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RESTAURANT INDUSTRY EMPLOYMENT UPDATE

Employment data was positive for quick service and mixed for casual dining.

 

The overall jobs picture this morning was mixed this morning as the unemployment rate ticked down 10 basis points with a sequentially flat labor force participation rate but Private Payrolls for October came in at 104k versus 125k consensus and 191k prior (revised from 137k).  The revision was good news but, at the end of the day, this news still indicates – at best – that the economy is making very slow progress.

 

Employment by age shows a large uptick in employment in the 20-24 YOA bracket in October, indicating a sequential acceleration from September’s level.  This is a positive for the QSR industry which sources a lot of its customers from younger age cohorts.

 

RESTAURANT INDUSTRY EMPLOYMENT UPDATE - employment age

 

 

The second chart, below, is on a one month lag versus the chart above and shows employment growth in the full service and limited service industries.  Hiring continues to be strong on a year-over-year basis but, on the margin, employment growth in limited service restaurants showed improvement during September while full-service restaurants hiring slowed sequentially in terms of year-over-year growth.  We would need to see a continuation of this trend in October to gain more conviction of concern among restaurant operators.

 

RESTAURANT INDUSTRY EMPLOYMENT UPDATE - restaurant hiring

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


NOBODY BIG IS GOING PRIVATE FOR ANY TIME SOON

We like lodging but buying HOT because you think it is going private is not a sound investment strategy.

 

 

Theflyonthewall.com recently reported that there was go private chatter related to Starwood Hotels.  No offense to HOT shareholders – lodging stocks look interesting to us too – but the chances of a large company going private in our space over the near term are very slim.  Here is why:

  • Debt markets are not available for deal leverage
    • Max leverage for super high quality stuff is 5.5x and for meat and potato, it's 4.5x
    • All the peak deals were done in the CMBS markets, which aren’t really back
  • HOT does not own enough real estate for LBO.  Blackstone was able to take Hilton private given the frothy financing environment for real estate.
    • It’s not that cheap
    • Fritz likes being public and likes his job, so we don’t think the interest is there.  There is no one on the board likely to encourage them to do it
  • CEOs are not interested in M&A.  They are chasing new Greenfield opportunities.
  • M&A deals over the last 5 quarters or shall I say lack thereof:
    • ProLogis/AMB
    • Ventas/NHP
    • Corporate properties associates ($916MM)
  • There was the Sonesta deal yesterday.  However, it's a micro cap transaction and is more of an asset sale rather than M&A since their main asset sold - Royal Sonesta Hotel Boston - accounted for 86% of the purchase price.

ACTUAL PRIVATE PAYROLL GROWTH

ACTUAL PRIVATE PAYROLL GROWTH - Jobless Stagflation Birth Death Adjustment Impact

 

In 2011 YTD, the BLS’s birth/death model has contributed +530k jobs (34.7% of the headline number). This compares to +314 (35.8% of the headline number) in the year-to-date in 2010. On a YoY basis (which you have to analyze it due to the B/D Adj. being NSA and the Private Payrolls # being SA), the U.S. lost -70k jobs in October when netting out the B/D Adj.


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WMS: LOW EXPECTATIONS FOR FQ1

FQ1 was likely another weak quarter but can management convince investors they can turn it around?

 

 

We don’t think anyone has great expectations going into WMS’s print on Monday after close, despite the stock's nice recovery from $16ish lows in early October.  Buy-side whispers of a big earnings miss made their way to the sell-side after G2E and analysts took down numbers for the quarter and year.   

 

We’re still a penny below consensus for the quarter, although it’s not really about the quarter for WMS.  The performance of this stock will be determined on the Company’s ability to convince investors that the story isn’t broken and that they are on the road to recovery.  While there may be some short covering, management will likely be unsuccessful on this earnings conference call.  WMS is probably a show me stock at this point.

 

While replacements have been improving since 2008, the lack of new casinos and expansion have put overall slot market demand at all-time lows.  However, calendar 2012 should display a sharp uptick in new casinos/expansions. 

 

For FQ1, WMS likely incurred more impairment charges and needs at least another quarter to turn around the declines that they’ve been experiencing in their gaming operations install base.  As we wrote about in “G2E KEY TAKEAWAYS” on 10/06/11, we did walk away from G2E more bullish on the company over the long term.  They seem to be addressing their issues and getting back to what they do best – designing and developing good games.  However, it will likely take a couple of quarters to materialize.

 

Detail:

 

We estimate that WMS will report revenue of $180MM and adjusted EPS of $0.28.

  • We estimate product sales of $106.5MM at a 48% gross margin – impacted by some write-downs and promotional environment
    • 5,400 machine sales at $16.5k
      • 3,250 machine sales into NA – almost all replacement
    • $17MM of conversion and used game & other revenue – likely at lower than normal margins due to promotional activity
  • $73MM of gaming operations revenue at a 79% gross margin
    • We expected a sequential decline in WMS install base as well as yield pressure as WMS brings on new products at a slower pace than what’s been rolling off.  This trend should reverse towards the end of their fiscal year.
  • Other stuff:
    • R&D: $29.4MM
    • SG&A: $36.5MM
    • D&A: $21MM

Bearish TAIL: SP500 Levels, Refreshed

POSITION: no positions in SPY or Sector ETFs

 

Since I have no idea what the next central plan is other than its to “go big” (Obama at the G20 today), I’m just going to get out of the way. While the US stock market’s intermediate-term TREND level of 1213 held this week, its longer-term TAIL level of 1267 did not. This market is in no man’s land now.

 

Across my risk management durations here are the lines that matter most: 

  1. TAIL resistance = 1267
  2. TRADE resistance = 1251
  3. TREND support = 1213 

The way I’ve managed risk around this is from a net exposure perspective (overall my call is to take gross exposure down). On Tuesday’s TREND line test of 1213, I moved the Hedgeye Portfolio to 9 LONGS, 5 SHORTS. As of today, I’ve tightened that back up to 7 LONGS, 7 SHORTS.

 

The EUR/USD is going to decide which way the SP500 trades from here. I’m watching how the Euro’s $1.36 TRADE line support holds up very closely.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish TAIL: SP500 Levels, Refreshed - SPX


TGT: Selling

Keith just sold Target in the Virtual Portfolio; oil is too high and TGT has broken its immediate-term TRADE line of support.

 

TGT: Selling - TGT levels 11 4 11


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