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WEN - A SMOOTH TRANSITION FOR THE NEW BURGER?

The central tenet surrounding the bull case for Wendy’s which lies at the core of fixing the Wendy’s brand is the rollout of the new hamburger, beginning in 2H11.  In January, our fundamental view of the stock was positive but, various red flags over the past six months have moved us to change that stance.  The most important of which is this: we are now in 2H11 and there still appears to be issues with rollout of the new product.

 

It was reported on Friday that WEN is suing franchisees Lewis Topper and Jeffrey Coghlan and their WendPartners Franchise Group, alleging breach of contract and claiming they missed deadlines to buy and install bun toasters.

 

Lewis Topper and Jeff Coghlan are not insignificant franchisees.  Both have been inducted into the Wendy's Hall of Fame and sit on the board of directors of OFFA - the Old Fashioned Franchise Association.   According to the OFFA web site, the purpose of the organization “is to give Wendy’s franchisees a voice.”   

 

The OFFA Mission states, “By positively representing the collective interest of the franchise community, we are reasserting the importance of franchisee involvement in the management decision making process.  We are the only independent franchisee organization in the Wendy’s system. We are dedicated to preserving the values Dave Thomas instilled in Wendy’s franchisees from the beginning and to enhancing our members’ investment and profitability.”

 

The key part of the mission of OFFA is “enhancing our members’ investment and profitability.”  The WEN system seems to be fully behind the idea of the new hamburgers, but there has been some disagreement around the type of toasters to be used and the appropriate testing of the product since January.  Toasting the buns of the new hamburger was emphasized as a key component of the new product by management.  An example of the one of the toasters that was tested by Wendy’s is pictured below.  The machine costs approximately $10,000. 

 

WEN - A SMOOTH TRANSITION FOR THE NEW BURGER? - wen toaster

 

 

My guess is that the disagreement between management and the franchisees anchors on the question of who is going to pay for the equipment and whether or not the company has provided adequate evidence that the franchisees’ investment in the equipment will yield an adequate ROI.  We believe that WEN management is on the right track, but the path to recovery is clearly taking longer than had been expected.  As the news on toasters is hitting the tape, it seems that the breakfast rollout and remodel program are also experiencing some difficulties. 

 

If the issue of paying for the toasting equipment could very important if it is a leading indicator for the larger discussion of which parties will bear what proportion of the cost of upgrading the asset base.  While I think the company may have gone back to the drawing board for a better plan as it relates to the remodels, the most crucial question at this juncture is how much, if any, financial support the company will provide the franchise system in carrying out the program.  Needless to say, the impact of these disputes has the potential to be a drag on EPS which may not be factored in to consensus estimates for 2012.  Indeed, as MCD marches forward with its remodel program, the longer WEN takes to resolve these issues, the more share the company is likely to lose to MCD.  The potential turmoil between the franchisees and management can only slow the potential progress of breathing life back into the Wendy's brand!

 

The street has been getting slightly more bullish of late, while the short interest in the stock is low but rising.  MCD has been posting some strong sales results, which is likely making life more difficult for Wendy’s.  Each issue that arises, whether it is around investing in new kitchen equipment, reaching consensus on breakfast, or the remodel program, pushes out the timeline for the turnaround further. 

 

At Hedgeye, we define our investment stance on each stock on three distinct durations: “Trade”, meaning three weeks or less, “Trend”, meaning three months or more and “Tail” meaning three years or less.  Given the issues that are weighing down WEN’s turnaround story, we are currently negative on a Trade duration, but bullish on the Tail. 

 

WEN - A SMOOTH TRANSITION FOR THE NEW BURGER? - wen rating historical

 

WEN - A SMOOTH TRANSITION FOR THE NEW BURGER? - WEN buyside sentiment

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 


Weekly Asia Risk Monitor

Positions in Asia: Long Chinese equities (CAF); Long Indian equities (INP); Short Japanese equities (EWJ).

 

We’re keeping this piece short and sweet going forward. Email us at if you’d like to dialogue more deeply about anything you see below.

 

PRICES

 

It was a rough week for the bellwether markets in Asia (China’s Shanghai Composite down -2.5%: Japan’s Nikkei 225 down -3%; India’s SENSEX down -2.8%). On the positive side, Thailand’s SET Index continues outperform the broader region, up +1.1% wk/wk and up +9.7% mo/mo. On both a median and average basis, Asian equity markets are down for the YTD – not confirming the “global growth will come roaring back in 2H” sentiment embedded in consensus estimates. The Japanese yen stole the show on the currency front (+1.8% wk/wk) and we think BoJ intervention is just around the corner from current levels. In the fixed income market, Indian sovereign debt yields ripped across the curve after the RBI hiked rates more than anticipated (+50bps vs. consensus estimate of +25bps). U.S. dollar correlations to Asian asset classes picked up noticeably over shorter durations – mostly inverse, though Chinese equities stand out as having a positive correlation of r² = .50 on a trailing 3wk basis. Dollar UP = Deflating the Inflation.

 

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KEY CALLOUTS

 

China: A tragic bullet train accident dominated the headlines earlier in the week followed by accelerating industrial earnings growth (+28.7% YTD). Though nothing more than consensus hearsay at this point, rumors which suggest that China is looking to accelerate diversification of its $3.2T of FX reserves (at least $1.2T are denominated in US dollars) continue to pickup as the debt ceiling drama accelerates. The “China diversification story” is not new news, FYI.

 

Japan: The key callouts out of Japan this week are directly related to monetary and fiscal policy. BoJ governor Masaaki Shirakawa signaled to the market that the BoJ stands ready to intervene (again) in the global FX market to stem the yen’s rapid appreciation. We’ve been bullish on Japan’s currency for the last few months, but are now bearish as BoJ intervention and a likely government shutdown in early fall looms large. Japan’s manufacturing data continues to improve on the margin, but it remains decidedly negative and our models point to a continuation of that phenomenon throughout the remainder of the year. Household spending growth slowed to -4.2% YoY in June and we do not see a meaningful acceleration on the horizon in 2012 if the consumption tax is doubled in upcoming Diet legislation.

 

India: The RBI hiked rates by double that of consensus estimates and we used the resulting equity market weakness to buy Indian equities. We’ve been the bears on India since early November and we see the vast majority of our negative catalysts in the rear-view mirror. Food inflation slowed to the weakest pace of growth since February ’09 and our models point to India’s monthly WPI figure to peak in August. We look for the implementation of Prime Minister Singh’s rice subsidy and health insurance to be bullish near-term for Indian growth (our models point to the first sequential acceleration since 1Q10 in 4Q). Further out, the program is likely to incrementally stoke inflation (wider fiscal deficit) and slow growth (higher interest rates), so, needless to say, we’ve got this position on a tight leash in the absence of further color.

 

South Korea: GDP growth slowed sequentially in 2Q (+3.4% YoY), while June industrial production growth slowed to the lowest rate in nine months (+6.4% YoY). Our models put us 100-200bps below the Bank of Korea’s GDP estimates for 2H11 and we expect their hawkish talk to subside on the margin as Korean economic growth comes in below their forecast. Korean growth is healthy; it’s just not as healthy as they’d like.

 

Australia: Both CPI and PPI came in faster on a YoY basis and slowed on a QoQ basis in 2Q – in line with our expectations – and created incremental RBA rate hike speculation in the FX and swaps markets. We think Stevens would be foolish to hike rates on Monday and risk sending the Australian economy into a potential recession. Simply put, there is not end demand on the ground: corporate credit growth contracted in June on a MoM basis for the first tin since October ’09 and mortgage origination grew at the lowest rate ever (+6% YoY). Forget the Chinese demand story; Australia’s housing market remains anemic and looks to hang over the economy for the foreseeable future (RPData’s House Price Index posted a sixth-consecutive monthly decline in June: -0.2% MoM).

 

New Zealand: Rates are going up in New Zealand soon (bullish for NZD). Reserve Bank of New Zealand governor Alan Bollard said it and recent economic data supports it: widening trade balance in June (+9.3M NZD YoY); rising business confidence in July (47.6 – a 14-month high); faster Money Supply growth in June (M3 = +7.3% YoY). The bifurcation between the Australian and New Zealand economies continues to widen.

 

Thailand: The Bank of Thailand reiterated our call that populist Pheu Thai policies will stoke inflation by stating, “The risk to inflation outweighs the risk to growth – especially in light of continued fiscal stimulus”. We remain bullish on Thai interest rates over the long-term TAIL, as we see little way around the government’s stated objectives other than higher rates of growth and inflation. Nearer term, accelerating industrial production growth (+3.3% YoY), quickening trade balance growth (-$656M YoY vs. -$2B YoY prior), and improving business sentiment (53.1 vs. 50.9 prior) all proved bullish for Thai stocks.

 

Singapore: CPI accelerated in June to +5.2% YoY alongside a sharp acceleration in industrial production growth to +10.5% YoY. The pickup was driven largely by pharmaceutical output (+41.5% YoY) while electronics production fell (-15.3% YoY). The jobless rate ticked up +20bps to 2.1% in 2Q and we should see that edge down in 3Q as growth reaccelerates. The inflation reading continues to support our bullish bias on the Singapore dollar (SGD).

 

Taiwan: GDP growth slowed in 2Q to +4.9% YoY alongside a deceleration in industrial production growth to +3.6% YoY – a 21-month low. As we called out in November of last year, Asia’s weakening manufacturing statistics continue to stand counter to overly-bullish expectations for U.S. GDP growth in 2H11 (Asian factories produce the stuff we consume typically 6-9 months before we buy it).

 

Darius Dale

Analyst


CONSUMER CONFIDENCE FALLS IN JULY

The University Of Michigan Survey Of Consumer Confidence Index collapsed in July.  The ongoing employment crisis, reduced home prices, and still-elevated gas prices are weighing on sentiment.  The embarrassing debacle in Washington is also likely causing concern. 

 

Looking at the components of the Index, it was telling that expectations came down so sharply, from 64.8 in June to 56 in July.  This is the lowest level since November 2009.  The overall Sentiment Index declined 7.8 points to 63.7 in July.  This month brought the largest decline since March and the lowest level for the Index since March 2009.   Current Attitudes declined by 6.2 points to 75.8, the lowest level since November 2009.

 

With GPD growth slowing to a measly 1.3% in the second quarter, the employment situation showing no real signs of turning around, and gasoline prices at $3.70 per gallon on a national basis, it makes sense that consumers are fearful.  The ceaseless media focus on the debt ceiling debate and the apparent incapability of the nation’s elected representatives to reach a resolution is also heightening concerns.

 

CONSUMER CONFIDENCE FALLS IN JULY - umich sentiment july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich expectations july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich attitudes july

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Early Look

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CONSUMER CONFIDENCE FALLS IN JULY

The University Of Michigan Survey Of Consumer Confidence Index collapsed in July.  The ongoing employment crisis, reduced home prices, and still-elevated gas prices are weighing on sentiment.  The embarrassing debacle in Washington is also likely causing concern. 

 

Looking at the components of the Index, it was telling that expectations came down so sharply, from 64.8 in June to 56 in July.  This is the lowest level since November 2009.  The overall Sentiment Index declined 7.8 points to 63.7 in July.  This month brought the largest decline since March and the lowest level for the Index since March 2009.   Current Attitudes declined by 6.2 points to 75.8, the lowest level since November 2009.

 

With GPD growth slowing to a measly 1.3% in the second quarter, the employment situation showing no real signs of turning around, and gasoline prices at $3.70 per gallon on a national basis, it makes sense that consumers are fearful.  The ceaseless media focus on the debt ceiling debate and the apparent incapability of the nation’s elected representatives to reach a resolution is also heightening concerns.

 

 

CONSUMER CONFIDENCE FALLS IN JULY - umich sentiment july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich expectations july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich attitudes july

 

 

Howard Penney

Managing Director



MPEL TRADE UPDATE

Higher estimates should continue the positive momentum in the stock.

 

 

Keith bought MPEL in the Hedgeye Virtual Portfolio today at $14.73 ahead of its upcoming Q2 earnings report.  The stock is trading close to a key TRADE support level.  MPEL has been our top idea for almost a year due to our projections of consistenly better than expected earnings.  The Q2 earnings release should be the best of the bunch and will likely be the next catalyst.  The company has gained market share YoY, despite Galaxy Macau opening on Cotai, and July share has been trending higher for MPEL so Q3 also looks like a big beat.  At 12x 2012 EBITDA, MPEL is still trading at a discount to most of the Macau players despite the huge outperformance of the stock.  Layering in the future development of the best site in all of Macau - Macau Studio City - completes the MPEL growth story.

 

MPEL TRADE UPDATE - MPEL

 


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