Commodity price changes were mixed over the past week as chicken wings, cheese, and coffee gained while beef and grains declined. The strengthening dollar is putting a dampener on food inflation, particularly with respect to grain prices, and this, if it continues, will help to ease price inflation – eventually – in derivative food groups like proteins and dairy. One beneficiary could be PNRA while companies with exposure to dairy and protein like CAKE, CMG, TXRH and JACK will likely have to work through other supply and demand factors that are sustaining higher commodity prices in those groups. The bad news for BWLD was wing prices increasing by over 7% week-over-week.
Wheat – PNRA, DPZ, PZZA
Supply & Demand
Tomorrow’s World Agricultural Supply and Demand Estimates update from the World Agricultural Outlook Board will shed new light on supply and demand pressures on wheat and other foodstuffs. Analysts are expecting a large increase in the size of the winter crop planted – the largest for three years – just as global supplies are growing to their highest levels in 10 years. Russia, Ukraine, Canada, and India also harvested larger crops in 2011 than in 2010 due, in some cases, to adverse weather conditions in 2010.
Demand is still expected to be strong in 2012. The USDA expects growth in demand to exceed 4% with feed use in wheat rising 16% year-over-year as corn prices push farmers to substitute more for corn in livestock feed.
Panera follows a laddering purchasing strategy for wheat and, as a result, the cost of the grain for PNRA is expected to be flat in 2011 versus the year prior.
As of the last earnings call, on October 26th, management declined invitations to provide thoughts on the quarterly cadence of commodity inflation for 2012 instead providing 4% as an annual inflation estimate. The company locks into some of its wheat needs up to a year in advance so we do not expect any revision in near-term expectations due to the spot price declining. The top-line has been strong, however, so the company could continue to deliver in the face of commodity pressure.
Dominos is locked into wheat “partway” into 2012.
Chicken Wings – BWLD
Supply & Demand
As the impact of processors cutting production is felt in the supply of chicken and the demand for chicken from the food service industry increases in 2012, we expect prices to increase for chicken wings.
Our bearish thesis that we laid out for Buffalo Wild Wings’ stock in October was based on wing prices of $1.40 in 1Q12. Prices are currently at $1.70 and we think downgrades and a change in tone from management are likely as the investment community looks to 2012.
Beef – WEN, TXRH, JACK, CMG
Supply & Demand
Beef prices declined on the week as rains in Texas boosted winter wheat and cattle pastures. 2011 was the driest year on record in Texas and the domestic herd size is depleted due to high feed costs coinciding with the drought in the Lone Star State and high feed costs. Feed costs remain high but, if corn prices come down then margins for processors could improve over the intermediate to long term.
Demand for beef continues to grow as changing diets in emerging markets and fading BSE-related restrictions on U.S. beef are bullish tailwinds over the long term.
WEN, TXRH, JACK, CMG
As this week's beef chart shows, companies with exposure to beef prices are facing significant year-over-year cost inflation for at least the first quarter.
Chicken – Whole Breast
BYD Q4 looks like a beat. Will the sell side finally give this stock a break?
As always, BYD is pretty low on the list of what’s ‘sexy’ in gaming right now, and maybe that’s why we like it. In a slow but steady US GDP growth environment, we believe Las Vegas – both the Strip and Locals – could surprise on the upside in 2012.
For Q4, BYD could beat pretty handily. We’re projecting $115 million in EBITDA and the Street is only at $111 million. Even our number may be conservative. Our EPS estimate is $0.01. This should be the first YoY increase in EPS since Q3 2007. We think management will be positive on 2012 during the conference call, particularly about the LV Locals market which finally may start to show consistent, albeit slow, growth going forward.
BYD is definitely not a consensus long call. Most analysts have Neutrals, Holds, and Sells on the stock. JPM and Lazard recently downgraded it due to Atlantic City concerns, right before New Jersey released strong December numbers.
We estimate that BYD will report $583MM of revenues and $115MM of EBITDA in 4Q11.
- Las Vegas locals revenue will be down just -0.5% YoY to $151MM and EBITDA will increase to $35MM due to a 2% YoY reduction in operating expenses.
- 4QTD Locals revenue has been up 6.8% but due to an accounting peculiarity in the Nevada Gaming Commission reporting, December will likely be down.
- Downtown revenue of $58MM and EBITDA of $11MM
- Midwest & South revenue of $197MM and EBITDA of $39MM – which includes $27MM of revenues and $8MM of EBITDA from Imperial Palace
- Borgata revenue of $174MM and EBITDA of $40MM
- $10MM of corporate expense
- $35MM of D&A
- $2MM of share based comp
- $1MM of deferred rent
- $40MM of interest expense
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HEDGEYE 1Q12 KEY MACRO THEMES
REPLAY PODCAST & SLIDES
January 11, 2012
Earlier today, Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl G. Jones, hosted their quarterly themes conference call. In addition to another lively and robust Q&A session, the core topics included:
- 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.
To access the replay podcast, please copy/paste the link below into the URL of your browser:
To access the accompanying slide presentation, simply click on the following link:
The Hedgeye Macro Team
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.
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.
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.
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