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CAKE: LOOKING AHEAD TO 4Q EARNINGS

We were cautious on The Cheesecake Factory’s prospects for 2011 for much of last year.  Approaching 4Q earnings, we think expectations are in line. 

 

The Cheesecake Factory has been downgraded by several sell-side firms in the last few months.  Our bearish stance on the stock hinged on two factors: overly optimistic company outlook on commodity costs in 2011 and consensus estimates being too high for the year.  During the third quarter, both of those factors changed as management revised its guidance on commodities and the street lowered expectations.  Sentiment duly followed the stock price but, at this juncture, we believe that the fourth quarter is likely to be strong for the company.  Furthermore, the likeliness of commodity inflation surprising the Street has been reduced; we believe that on the short side heading into earnings, the risk outweighs the reward.

 

CAKE: LOOKING AHEAD TO 4Q EARNINGS - cake sentiment

 

 

One chart we would like to highlight pertaining to the top-line is below: CAKE system same-store sales versus the ICSC Chain Store Sales Index.  The correlation between the two data sets is +0.8.  Given that consumer metrics in general, not only the ICSC Chain Store Sales Index, have been indicating quite healthy levels of spending, it is difficult to be bearish on CAKE’s top-line prospects.  CAKE is a beneficiary of traffic in malls and the strong dollar as much as any other player in the space.  Our firm’s macro call has been Strong Dollar = Strong Consumption and that applies to CAKE as well.

 

CAKE: LOOKING AHEAD TO 4Q EARNINGS - cake comps vs icsc

 

 

Another strong aspect of CAKE’s top-line story is its growth profile.  The smaller format of restaurant that the growth is weighed towards is offering higher returns and productivity (north of $1k/square foot).  From a guidance perspective, we expect continuing positive tone around this point.  

 

While our estimate for 4Q EPS is coming in slightly below the Street’s at $0.51 versus $0.52, we believe that the top-line will overshadow any other concerns.  The company continues to generate free cash flow (~$130m through the first three quarters) and is using the majority of that to buy back shares.

 

 

 

Howard Penney 

Managing Director

 

Rory Green

Analyst




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Q1 2012 MACRO THEMES AND PRESENTATION

Valued Client,
 
5-10 minutes prior to the 11AM EST start time today please dial:

(Toll Free) or (Direct)
Conference Code: 958997#
  

Materials:"Q1 2012 THEMES"

                 
To submit questions for the Q&A, please email .

****************************************************************************** 


Q1 THEMES & PRESENTATION:

STRONG DOLLAR = STRONG CONSUMPTION, DEFLATING THE INFLATION II & GROWTH SLOWING'S BOTTOM

 

Topics will include:

   

  • Strong Dollar = Strong Consumption - Our King Dollar thesis continues to strengthen and with it the outlook for U.S. consumption, roughly 70% of GDP, and U.S. consumption-related equities.
  • Deflating the Inflation II - Alongside the strengthening of the King Dollar and the continued high inverse correlation of commodities to the U.S. dollar, we expect to see commodity inflation continue to subside. Winners include: domestic and international consumers. Losers include: commodity producers and emerging market currencies as their central banks ease monetary policy.
  • Growth Slowing's Bottom - One standard bearer of global macro markets is that they revert to the mean.  As economic growth bottoms out, certain equity markets, notably China, Germany, and the U.S., look set to outperform.

 

ABOUT HEDGEYE

Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service. For a complete listing of our sector head bios, please click here: https://www2.hedgeye.com/pages/team

 

Please contact if you have any questions.  

Regards,

   

 

The Hedgeye Sales Team

 
HEDGEYE RISK MANAGEMENT                                                       
111 Whitney Avenue
New Haven, CT 06

www.hedgeye.com
 


THE HBM: YUM, GMCR

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Gasoline Use

 

According to MasterCard Inc., U.S. Gasoline demand fell by 1.4% WoW and 4.1% YoY to the lowest level in more than seven years of records.

 

 

Comments from CEO Keith McCullough

 

Romney wins big and continues to be a Stable/Strong US Currency trade. Obama is going to have to deal w/ that too:

  1. HANG SENG – in my core multi-factor model, this index carries a heavy-weight as a leading indicator – so seeing last night’s follow through buying (on volume, ahead of more Chinese data this week) is just bullish. Hang Seng +0.8% to 19,151 matters because it’s an explicit confirmation of an intermediate-term TREND breakout > 18,616 support. China Growth Slowing at a slower pace.
  2. COPPER – the Doctor is in the Global Macro house this morning! Ringing the alarm clocks on the bears early (and loudly), up +1.1% isn’t the point as much as an intermediate-term TREND breakout > $3.45/lb – we’ll see if that holds (still below TAIL resist of $3.98), but Copper likes what it sees out of China all of a sudden.
  3. TREASURIES – literally the only major leading indicator in my macro model that has not yet confirmed bullish immediate-to-intermediate-term slopes of growth and inflation readings. TRADE line support for 10yr yields = 1.96% (so we’re above that), but the TREND up at 2.03% is the biggest line in the sand that has not yet been traversed. Stay tuned.

Ron Paul won the youth/change vote (18-27 yr olds) again last night on Hayekian economics.

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: YUM, GMCR  - subsector fbr

 

 

QUICK SERVICE

 

YUM: Yum! Brands’ Taco Bell chain is in the news today as details emerge about its new menu aimed at taking share from Chipotle.  Mike Brugamin, a former Yum! Brands senior project manager and Taco Bell store-owner, was quoted by Bloomberg as saying “they have a tough road ahead of them… [Taco Bell] has always been about value.”  Such a turnaround obviously required capital in order to produce the new menu items and that can be expensive for franchisees.  In our view, the company’s efforts are aimed at improving brand perception. As the Bloomberg article states, Taco Bell scored the lowest in food quality and atmosphere among limited-service Mexican eateries, including Chipotle and Qdoba, according to a September survey by Nation’s Restaurant News and consultant MD Partners.

 

YUM: Yum! Brands is adding 100 KFC restaurants to its Africa division, opening up in seven new countries.

 

GMCR: Green Mountain will report 1QFY12 earnings on February 1st, after the market close.

 

THE HBM: YUM, GMCR  - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP – January 11, 2012


As we look at today’s set up for the S&P 500, the range is 25 points or -1.48% downside to 1273 and 0.46% upside to 1298. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - onefinal

 

THE HEDGEYE DAILY OUTLOOK - two

 

THE HEDGEYE DAILY OUTLOOK - three

 

EQUITY SENTIMENT:


TREASURIES – literally the only major leading indicator in our macro model that has not yet confirmed bullish immediate-to-intermediate-term slopes of growth and inflation readings. TRADE line support for 10yr yields = 1.96% (so we’re above that), but the TREND up at 2.03% is the biggest line in the sand that has not yet been traversed. Stay tuned.

  • ADVANCE/DECLINE LINE: 1633 (+821) 
  • VOLUME: NYSE 840.83 (16.48%)
  • VIX:  20.69 -1.80% YTD PERFORMANCE: -11.58%
  • SPX PUT/CALL RATIO: 1.40 from 2.03 (-31.03%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 57.44
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.95 from 1.98
  • YIELD CURVE: 1.71 from 1.74

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00am: MBA Mortgage Applications, Jan. 6 (prior -4.1%)
  •  8:40am: Fed’s Evans speaks on U.S. economy in Illinois
  • 9:00am: Fed’s Lockhart to speak on economy in Atlanta
  • 10:30am: DoE inventories
  • 12:30pm: Fed’s Plosser speaks on economy in Rochester, NY
  • 1:00pm: U.S. to sell $21b 10-yr notes (reopen)
  • 2:00pm: Fed’s Beige Book

 

WHAT TO WATCH: 

  • Mitt Romney wins New Hampshire primary, Ron Paul finishes second; South Carolina primary next
  • Microsoft said 4Q industry PC sales will probably be lower than analyst est. on Thailand flooding
  • Geithner meets with Chinese officials, encouraged by comments on growth; due to meet Japanese PM Yoshihiko Noda
  • MetLife to shut its home mortgage-origination operation, costing at least $90m; most of 4,300 units employees to lose jobs
  • CFTC may vote on Dodd-Frank Act proposal that would limit proprietary trading by banks, limit hedge fund investments
  • CEOs of Deutsche Boerse AG, NYSE Euronext meet in NY today as they seek to overcome opposition to exchange combination
  • MF Managing Director Christine Lagarde to meet with French President Sarkozy after meeting with German Chancellor Merkel yday. Merkel, Italian Prime Minister Monti give news conference ~7am ET
  • Supervalu releases earnings at 8am; watch gross margin, forecast
  • Lennar releases earnings at 6am; watch orders, traffic, mortgage availability
  • No IPOs planned

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


COPPER – the Doctor is in the Global Macro house this morning! Ringing the alarm clocks on the bears early (and loudly), up +1.1% isn’t the point as much as an intermediate-term TREND breakout > $3.45/lb – we’ll see if that holds (still below TAIL resist of $3.98), but Copper likes what it sees out of China all of a sudden.

  • U.S. Wheat Expanding From Century Low as Glut Looms: Commodities
  • Coal Set to Rebound After Worst Year Since 2005: Energy Markets
  • Oil Falls From Near One-Week High After German Economy Shrinks
  • China’s Gold Imports From Hong Kong Reach Record on Demand
  • Soybeans Fall as Cooler Weather in South America May Help Crops
  • Cocoa Retreats by 3.1% on NYSE Liffe, Erasing Earlier Gains
  • Copper Trades Unchanged at $7,740 a Ton in London, Erasing Gain
  • Thailand to Buy Rubber at Above-Market Rates After Protests
  • Red Kite Evangelicals Reap 47% Sowing Bet on China Copper Market
  • Rio, Fortescue Halt Ore Loading, Ports Shut as Cyclone Nears
  • Exxon, Vitol Said to Sell Nigeria Oil Supply to Bharat Petroleum
  • Russia Resumes Crude Oil Deliveries to China Via Kazakh Pipeline
  • Iranian Nuclear Scientist Killed in New Attack Against Program
  • COMMODITIES DAYBOOK: U.S. Wheat Acreage Expands Most in 3 Years
  • Gold Climbs to 4-Week High on China Demand, Europe Debt Concerns
  • Rapeseed May Advance 5.9% in Retracement: Technical Analysis
  • Australian Ports Shut for Cyclone Export 41% of Global Ore Trade

 

THE HEDGEYE DAILY OUTLOOK - four

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - five

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - six

 


ASIAN MARKETS


 HANG SENG – in our core multi-factor model, this index carries a heavy-weight as a leading indicator – so seeing last night’s follow through buying (on volume, ahead of more Chinese data this week) is just bullish. Hang Seng +0.8% to 19,151 matters because it’s an explicit confirmation of an intermediate-term TREDN breakout > 18,616 support. China Growth Slowing at a slower pace.

 

THE HEDGEYE DAILY OUTLOOK - seven

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - eight

 

 

 

The Hedgeye Macro Team

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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