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(REVISED) PENN: TRADE UPDATE

Please disregard previous email.

 

 

Today, Keith shorted PENN in the Hedgeye Virtual Portfolio at $36.40.  According to his model, PENN currently has TRADE resistance at $37.54 and TREND resistance at $40.03.  

 

As we mentioned in our notes last week (REGIONALS ROLLING [OVER], (9/8/11); REGIONALS: SHOW ME THE GROWTH, MO (9/13/11)) the regional gaming market revenues for August slowed down in some markets and declined in others.  We saw a similar bearish trend in July.  A sluggish domestic environment characterized by weak housing and high unemployment has certainly affected the US consumer in those two months and it should continue into September.

 

PENN is our top short in the regionals space given its exposure to many of the underperforming markets (IL, IN, PA) and relatively more downside to its trough valuation in March 2009.  We certainly don't see the quarterly upside for Q2 that the investors have grown accustomed to and estimates may actually need to come down.  While PENN is a fine company with solid management, the sell side is overly bullish on the name in our opinion.

 

(REVISED) PENN: TRADE UPDATE - PENN



PENN: TRADE UPDATE

Keith shorted PENN in the Hedgeye Virtual Portfolio.  

 

 

Today, Keith shorted PENN in the Hedgeye Virtual Portfolio at $36.40.  According to his model, PENN currently has TRADE resistance at $37.54 and TREND resistance at $40.03.  

 

As we mentioned in our notes last week (REGIONALS ROLLING [OVER], (9/8/11); REGIONALS: SHOW ME THE GROWTH, MO (9/13/11)) the regional gaming market revenues for August slowed down in some markets and declined in others.  We saw a similar bearish trend in July.  A sluggish domestic environment characterized by weak housing and high unemployment has certainly affected the US consumer in those two months and it should continue into September.

 

PENN is our top short in the regionals space given its exposure to many of the underperforming markets (IL, IN, PA) and relatively more downside to its trough valuation in March 2009.  We certainly don't see the quarterly upside for Q2 that the investors have grown accustomed to and estimates may actually need to come down.  While PENN is a fine company with solid management, the sell side is overly bullish on the name in our opinion.

 

PENN: TRADE UPDATE - PENN


Former CNBC Executive Joins Hedgeye

Hedgeye Risk Management, the leading real-time investment research firm, today announced that Jeremy Pink, former Senior Vice-President, Business News at CNBC, has joined the firm as a Managing Director to lead their mass-market product and media efforts.
 
“We’re excited about having a distinguished executive on our team.  Jeremy shares our vision for redefining the financial media space; the depth and breadth of his experience will help accelerate building out that aspect of our business,” said Keith McCullough, Founder and CEO of Hedgeye Risk Management.   
 
“Hedgeye’s dedicated team of analysts and researchers creates some of the most innovative and original content about financial markets and macroeconomics of anyone in the world. I am delighted to help bring that original content to retail investors around the globe,” Mr. Pink said in a statement.  “Hedgeye’s analysis and insight promises transparency, accountability and trust; attributes that smart investors demand in today’s volatile global markets.”

Hedgeye is pushing its resources into building its mass-market business with a real-time stock alerts product and daily newsletter to start.  Mr. Pink will be developing more subscription products targeted at this market segment with brokerage accounts, half of who don’t trade at all and an over-whelming majority who trade between just 1-10 times per year.  Hedgeye’s value proposition around real-time risk management and its principles of transparency, accountability and trust, give it confidence that retail investors will inevitably subscribe and become more active in managing their own portfolios.

 
 
ABOUT HEDGEYE RISK MANAGEMENT
Hedgeye Risk Management, a leading on-line financial media and information company, delivers real-time research to institutional and individual investors. Hedgeye generates and delivers actionable investment ideas by combining quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team includes some of the world’s most highly regarded research analysts – united around a vision of independent, un-compromised real-time investment research, as a service.


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LIZ: Black Book Available

 

Our LIZ Black Book is now available...

 

We think that LIZ has more positive asymmetric factors than nearly any other story we can find in retail today. Yes, we know it’s a small, ugly, financially and operationally-levered story with a horrific track record in hitting expectations and in corporate governance. But trust us, that’s the consensus call.

 

This is not simply a call on improved operational performance or a simple divestiture. But rather the culmination of changes that have greatly reduced the asset intensity of the model at the same time we see sales and EBIT margins turn up meaningfully on the margin.

 

We can talk about our $16 sum-of-parts model until we’re blue in the face, but stocks don’t trade on break-up values…we get it. But they do trade on cash flow, and the delta here for changes in cash flow and RNOA will be unmistakable over the next 12-months, and should lead to price appreciation that will be embarrassing to have missed.

 

 

If you have not received a copy of our report, contact to request access.

 

LIZ: Black Book Available - LIZ BB Cover

 

Casey Flavin

Director

 

 

 


THE HBM: PNRA, YUM, SBUX, CBRL, DIN

Notable macro data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

Commodities

 

While coffee prices have declined -3.3% over the last week, prices have increased 24% since August 8thand near peak YTD levels.

 

THE HBM: PNRA, YUM, SBUX, CBRL, DIN - coffee 913

 

 

Subsectors

 

Full service restaurants outperformed peer food, beverage and restaurant subsectors as DIN and CBRL traded strongly.  CBRL reported a poor quarter this morning and is set to decline on the open, trading down -5% premarket.

 

THE HBM: PNRA, YUM, SBUX, CBRL, DIN - subsectors fbr

 

 

QUICK SERVICE

  • PNRA has been reiterated Overweight by Piper Jaffray with a price target of $148
  • YUM expects its Indian operations to be around $1 billion by 2015.
  • SBUX short interest has increased by 61% as of the August 31stdata versus the data as of two weeks prior.

 

CASUAL DINING

  • CBRL reported $1.00 in EPS for 4QFY11 versus expectations of $0.91.  The board has authorized $65mm for share repurchases.  Restaurant comps came in at -1.4% versus consensus of -0.7%.  Retail comps came in at -0.7% versus consensus of +1.2%.  Traffic declined 4.2% during the quarter while average check gained 2.8%.  Operating margins, at 6.2%, were 60 basis points below consensus. 
  • DIN’s Applebee’s Neighborhood Grill & Bar has teamed with sports channel ESPN for a fall Monday night football “Check In and Win” promotion.

 

THE HBM: PNRA, YUM, SBUX, CBRL, DIN - stocks 913

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Half The World

This note was originally published at 8am on September 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Half the world hates, what half the world does every day…Half the world lies, half the world learns…Half the world talks, with half the mind on what they say.”

 – Neal Peart

 

To suggest that these lyrics by Canada’s son Neal Peart apply to Wall Street would be all too appropriate.

 

There’s the buy side half, and there’s the sell side half.

 

But even within those groups, there are the big guys – with a big sense of entitlement – such as the Morgan Stanleys, Citigroups and BofAs of the world who use the Fed as their piggybank at our expense.  No, Hedgeye did not accept any TARP money and we won’t in 2012, either.

 

Similarly on the buy side there are the PMs and Analysts who have exclusive access to management teams to get inside info during ‘double secret one-on-ones’ at broker conferences.

 

And then there are the others who have to fight harder and rely on a tried and true investment process that will consistently generate positive returns across all durations without what we call “orange jumpsuit risk”.  We’re proud to call many of them our clients.

 

But as for the big guys, especially on the sell-side-half, it’s pretty amazing that despite all the resources, access and clout, there’s still such absence of any rigorous quantitative modeling of earnings and cash flow.

 

This translates into what we’ll call ‘entitlement to grow’. It’s what the sell side seems to bestow ad nausea to virtually every company in (and out) of the S&P.  

 

Sit next to any analyst – even someone considered halfway decent – while they’re building out a model. When plugging in a growth rate for a certain product, business line, or region, and ask them to build a bearish revenue case.  The chances are that they’ll take revenue growth closer to zero.

 

Then what about gross margins? Maybe they’ll take them down a few basis points . . . let’s say 50bps.

 

As for SG&A, here’s the real kicker.  Companies in retail give SG&A guidance – for the most part – as a percent of sales. That means, of course, that the sell side models it that way as well. But the guided SG&A ratios are simply the product of the company’s sales results from a largely predetermined SG&A plan. That sell-side “bear” will end up with margin deleveraging of around 50bps.

 

In reality (which is where we live) what happens if sales targets come in light – or heaven forbid – are actually down year on year?

 

SG&A is planned predominantly on a fixed basis. Roughly 60-70% of SG&A costs are headcount-related for the average retailer or brand.  Then there’s another 10-15% that’s marketing and R&D. The remainder is largely corporate (i.e. fixed). Are these expenses pliable? Yes, in part. Some can be flat-out cut, even if they shouldn’t be. But those that are certainly take more time than the cadence of revenue recognition.

 

So what’s the REAL bear-case?

  • Unemployment is still in the dog house, and there’s no near-term tax stimulus;
  • Consumer spending – which is 72% of our economy – is down 1-2%;
  • Zero percent 4Q GDP growth;
  • ‘Essential Spending’ which includes housing, food, energy, etc… +2-4%; and
  • Discretionary spending -5-7%.

If this is the scenario, can the Wal-Marts of the world do, ok?  Yes they can, which is why WMT is one of our top long ideas.  Nike, which has a structural advantage and is gaining share in a global duopoly in a GDP+ category?  Definitely.  Liz Claiborne, which has more asymmetric factors to outperform in a bad economy than almost anyone in retail?  Yes.

 

How about JC Penney, which is…well…it’s JC Penney? Absolutely not. The other key losers are those that are posting unsustainably high growth rates today, like Hanesbrands and UnderArmour (even though the latter is a great longer-term story).

 

Whether a company wins or loses is one thing, but being fully represented in expectations is another. If JC Penney’s sales square footage is -1%, comps are down 3-4%, gross margins are down 100bps+, and SG&A is growing by 3%, does anyone want to guess what that does to EPS growth? Do the math, it gets you to something like -125% -- or some other meaningless number when EBIT is wiped out entirely.

 

Is that dude whose shoulder you’re watching over running any of these numbers? My sense is that he’s probably not. Actually, my opinion is meaningless when the flat-out fact is that the consensus is looking for EBIT to grow for JC Penney in the high single digits over the next year.

 

So Mr. Ackman, do you believe +8% or -125%. Not exactly a delta I want to be looking at in this tape.

 

There’s this little thing called leverage. It’s a wonderful thing on the upside (circa 2003). But unfortunately, today it’s looking like 2008 all over again.

 

If you’re not part of the right half, get there… fast…

 

Keith’s immediate-term ranges for Gold, Oil, and the SP500 are now $1779-1897, $87.51-90.73, and 1148-1207, respectively.

 

Brian P. McGough
Managing Director

 

Half The World - Chart of the Day

 

Half The World - Virtual Portfolio


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