A weekly look at commodity trends pertaining to our space. Over the last week, dollar strength and concerns surrounding economic growth have helped drive overall commodity prices lower.
Proteins moved higher, week-over-week, despite strength in the dollar and a fall off in grain prices. Coffee was the most notable mover of the week, declining -5.8%, but remain high on an absolute basis, as the chart below shows.
The CRB Foodstuffs Index is currently 9.25% above the July 2008 peak while WTI crude oil is trading 37% below its 2008 peak (Brent is down 23% from its 2008 peak). Retail gasoline prices in the U.S., on the other hand, are down 11.5% versus the ’08 peak, despite the decline this summer.
Coffee prices declining over the last week may be rooted in speculation that demand from roasters is weakening because of higher prices and increased supply. Despite the recent drop, coffee prices remain up 42% and 16% on a year-over-year and year-to-date basis, respectively. Emerging market demand for coffee also remains strong. Bloomberg reported today that emerging market and producing countries will account for more than 50% of all the coffee consumed in the world by 2020, according to P&A Marketing International.
Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.
PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”
“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”
HEDGEYE: Peet’s is a company with a very competent management team that manages coffee costs extremely well. Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.
SBUX (7/28/11): “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”
“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”
HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.
GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”
HEDGEYE: GMCR hedges out 6-9 months in advance. Strength in the dollar has helped bring coffee prices lower but whether or not dollar strength will continue or not will be a significant factor in future price action in coffee. Growing demand, globally, is bullish for coffee prices over the long term.
Wheat and corn prices came down week-over-week. Today, wheat futures are rebounding from a five-week low on speculation that demand will increase from livestock producers seeking an alternative to higher-prices corn as a feed grain.
Below is a selection of comments from management teams pertaining to grain prices from recent earnings calls.
PNRA (7/27/11): “Just to note on the cost of wheat, in 2011 overall, the per-bushel cost will be about the same as 2010 due to our laddering purchasing strategy.”
“We are going to take price in the fourth quarter. This price will offset dollar for dollar the per-bushel inflation of wheat of approximately $3 a quarter that we're going to see in the fourth quarter of this year and then across next year”
“We do continue to expect significant inflationary pressures in 2012, 4% to 5% food inflation, $10 million of unfavorability on wheat costs, which means that we don't expect operating margin much better than flat to full-year 2011 in 2012.”
HEDGEYE: Wheat costs have come down but it remains unclear whether or not the current easing of grain prices will continue. Weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S. Slowing demand may also mean lower sales for PNRA, so it remains to be seen if margins improve from this effect, even if high wheat costs come down.
DPZ (7/26/11): “We're fairly locked in on our chicken, locked in on our wheat into – partway into next year.”
PZZA (8/4/11): “We're actually covered through Q1 from a contract standpoint. So from a supply chain disruption or even significant price impact we don't anticipate anything between now and the end of the year.”
Chicken wing prices are up 20% from the year-to-date low in June. On a longer term basis, there is plenty of room for chicken wing prices to run higher, as the second chart below shows. It is likely, unless the increase in prices escalates further from here, that chicken wing price growth will remain negative, year-over-year, until the second half of 2012. BWLD has reaped significant rewards from declining wing prices over the last year but this tailwind could be in the process of turning around at this point.
While we agree, what does that say about valuations 2 months and 30% ago when Goldman had a Buy rating on the sector?
Goldman is passing itself off as a contrarian on Lodging because he is bullish. We’re bullish too but only as of very recently. GS has been bullish all the way through the recent carnage. This reminds me of the market perma-bulls in March of 2009 who patted themselves on the back because they called the March low – after calling the Feb low, the Jan low, the December low, well you get the picture. Even a broken clock is right twice a day.
GS lowered their 2012 RevPAR forecast to +4-5% due to economic concerns which begs a couple of questions. One, what were you doing at 5-7% in the first place? Second, what is the value add to make a change after the stocks have corrected 30%? The stock market is a discounting mechanism after all. We’re projecting 3-4% RevPAR growth but that is splitting hairs. The reality will likely be that if our target is reached, these stocks are going higher.
We certainly agree with Goldman’s assertion that valuations are reasonable now. However, if they are only reasonable now, how did they characterize them when the stocks were 30% higher? Looks like the term was “attractive”. Not sure I would characterize that as shrewd analysis.
We would characterize the current valuations as more than reasonable or even attractive. MAR, for instance, is trading right at its March 2009 trough. HOT is trading at 7.5x 2012 EV/EBITDA. This isn’t just a valuation call either. We actually think YoY RevPAR growth will accelerate the rest of the year from the July/August lows which will allay fears of massive earnings reductions. See our recent positive lodging posts "LODGING: REVPAR REVS UP (9/9/11)" and “IT’S NOT THE ECONOMY STUPID! (8/25/11)."
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Notable macro data points, news items, and price action pertaining to the restaurant space.
Full service restaurants outperformed for a second straight day. Over the past three months, the subsector has been severely beaten down, declining almost 13%.
- WEN is testing four prototypical new store designs, one of which is described in an article posted on QSRweb.com yesterday. MCD is clearly putting pressure on competitors to keep up with its modernization of its store base.
- MCD advertisements shown by Channel Seven in Australia during children’s TV programming have earned the broadcaster censure from the broadcasting watchdog.
- MRT was reiterated “Overweight” at Piper Jaffray with a $9 price target. “Travel data” was highlighted as a key factor in the “high-end consumer recovery thesis” related to this stock.
The Macau Metro Monitor, September 14, 2011
MID-AUTUMN FESTIVAL HOLIDAY SEES INCREASING TRAVELERS Jornal Va Kio
The Hengqin checkpoint recorded 27k border crossings in the 3-day mid-autumn festival holiday, up 42% YoY.
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR JULY 2011 DSEC
Visitor arrivals in package tours soared by 46.1% YoY to 670,664 in July 2011. Visitors from Mainland China (489,503); Taiwan (46,776); Republic of Korea (31,066); and Hong Kong (28,839) surged by 51.2%, 90.8%, 151.1% and 19.3% respectively.
At the end of July 2011, total number of available guest rooms of hotels and guest-houses increased by 2,080 (+10.5%) YoY to 21,804 rooms, with that of 5-star hotels accounting for 62.8% of the total. The average length of stay of guests decreased by 0.07 night to 1.4 nights. The average occupancy rate of hotels and guest-houses notched up a record high of 88.2%, up by 8.2% points YoY.
CHINA REAL ESTATE MARKET SLUMPS IN EARLY SEPT Capital Vue
According to Shanghai Securities News, home transactions in first-tier cities in China fell significantly in early September. New home transactions in the first 12-day period in September in Beijing averaged just 135 units, the lowest level since February; while Shanghai new home transactions so far in September fell 4% MoM to 1,648 units.
This note was originally published at 8am on September 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“All the world’s a stage,
And all the men and women merely players:
They have their exits and entrances;
And one man in time plays many parts.”
If U.S. politics is beginning to feel like theater, it should. Two nights ago, we had the Republican presidential candidates on stage. Last night, we had President Obama on center stage (albeit not the prime time stage due to a NFL matchup). All the political world is, indeed, a stage.
In Act 1, the Republican nominees took turns taking various shots at each other and at the current resident of the White House. According to the main stream media, former Massachusetts Governor Mitt Romney emerged as the protagonist in the dramatic comedy that has become the Republican race. Meanwhile, current Texas Governor Rick Perry seems to have lost, at least for now, his role as leading man. Although he did reaffirm his willingness to star in more independent films with the following statement about Social Security:
“It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you're paying into a program that's going to be there.”
That line is certainly not characteristic of a mainstream Hollywood blockbuster, but for those of us that enjoy factual documentaries it is a noteworthy comment.
Sometimes hero and sometimes villain, Congressman Ron Paul also provided ample Oscar worthy material two nights ago, which included the following quips:
“It isn't authorized in the Constitution for us to run a welfare state. And it doesn't work. All it's filled up with is mandates. And the mandates are what we're objecting to. I want to repeal all the mandates.”
“You can buy a gallon of gasoline today for a silver dime. A silver dime is worth $3.50.”
As for President Obama, like a poorly reviewed low budget film, expectations were low for him heading into last night’s command performance. While “expectations are the root of all heartache”, low expectations, on the other hand, are also the source of many upside surprises. Unfortunately, President Obama had center stage last night, but like an off Broadway show that isn’t quite ready for the big lights, Obama fell short.
Initially, the equity futures cheered Obama on as it was clear that his American Jobs Act was to be an upside surprise at $447 billion versus the rumors of $300 billion, but the new ideas that he and his aides were hinting at were virtually non-existent. The core tenets of his proposed job bill are as follows:
- Cuts payroll taxes in half for every working American and small business ($240 billion);
- Extends unemployment benefits for another year ($63 billion);
- Immediate investment in infrastructure ($50 billion);
- Rebuild and modernize at least 35,000 schools ($30 billion); and
- Help prevent state and local governments from laying off teachers and police ($35 billion).
Sound like a sequel? It should. The American Jobs Act has very similar tenets to President Obama’s original $800+ billion stimulus program, a program whose benefit to the economy was dubious at best. In fact, some estimates suggest that President Obama’s original stimulus bill cost an astronomical $280,000 per job. This is not exactly Keynesian policy that we can believe in.
While I’m generally hesitant to support government intervention in the economy, I would admit that there are policies that the government can enact which could catalyze long term economic activity. Unfortunately, this bill does not any. On the first key point of cutting payroll taxes, it is certainly a short term economic benefit, but short term cuts do not motivate long term investment. On the second key point of infrastructure spending, while perhaps the United States needs heightened infrastructure investment, there is no multiplier effect or long term job creation with such.
In addition, not only did President Obama present a bill last night that has limited new ideas and likely wouldn’t meaningfully stimulate the economy, he also presented a bill that will likely not pass through Congress. In presenting a bill last night that he did not first discuss or at least attempt to craft with Republican leadership, Obama continued to play into the highly partisan environment that is gripping Washington. To be fair, the partisanship is not all his fault, but he is certainly reaffirming that he is not a disinterested statesman who is above the fray.
Three years into his Presidency, it is also now clear that President Obama owns the economy. Without a doubt, he can blame the prior administration for leaving him with an economy that was on life support, but he and his administration have passed extensive legislature that has been largely ineffectual. As Michael Boskin from the Wall Street Journal wrote yesterday:
“Cash for clunkers cost $3 billion, just to shift car sales forward a few months. The Public-Private Investment Partnership, despite cheap federal loans, generated 3% of the $1 trillion claimed, and toxic assets still hobble some financial institutions. The Dodd-Frank financial reform law institutionalized "too big to fail" amid greater concentration of banking assets and mortgages in Fannie and Freddie. The foreclosure relief program permanently modified only a small percentage of the four million mortgages the president promised. And even Mr. Obama now admits that the shovels weren't ready in all those "shovel-ready" stimulus projects.”
The best future advice for President Obama and his administration likely also comes from Shakespeare:
“Boldness be my friend.”
As it stands, the American Jobs Act is not bold, innovative, or likely to pass.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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