its border, in the run up to World War II. The concept was based on the success of static trench like warfare during World War I, which enabled the French, generally, to impede German progress. Ultimately, the antiquated defense measures of the Maginot line were limited in their ability to hold back German troops and France, as we know, was conquered by the Germans.
One has to wonder how long the antiquated defense of production cuts will enable OPEC to hold the current attack on Oil’s Maginot Line.
The “Trend” in oil is negative. Buying oil is for a “Trade”. KM’s lines for oil prices are:
Buy “Trade” = $68.94/barrel
Sell “Trade” = $81.85/barrel
Daryl G. Jones
(chart courtesy of stockcharts.com)
Some key data points arrived this week in regards to Italian economic health. On Tuesday CPI numbers were released for September which came in slightly better than August on a year-over-year basis, though still up almost 4%. Today, industrial activity data for August was released showing an unsurprising drop in both sales and orders.
A more telling measure of Italian economic credibility came from three Libyan government entities: The Central Bank of Libya, Libyan Investment Authority and Libyan Foreign Bank. These three entities boosted their holding in floundering UniCredit to 4.2% and committed to participate to the tune of almost 10% in an upcoming 6 billion Euro secondary. UniCredit, Italy’s largest bank, has seen its balance sheet shredded by the credit markets and has been rushing to shore up capital.
Italy has always been one of the weaker hands at the EU table and their finance industry has a long history of unsavory practices and corruption. The fact that one of their preeminent financial institution is receiving a bailout from a country that has just reemerged from rogue status and remains controlled by an unbalanced megalomaniac dictator (recall our 9/5 post) says a lot. This isn’t Warren Buffet to the Rescue – this is Muammar Qaddafi.
As a point of fact, Libya has a long investment history in Italy. During the decades when the rest of the world shunned doing business with them because they sponsored terrorism. The Libyan government acquired stakes in Italian banks, utilities & sports teams, but the timing of this move coming so closely on the heels of Berlusconi’s pledge to compensate Libya monetarily for colonial period abuse suggests that Italy and Libya are becoming increasingly chummy.
This is unnerving.