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The only story that matters is that MPEL is on track to blow out the Q2 and the sell side needs to get decidedly more positive.



The bears are spewing such stories as:  Galaxy is going to crush CoD, the Gov’t doesn’t want Studio City, MPEL is flooding the junkets with credit.  The reality is that none of these are likely true.  What is probably true is that MPEL is on track to produce $180-190 million in Q2 EBITDA, just “slightly” above the Street at $135 million.  We’re looking forward to seeing these analysts justify their Neutral ratings, $550 million 2011 EBITDA estimates, and $11 price targets in the face of another terrific quarter.


So why the bear stories?  I guess some analysts need to grasp on to something to justify why they missed the big move in the stock.  Unfortunately for them, they may miss the next big move up.  Yes, the stock has done well but estimates keep going higher.  But they’re still not high enough, not for Q2, 2011, or 2012 - so we haven’t seen a significant amount of multiple expansion.  At 10x 2012 EBITDA of $700 million, the stock remains heavily discounted.


We’ve learned a lot while (still) here in Macau.  So let’s address the bear stories:

  1. Macau Studio City (MSC) – a government official made the comment that MPEL has to stick to its 2008 plans for the site and people assume there is some sort of conflict.  The fact is that the government asked MPEL to take over the project and MPEL intends to keep the major tenets of the original plan intact.  In fact, the guys we would consider “in the know” including competitors, think that a) MSC is the best site on Cotai and b) MSC will open before Wynn Cotai.
  2. CoD and junket credit – this is actually old news.  We believe CoD pumped some liquidity into the junkets ahead of Galaxy opening.  So did other casinos.  Big deal.  There hasn’t been anything recently.
  3. Galaxy impact on CoD – CoD lost 3-5% visitation after the Galaxy opening but spend per visitor went up substantially.  Visitation has come back and spend per visitor remains high.  Oh and by the way, oft ignored Altira is performing well above estimates and is meaningful to MPEL.

SP500 Levels Refreshed: The Crossroads

As most of you know, President Obama gave a speech and held a subsequent press conference this afternoon.  While it is likely that many CNBC viewers were disappointed that the President bumped my scheduled appearance today, more generally President Obama’s comments were noteworthy. 


In both the strongest tone and most aggressive language we’ve seen, Obama challenged the Congress to “do their job” as it relates to the debt ceiling debate.  He also articulated that the deficit solution would require both increased taxes and reduced expenditures.  Our read-through is that the next month plus will see heated political debate and increased uncertainty as both sides attempt to negotiated for a common ground, especially given Obama’s heightened rhetoric today.  The uncertainty related to the debt ceiling will continue to weigh on markets, as we can see in the sell-off intraday.


In Greece, what seemed like a solution is increasingly being viewed for what it is, an extension of the issue.  While Greek equities initially rallied on the austerity news to up almost 3%, they closed on the lows for the day.  Meanwhile, the credit market barely budged on the “positive” austerity news.  The reality remains, European credit markets continue to signal that a restructuring of some sort will have to occur as Greek austerity will not be enough to narrow the deficit and funding gap.


We’ve outlined our revised levels for the SP500 below and took advantage of the equity strength to add to our SP500 short position today.  The other key moves we made in the Virtual Portfolio today include:  buying Carnival Cruise Lines (CCL), selling Gold (GLD), selling CIT (CIT), shorting Ralph Lauren (RL), and buying Ameristar Casino (ASCA).   No major exposure changes per se, but just taking advantages of some good prices.


As we get closer to The Crossroad for U.S. and European debt this summer, we’ll likely continue to keep the Virtual Portfolio balanced on the long and short sides, and keep our positions moving.  After all, no one’s ever lost their job for taking profits.


Daryl G. Jones

Director of Research


SP500 Levels Refreshed: The Crossroads - 1

Less Bearish on India

Conclusion: India is flirting with a bullish TREND breakout and, should prices confirm, this is an explicit sign that our nearly eight month-old call for economic stagflation in India has been fully priced into Indian stocks.


On June 7, we published a note titled, “Still Bearish on India”, the conclusion of which was:


Our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more stagflation in India’s intermediate-term future.


From the day of that report, India’s benchmark SENSEX Index exhibited a peak-to-trough decline of -5.3% (June 20). It has since rallied +6.8% (largely due to declining crude prices and marginally dovish comments out of the central bank) and, for the second day in a row, it closed above our intermediate-term TREND line of 18,467. While two days of positive TREND is hardly a trend in and of itself, it is still highly noteworthy on the margin. Further confirmation of this bullish breakout in Indian equities is an explicit sign that our nearly eight month-old call for economic stagflation has been fully priced into Indian stocks.


Less Bearish on India - 1


As we wrote in a research report on Friday afternoon titled, “Emerging vs. Developed Markets: Aggressively Framing Up the Debate”, our contrarian Deflating the Inflation thesis bodes well for strength in bombed-out equity markets across the EM universe (please email us for a copy of the full analysis). Recall that at one point in the current cycle, India was the worst performing equity market in the entire world (-16.9% from November 5th to February 10th).


India is the poster child for a market that could do well in 2H as deflating prices across the commodity complex reduce upward pressure on WPI readings. To be clear, however, we’re not necessary comfortable with getting long right here and now, as there are some key issues that we are monitoring which we’d like additional color on: 

  • The Federal Government raised the prices it pays farmers for raw rice, soybeans, and peanuts in a range of +8% to +17.4% to all-time highs and those increases are expected to impact food inflation readings around October when the new crops come to market;
  • India is continues to rely on pollyannaish assumptions around subsidies, growth, and state asset sales to meet its current year fiscal deficit reduction goal. We’ve been bearish on their ability to hit the target since the day the budget was unveiled and nothing has changed on that front (bearish for the Indian rupee; bearish for Indian sovereign debt). Notably, Finance Minister Pranab Mukherjee came out overnight and “affirmed” his full-year growth assumption of +8.5% YoY. In actuality, this was a -75bps haircut (recall that the growth projection released alongside the budget was +9.25% YoY);
  • We’re not sure if consensus is bearish enough on Indian growth yet. It’s pretty clear from our daily analysis of sell-side and buy-side commentary that our Accelerating Inflation call (and the accompanying monetary tightening) is well understood. While the Slowing Growth component of our economic stagflation thesis has been getting priced into India’s currency and its credit market to a large extent over the last 2-3 months, we’d like to see consensus GDP forecasts come down a bit from current projections that range about +70-100bps above our model’s most bullish scenarios for India’s real GDP growth (2Q11-4Q11). This morning’s data supports our contrarian view on Indian growth as the number of stalled projects and the number of new projects in the corporate sector grew and fell +18.1% YoY and -9.3% YoY, respectively; and
  • As our long-term Sovereign Debt Dichotomy thesis continues to play out in Europe, it will be interesting to see if the market starts to look toward other PIIGS as Greece’s short-term fiscal woes are resolved with the “elixir” of more debt. Heightened global risk aversion is always a risk for the SENSEX due to India’s lax capital controls that encourage foreign investor participation. In the YTD, foreign investors have purchased a net +$322.3M worth of Indian stocks. In February, the net amount was closer to -$2.2B, which suggests that there is enough volatility for the current positive trend to reverse course in a meaningful way. 

Less Bearish on India - 2


Less Bearish on India - 3


Less Bearish on India - 4


Net-net, the likelihood that the YTD bottom in Indian equities is in the rear-view mirror is a growing possibility that needs to risk managed. And taking a cue from our quant model, at the bare minimum, India is no longer a key short idea. Analyzing India at this critical juncture lends us a great opportunity to highlight a bit of our process as it relates to putting on and taking off exposures. Essentially there are three buckets a company, country, security, currency or asset can be in: 

  • Long Idea: Positive fundamentals supported by a bullish quantitative setup;
  • Short Idea: Negative fundamentals supported by a bearish quantitative setup; and
  • Neutral: This is the “do nothing” bucket whereby fundamentals and quantitative signals do not confirm one another. One of the key skills a risk manager must possess is the ability to know when to move his or her favorite long or short ideas into the neutral bucket – a troubling task for anyone that tends to get married to their theses. 

As we say repeatedly, an investor can be bullish, bearish, or not enough/too much of either. To that point, we don’t want to risk being too bearish on India as prices signal to us our bearish thesis is largely priced in. For now, we are comfortable moving India from the “Short Idea” bucket into the “Neutral” bucket.


Darius Dale


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RL: Good Question

Question from an astute client. "Why short great companies that you love longer term for a trade when there's enough longer term crap out there?"


The question is referring, of course to Keith's move this afternoon in adding RL to the short side of the Hedgeye virtual portfolio.


The answer to the question boils down to our process as a team. Keith actively manages near-term (TRADE) risk across a broad array of names where we have an edge on the fundamentals. But make no mistake -- he is ‘ticker agnostic’. Keith has been known to say “McGough/(or any other Hedgeye analyst) likes XYZ so much that we’re shorting it…” only to buy it back when the price matches the fundamentals. His track record is on the Hedgeye site for all to see.


Yes, I (McGough) am a RL bull over the intermediate to long-term (which we call our TREND and TAIL durations, respectively), as I think that a $9 EPS number is in the cards within 3-years. I think that the 'it's too expensive' arguement is a recipie to get steamrolled for any company that has earnings momentum (the same way many stocks that appear so cheap can still be great shorts).


But stocks do not go up or down in a vacuum. And the reality is that as an analyst, my expertise in gauging what the stock will do 3-weeks out is average at best. I know where I'm good, and I know where I am simply not.


That’s why I spend 90% of my time on the fatter-tailed fundamental research, which is where I’ll pit my teams’s work against anyone’s. It’s also why I leave the near-term part of the equation to Keith, who is our full time risk manager. His models show that the stock probably has near $5 in downside from here based on current factors.


Does this mean I don’t like the company? No. Does it mean that if I am an investor that has the luxury of looking out many quarters and/or years, I would not own RL?  No. In fact, I think estimates are too low this year by about $0.50 ($6.80 vs. the Street at $.6.29). For that matter, an investor who can look out 1-2 years should have a better price to buy it than where it is today.


RL: Good Question - 6 29 2011 2 33 27 PM



RL: Shorting (Again)


Keith added to our RL short today in the Hedgeye virtual portfolio with the stock overbought relative to his model on an immediate-term TRADE basis.


RL: Shorting (Again) - RL VP 6 29 11




Here is a comprehensive view of top line trends in the QSR category heading into earnings season.  Commodity costs are elevated; investors get that.  How companies handle that and maintain comps will be the key differentiator over the balance of the year.


In the quick service space, traffic has been the prize operators have aimed for over the past number of years.  Some, like CMG, have had tremendous success in driving guest counts while others, like WEN, have struggled in that regard over the last couple of years.  Below, we go through several key names in the QSR space in terms of where they stand from a comparable sales growth perspective as we roll towards earnings season kicking off.





Chipotle has blown away expectations for a number of quarters now.  Management struck a more cautious tone on the most recent earnings conference call of February 20th, but the company is likely to report another solid quarter of comparable restaurant sales growth on July 19th.  Over the past three quarters, the company has produced double-digit comp growth.  The concept has been wildly popular but, expectations surrounding top line growth have moderated somewhat.  During the first quarter, CMG comparable restaurant sales grew 12.4% (11.4% excluding the impact of a BOGO promotion).  This represented an acceleration in two-year average trends of 105 basis points (55 basis points excluding the impact of the BOGO promotion).  Despite this robust growth, restaurant-level margins contracted in 2Q which has led management to make the decision to raise prices further.  Labor pressure related to the federal immigration authorities’ probes into CMG’s hiring practices has also impacted margins.


In light of the strong performance during 1Q, management raised its guidance for comp growth from low single-digit to mid-single digit.  On the February 20th earnings call, management said that it would hold off any further increase in price until the third quarter to properly assess food inflation and the reaction of its customers, particularly in California, to prior price increases.  News emerged over the past few days that the company has raised prices $0.50 at its New York chains, with lines (according to the Wall Street Journal, still “out the door”) and plans to raise prices in the next few weeks at its stores in the Northeast and Southeast, with changes in other markets to follow.


While New York City’s customers may absorb the price increase with little impact on frequency of visits, it remains to be seen if the broader store base will react in a similar manner.  The company needs to maintain transaction counts to meet investor expectations in the back half of the year. 

Hedgeye: CMG is going to once again post a strong quarter.  







I continue to believe that the COSI turnaround story is on track, despite what the weakness in the stock, of late, might be suggesting.  In 1Q11 COSI reported a 3% in same-store sales, implying that 2-year trends declined from a -0.3% to -0.7%.  All of our visits and checks suggest that the company can post 3-4% same store sales in 2Q11. 


Hedgeye: COSI (the stock) has struggled of late, but the sales trends are telling a different story.  I believe there will be incremental positive news when the company reports the quarter.







Domino’s Pizza’s management team has carried out an impressive turnaround over the past 18 months.  The introduction of a new pizza was well-received in early 2010, with a massive increase in comparable restaurant sales growth coinciding with the new product and the accompanying advertising campaign.  The company has remained focused on driving comp growth by other initiatives also.  For instance, the company has rolled out an impressive online ordering system that accounted for 25% of sales in the first quarter, according to the most recent earnings call.


Hedgeye: Management is guiding to domestic company comparable-restaurant sales of +1 to +3%.  The mid-point of this range implies two-year average trends of 5.2%, a sequential deceleration of 105 bps from 1Q11.  All indication are that DPZ will meet or exceed current guidance. 







Jack in the Box has seen comparable restaurant sales recover over the last couple of quarters but lags the QSR group on this metric.  Management is guiding to what I believe is an achievable range of +2 to 4% comparable restaurant sales growth during the third quarter.  The mid-point of this range implies two-year average trends of -3.2%, a sequential acceleration of 70 basis points.  I believe that this is within reach for Jack in the Box.  The mid-point of management’s guidance range for Qdoba comparable restaurant sales, of +4 to 6%, would represent a sequential acceleration in two-year average trends of 20 basis points to +4.8%.


California and Texas have been soft markets for JACK over the past couple of years but, encouragingly, that there has been a recent bounce-back in comps in both markets.  In fact, according to management commentary during the most recent earnings call, “California and Texas both continue to have positive same-store sales and California was our best performing market on a two-year basis.” Together, the Lone Star and Golden states make up 57% of the company’s total store base.

Hedgeye: Given the improving MACRO environment JACK has a chance to beat consensus environment.









MCD sales have been strong thus far this year but, as we highlighted in our “MCD – HORSESHOES AND HANDGRENADES” on June 8th, the change of tone between the April and May press releases was telling.  April’s U.S. results were, according to the company, driven by McCafé, beverages, breakfast, and featured core products.  May’s U.S. sales commentary, however, did not mention core products or McCafé.


The crux of my bearish thesis on MCD, that originated in the latter stages of 2010 and was published in a black book in mid-January, was that McDonald’s has become over-dependent on beverages to drive sales.   The risk to this strategy, as I see it, is that it is not sustainable and I expect to see MCD struggle to match the beverage sales of 2010 this year.  With any drink for $1 at MCD this summer, it seems that management is maintaining its loyalty to the idea of driving guest counts but average check is likely to suffer and my bottom line, that MCD’s core business is declining, remains intact.   My view here is specific to MCD’s domestic business which accounts for ~46% of the company’s overall operating income. 

Hedgeye: It appears the MCD is having a strong June in the U.S., which could imply acceleration in 2-year trends.  With 2Q11 sales trends likely to will be in line with consensus, what will 3Q11 trends bring given the extremely difficult comparisons? 







Panera Bread has seen tremendous growth over the last few years, as have other fast casual concepts, and the past couple of quarters have been especially impressive.  Despite weather impacting the first quarter, comparable restaurant sales grew +3.3% versus a +10% comp, implying a 40 basis point sequential acceleration in two-year average trends. 


As of the date of the most recent earnings call, April 27th, reported 2Q to-date comparable restaurant sales growth was +5.3%.  The guidance range provided for the same date was +5 to 6%, the mid-point of which would suggest acceleration in two-year average trends of 90 basis points. 


Hedgeye: PNRA recently launched its first national advertising campaign, which should provide a lift to the current trends.    







Starbucks’ stock has been on an incredible run and, with prices rising, some investors I have spoken with are wondering when to pile in on the short side.  I am certainly not there; I think the company has further avenues for growth available.  Growth for Starbucks, going forward, is expected to come primarily from its CPG business and China.  Unless you are bearish on the aggregate of these two factors, I think it is difficult to build a credible short thesis. 


In terms of guidance, management expects revenue growth for the full year to be driven by mid single-digit comp growth.  I remain positive on Starbucks’ future business prospects and believe that the company is taking the right steps to grow market share, whether it is developing mobile payment apps for Android and i-Phone smart phones or taking control of its distribution channels to protect the brand’s equity.  I expect a strong quarter from Starbucks from a sales perspective, but coffee costs rising does pose a concern. 


Hedgeye: Intra-quarter, our in-store analysis suggested that SSS were double digits during the Frappuccino promotion. I expect SBUX to have another strong quarter.




COMPREHENSIVE QSR TOP LINE SNAP-SHOT - sbux pod 1 intl company





Sonic’s comparable restaurant sales growth has been impressive of late, with the premium six-inch hot dog promotion driving traffic across all day parts.  Customer satisfaction scores have improved and the value initiatives have been resonating with consumers.  On June 22nd, however, it was interesting to hear management describe a slowing in trends over “the past few weeks” during an earnings conference call.  The company was reluctant to shed light on the magnitude, or any other specifics, regarding the slowdown. 


Going forward, management is basing its hopes of bringing back incremental traffic on promotions including a BAJA hotdog and a new line of shakes.  Despite the fact that value offerings were highlighted as being responsible for driving traffic in the third fiscal quarter, the company felt comfortable adding 0.5% of price to the menu in early June.  The company now has 2% of price on the menu which will not begin to roll off until next April.

Hedgeye: SONC is relying on the “hotdog” to boost SSS from the May/June slowdown.  This will be a close call.  







Wendy’s is a stock that I like over the longer term but, as I highlighted in a post on June 16th, “WEN - INTERMEDIATE TERM ISSUES BUT THE LONG TERM STILL LOOKS GOOD”, there are some intermediate term issues that bear keeping in mind.  Net net, I like WEN as a standalone concept, near-term issues aside.


On the positive side:

  • Completed initiatives around the core products should improve consumers’ opinion of the Wendy’s brand
  • Further improvements in the 2011 pipeline including new burgers will be key to driving traffic in 2H11
  • Trends are improving at Wendy’s and I expect the company to take some price this year.


On the negative side:

  • The company has tested four new restaurant designs and expects to begin a new rollout plan in 2012.  I believe that the success of MCD’s new units in Tampa, Florida, has given pause to the WEN management team in their process.
  • The current level of sales at breakfast is not supportive of a major roll-out.


Hegdeye: WEN will not see a meaningful pick up in SSS until 4Q11, at the earliest.







YUM’s U.S. business is stagnating and management is not forthcoming with any earth-shattering solutions.  That is not to suggest they should have a “silver bullet”; their KFC, Taco Bell, and Pizza Hut concepts are in a tough place in the domestic market.  However, China and YRI remain major growth engines for YUM and, as I’ve said before, without a bearish view on China, I would not advise investors to be bearish on YUM.


Hedgeye: YUM USA is a disaster, with all three concepts seeing comps down between 3-7%.  YUM China is likely to post its second straight quarter of double digit SSS.











Howard Penney

Managing Director



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