We continue to hold a positive view of YUM on all three durations (trade, trend and tail). The earnings call tomorrow at 9:15am will offer a chance for analysts and investors to hear further details about 2011 and trends in 2012 to-date.
With both MCD and SBUX seeing their stocks decline on 4Q11 earnings results that were strong but not strong enough, the pressure was on YUM to print an exceptional quarter and, on the surface, it looks like they delivered.
Yum! Brands’ stock had a tremendous 4thquarter, outperforming the S&P 500 by 8.3%. At first take, there does not seem to be many holes we can poke in the results such that we can say that the momentum is going to slow in the near term. The top-line momentum in YUM’s China division is strong although food and labor inflation continue to pressure margins.
We’ll be waiting for additional color from management tomorrow on the call. The US division might be turning as the compares get easier from here and the worst for Taco Bell appears to be over.
- The China division reported $5.56 billion in revenues in 2011, up 35% versus 2010
- System sales grew 40% year-over-year in the fourth quarter (33% excluding FX), while comparable restaurant sales came in at 21% versus 17% consensus
- By concept, KFC comps were 22% in the fourth quarter while Pizza Hut delivery and casual dining comps gained 25% and 15%, respectively, during the fourth quarter
- Restaurant margin decreased 240 basis points to 15.8% in 4Q11 due to 11% commodity inflation and 18% wage rate inflation. FY11 commodity inflation was 8% and labor inflation 20%
- YRI reported system-sales up 11% (up 10% excluding FX) with same-store sales of 3%, slightly above consensus
- Comparable restaurant sales of 3% implied two-year average trends flat with 3Q11
- Restaurant operating margin decreased by 67 basis points to 11.6% in 4Q11
- The most significant 4Q11 upside surprise came from the US division
- 4Q comparable restaurant sales were up 1% versus consensus of -2.5%. KFC comps decline -1%, Taco Bell comps declined -2% and Pizza Hut comps were up 6% versus 4Q10. “The Box” promotion drove high single-digit comps in the latter stages of 4Q11
- 4Q restaurant operating margin declined by roughly almost 75 basis points driven by commodity inflation of 7%
Conclusion: Latin American JAN growth and inflation data continues to come in in-line with our views at the start of the year. Looking forward, however, the intermediate-term outlook has changed with the potential introduction of another round of The Bernank Tax.
All % moves week-over-week unless otherwise specified.
- Median: +3%
- High: Peru +4.8%
- Low: Venezuela +0.2%
- Callout: Latin American equity markets are up +12% YTD on a median basis
- FX (vs. USD):
- Median: +1.6%
- High: Mexican peso +2.4%
- Low: Argentine peso flat wk/wk
- Callout: Latin American currencies are up +8.2% vs. the USD YTD on a median bass
- S/T SOVEREIGN DEBT (2YR YIELD):
- High: Colombia/Mexico +2bps
- Low: Brazil -2bps
- Callout: Brazil -54bps YTD
- L/T SOVEREIGN DEBT (10YR YIELD):
- High: Mexico +16bps
- Low: Colombia -2bps
- Callout: Brazil +8bps YTD
- SOVEREIGN YIELD SPREADS (10s-2s):
- High: Mexico +14bps
- Low: Colombia -4bps
- Callout: Brazil +62bps YTD
- 5YR CDS:
- Median: -4.7%
- High: Argentina -2.3%/-17bps
- Low: Chile -6.5%/8bps
- Callout: Latin American 5yr sovereign CDS have tightened -13.9% YTD on a median basis
- 1YR O/S INTEREST RATE SWAPS:
- Median: +2.8%
- High: Colombia +6.3%/+32bps
- Low: Brazil -0.7%/-7bps
- Callout: Colombia +8.4%/+42bps YTD vs. Brazil -5.6%/-57bps
- O/N INTERBANK RATES:
- Median: flat wk/wk
- High: Colombia +5.2%/+24bps
- Low: Mexico -0.4%/-2bps
- Callout: Brazil down -16.9%/-210bps over the last six months vs. Argentina +4.1%/+40bps
- CORRELATION RISK: Globally-interconnected growth/inflation expectations continue to be priced into Latin American equity markets, based upon their 90% positive correlation to the 10yr U.S. Treasury Yield over the LTM.
Full price and performance tables can be found at the conclusion of this note.
CHARTS OF THE WEEK
The latest batch of PMI data shows Brazil improving, on the margin, relative to the other key economy in the region:
Argentina’s flurry of financial repression has achieved the desired results – for now:
The U.S. Dollar remains between the proverbial “rock and a hard place”, clouding the region’s intermediate-term growth/inflation/policy outlook:
Growth – Growth across the region was fairly mixed in JAN, but easing speculation has been highly supportive of growth expectations and capital markets inflows:
- Brazil: Both Manufacturing and Services PMI readings ticked up in JAN to 50.6 (vs. 49.1 prior) and 55 (vs. 54.8 prior), respectively. Export growth came in slightly faster in JAN as well: +6.1% YoY vs. +5.8%.
- Brazil: Lower volatility across global financial markets have been supportive of EM FX in the YTD, as capital flows in the form of repatriated USD-debt issuance and foreign portfolio direct investment pick up after a subdued 2H11. Brazilian corporations issued $12.3B in USD-denominated paper in JAN alone and the real closed the month +6.7% higher vs. the dollar. A rising trend of selling existing bonds on which the paperwork has been previously filed indicates this rush by Brazilian corporations to secure financing while pricing conditions are favorable.
- Mexico: Both Manufacturing and Services PMI readings ticked down in JAN to 51.8 (vs. 52 prior) and 51.7 (vs. 54.4 prior), respectively. On the consumer front, Confidence ticked up in JAN to 95.4 vs. 90.8 prior.
- Chile: The country’s Economic Activity Index (proxy for GDP) accelerated in DEC to +5.3% YoY vs. +4% prior.
- Colombia: The Urban Unemployment Rate ticked up in DEC to 10.4% vs. 10.3% prior.
Inflation – While reported inflation continues to trend down within the construct of our Deflating the Inflation II thesis, another round of The Bernank Tax is creating consternation within Latin American inflation expectations:
- Argentina: Argentine inflation-linked bonds are having their best start to the year since 2009, after the IMF failed in its mission to get the country to improve the quality of its inflation statistics – suggesting that Argentina’s trend of dramatically underreporting CPI will continue indefinitely. The notes are up +9.6% YTD vs. +1.4% for similarly-structured Brazilian paper.
- Colombia: CPI slowed in JAN to +3.5% YoY vs. +3.7%. We continue to look to the USD’s quantitative setup for clues as to what degree The Bernank Tax will limit any further downside/spur upside in LatAm inflation readings over the intermediate term.
- Peru: CPI slowed in JAN to +4.2% YoY vs. +4.7% prior.
Policy – Latin American policy continues to be highly interventionist, particularly with regards to exchange rate management:
- Brazil: The central bank bought dollars in the FX forwards market for the first time since JUL last week, in an attempt to slow the real’s appreciation (+8.6% YTD through Friday).
- Argentina: In what has become a near-weekly announcement of some new form of Big Government Intervention, the President Fernandez’s regime will require importers to seek authorization from the federal tax agency prior to purchasing goods abroad. The measure, which is another backdoor attempt at financial repression via keeping pesos from leaving the country, is estimated to slow production and create product scarcity among 5,500+ Argentinean producers – with the latter being supportive of even higher rates of structural inflation in Argentina (currently estimated at/above +25% YoY). While decidedly negative for Argentina’s long-term TAIL, the recent flurry of repressive measures have had the desired effect in the near term, however, with the benchmark Badlar rate falling to a four-month low of 14.75%.
- Colombia: Banco de la Republica, the country’s central bank, announced that it will purchase a minimum $20M USD per day in auctions for at least three months to “boost the nation’s international reserves”. We interpret that as a bid to stem the rally in the peso, which is up +8.5% for the YTD.
MOSHE’S BRAZIL NUGGETS
Moshe Silver, our Chief Compliance Officer, is fluent in Portuguese and mines the local Brazilian press for hard-to-get data points for us each day. Below, we flag his top three callouts from the previous week:
- Brazil strengthens bank requirements – in the aftermath of the Banco PanAmericano fraud scandal, the central bank undertook an examination of the banking sector which has now resulted in a large number of small and mid-sized banks seeing their reserve requirements boosted, some by a significant amount. The review is ongoing and bank authorities say further adjustments are likely.
- Real estate prices climb – building prices in Rio and SP, the nation’s two leading real estate markets, rose +1.2% and +1.3% MoM, respectively, in January, countering faltering price trends that have prevailed since September. No reasons for the price rise were given in the reporting, but we note that the biggest price rises are from small buildings and one-bedroom apartments. We speculate this corresponds to the recent trend among Brazilian business owners and executives who have been acquiring small pied a terre residences in the downtown areas of Rio and Sao Paulo, in order to avoid the multi-hour commutes. A growing number of people who work in the cities have taken to living near their offices during the week, and retreating to their homes for weekends.
- Major appliance sales up – the government’s decision to reduce sales tax on major manufactured goods spurred demand for white goods. Sales of refrigerators, ovens and washing machines were up 56% in December MoM, and up 30% YoY. Demand continued strong through January, resulting in inventory shortfalls. Retailers say there are not enough refrigerators to meet demand.
THE WEEK AHEAD
Key economic data releases and policy announcements:
- Chile: JAN Trade Data
- Venezuela: JAN CPI
- Brazil: JAN CPI (unofficial IGP-DI series)
- Chile: JAN CPI
- Mexico: JAN CPI
- Argentina: JAN CPI; JAN WPI
- Colombia: JAN CPI; Monetary Policy Minutes
- THIS WEEKEND:
- NEXT MON:
- Mexico: DEC Industrial Production
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Conclusion: We have reversed course on gold and added a long position in the Virtual Portfolio. The key factors driving this shift are monetary policy and price movement in the long term Treasury market.
Position: Long Gold via the etf GLD.
James Bond: What do you know about gold, Moneypenny?
Miss Moneypenny: Oh, the only gold I know about is the kind you wear... you know, on the third finger of your left hand?
Similar to Miss Moneypenny, who has a strong affinity for all things gold in the well known James Bond film “Golden Finger”, we acquired gold in the Virtual Portfolio earlier today. This is definitely a shift from our previous research note that discussed gold on January 23rd in which both value and demand factors were driving our cautions outlook on gold, specifically we wrote:
“From a relative price perspective, we also took a look at the gold / copper ratio going back more than twenty years. Based on this ratio, and as the chart below shows, copper is near its cheapest level as priced in gold. Currently, one ounce of gold can buy 440 pounds of copper.”
“It is also noteworthy to highlight that the world’s largest importer of gold is India, who is expected to import 54% less gold in Q4 2011 than in Q4 2010.”
So, what’s changed in the last three weeks? Well simply, monetary policy has become incrementally loose, inflation expectations have heightened, and, as noted in the chart directly below, gold is now in bullish price formation.
In terms of monetary policy, Chairman Bernanke and the FOMC were very explicit in the January 25thstatement:
“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Setting aside our amusement at the irony of the FOMC thinking they can predict economic conditions almost three years out when they have a proven track record of not being able to project out a couple of quarters, this verbiage, if taken at face value, does imply monetary policy will remain at Depression like levels until late 2014.
The key shift for us is that we had an expectation that the next move by the FOMC would be to become, even if on the margin, more hawkish. In fact, the opposite occurred and the FOMC extended their current “exceptionally low levels for federal funds rates” by a year from the prior statement on December 13th, 2011. This is inherently inflationary and, thus, a positive tailwind for gold.
In the chart below, we compare TIPS to Treasuries over the course of the past three weeks. This chart emphasizes that inflation expectations have increased in conjunction with the FOMC’s shift in monetary policy. Since January 17th, the TIP / IEF ratio has expanded almost consistently every day, signaling the market’s increasing view of inflation.
Coincident with this has been the bearish formation in long term treasury rates. As the chart below shows, the 10-year yield on Treasuries broke through the TREND line of resistance of 2.02% right about the time of the FOMC’s January 25th announcement and remains solidly broken. Obviously a declining yield on Treasuries is consistent with decline rates of return for fixed income.
Golden Finger is first and foremost a well known James Bond movie, but it is secondarily what Chairman Bernanke appears to be giving the nation’s saving class in providing them no return on their savings accounts or fixed income investments. When a savings account earns literally zero, gold is and will remain a reasonable alternative to capture absolute value.
Daryl G. Jones
Director of Research
Keith re-shorted PNK in the Hedgeye Virtual Portfolio at $10.37. According to his model, the TRADE and TREND resistance levels for PNK are $10.42 and $10.86, respectively.
As we wrote in PNK 4Q11: A MISS MAYBE IN THE CARDS (1/30/2012), we believe PNK may miss Street estimates when they report earnings on Feb 15. This is attributed to a less strong performance from L'Auberge and aggressive margin expectations for Q4. While favorable weather is boosting YoY regional gaming trends here in 2012, PNK maintains most of its exposure to warm weather climates not impacted by weather.
Mass leads the way. LVS was the clear winner as junket investment begins to pay off.
January gross gaming revenues (GGR) increased 35% YoY to $3.13BN. The timing of Chinese New Year celebration in January of this year versus February of last year clearly had a positive impact. We estimate that total direct play this month accounted for 7.0% of the market, compared to 6.0% last year. The total VIP market held at 3.01% vs. 3.08% in January 2011. Accounting for direct play and theoretical hold of 2.85% in both months, December revenues would have increased 37% YoY. Higher margin mass and slot revenues grew faster than VIP volumes this month. We expect to see this trend continue in 2012.
As we wrote earlier this morning in “FEBRUARY IN MACAU,” February faces the challenge of comping against CNY last year which will be somewhat offset by an extra day and an easy hold comparison, estimated at 2.65%.
Some interested trends to note from January include:
- LVS’s investment in Four Seasons continued to pay dividends:
- LVS’s gained market share for the 4th month in a row - reaching 18.6% in January
- FS rolling chip (RC) market share hit a record of 5.3%, surpassing Sands Macau for the second month in a row and coming within 10bps of Venetian’s market share
- Despite being the biggest share loser, MPEL’s growth in Mass was impressive and bested only by Galaxy
- MPEL mass revenues grew 74%, with 86% YoY growth at CoD
- Galaxy lost market share for the 4th straight month
- Record market shares north of 20% in past months were clearly assisted by high hold at Galaxy Macau which has averaged 3.24% since opening
- LVS, MPEL and Galaxy experienced record slot revenues
Y-o-Y Table Revenue Observations
Total table revenue grew 35% YoY this month, on top of 33% growth last January, helped by the shift in the CNY holiday. The shift in the holiday makes YoY comparisons for January and February somewhat less comparable. Mass revenue growth of 46% was in-line with the accelerated growth we saw last month. VIP revenues grew 31% and Junket RC rose 33%, with both continuing the ‘slowing trend’ that we began to observe in October.
Table revenues grew 41% YoY, showing a continuation of the pickup from the opening of junket rooms at Four Seasons and the best absolute month of growth since July 2010. At 43%, LVS had the best VIP growth after Galaxy and ranked #3 behind Galaxy and MPEL for Mass table growth.
- Sands was up 7% YoY despite high hold
- Mass was up 19%
- VIP was up 1%. Sands held high in January. Assuming 12% direct play (in-line with 4Q11), hold was 4.24% vs. 3.37% last January, assuming 10% direct play (in-line with 4Q10).
- Junket RC was down 21%, the first double digit decline since September 09
- Venetian was up 64% YoY, driven by a combination of easy hold comparisons, a pick up in VIP RC growth, and strong Mass growth
- Mass increased of 49%, posting the highest YoY growth at the property
- Junket VIP RC increased 34%
- Assuming 25% direct play in the quarter (below the 28% we saw in 4Q11 but higher than 2011), hold was 3.33% compared to 2.64% hold in January 2011, assuming 19% direct play (in-line with 1Q11)
- Four Seasons grew 50% YoY, driven by a huge Junket RC growth but dampened by a very difficult hold comparison and low hold and to a much lesser extent, 39% increase in Mass revenues.
- Junket VIP RC increased 5.6x YoY
- Four Seasons is clearly seeing a benefit from LVS’s recent initiatives. If we assume that monthly direct play volume picked up to ~800MM from 687MM/month in 4Q11, that implies a direct play percentage of 18.5% and a hold rate of 2.26%. In comparison, if January 2011 direct play was around 45% (54% in 4Q10 and 40% in 1Q11) then hold was 6.3%.
Wynn table revenues were up 18.4%, negatively impacted by low hold
- Mass was up 22% and VIP increased 17%
- Junket RC increased 36%
- Assuming 11% of total VIP play was direct (in-line with 4Q11), we estimate that hold was 2.65% compared to 3.07% last year (assuming 10% direct play – in-line with 1Q11)
MPEL had the slowest growing table revenues of the 6 concessionaires in January; however, its Mass table growth was the best of all the concessionaires excluding Galaxy. Table revenues grew 16% - driven primarily by 74% growth in Mass and 5% growth in VIP.
- Altira revenues plunged 24%, due to a 27% decrease in VIP
- Mass revenues increased 19%
- VIP RC decreased 26% - marking the second month of declines
- We estimate that hold was 3.3%, similar to the prior year
- CoD table revenue was up 51%, driven by 86% growth in Mass and 39% growth in VIP
- Junket VIP RC grew 32%
- Assuming a 15.5% direct play level, hold was 2.9% in January compared to 2.8% last year (assuming 13.7% direct play levels in-line with 1Q11)
Revs grew 18%
- Mass was up 23% and VIP was up 16%
- Junket RC was up 12%, implying 2.96% hold across the company’s properties
For the 8th month in a row, Galaxy posted table revenues growth north of 100% - at 115%. Mass soared 333%, while VIP grew 90%.
- StarWorld table revenues grew 4%
- Mass grew 78% while VIP declined 1.4%, negatively impacted by a difficult hold comparison
- Junket RC grew 13%
- Hold was 2.9% compared to hold of 3.3% hold last January
- Galaxy Macau's total table revenues were $281MM – flat MoM and 17% lower than October’s seasonal high and $1MM below November
- Mass table increased 12% MoM to $68MM, setting a property high
- VIP table revenue declined MoM to $213MM
- Hold was 3.15% - ‘high’ but lower than the last few months
- RC volume of $6.8BN was 1% higher than December and compares to a peak of $8.3BN in October
Table revenues grew 32%
- Mass revenue growth was 10% - the slowest of the concessionaires
- VIP revenue grew 38%
- Junket RC increased 27%
- Assuming a direct play level of 8% for both periods, we estimate that hold was 3.35% this month vs. 3.09% in January 2011
Sequential Market Share
LVS was the biggest winner in January, gaining 2% to 18.6% - the company’s best since October 2010. This compares to a 6 month trailing market share of 14.8% and 2011 average share of 15.7%.
- Sands' share dropped 20bps to 4.7%. For comparison purposes, January share improved over 2011's share of 4.6% and 6M trailing average share of 4.1%.
- VIP rev share decreased 20bps while Mass share fell 10 bps
- RC share decreased 30bps to just 2.7%, an all-time low for the property
- Venetian’s share increased to 9.7% from 8.1% in 4Q11 and the highest market share since Feb 2011. 2011 share was 8.4% and 6 month trailing share was 7.8%.
- VIP share increased 2.2% to 7.8%
- Mass share edged down 10bps to 15.0%
- Junket RC increased 50bps to 5.4%
- January was the 4th month in a row where FS gained share. FS share was 3.8%, up 60bps. This compares to 2011 share of 2.2% and 6M trailing average share of 2.3%.
- VIP share increased 10bps to 3.5%, the best share since January 2011
- Mass share fell 20bps to 1.9%
- Junket RC improved 1.4% to 5.3% - an all-time high for the property. January marked the second month where RC share at Four Seasons exceeded that of Sands Macao. It came within 10bps of Venetian’s share.
Low hold contributed to Wynn’s share decrease of 1.3% to 12.5%, below its 6 month trailing average share of 13.3% and well below its 2011 average share of 14.1%. We expect Wynn’s share to continue to struggle with the opening of Sands Cotai Central in March.
- Mass market share ticked down 20bps to 10.0%
- VIP market share decreased 1.9% to 13.0% as a result of low hold
- Junket RC share increased 1.4% to 14.2%
In a reversal from December, MPEL was the biggest share loser in January (this seems to be a pattern for them – going from best to worst and back again). Market share plunged 1.6% points to 12.8% - the company’s worst share since December 2009. This compares to their 6 month trailing share of 14.7% and 2011 share of 14.8%.
- Altira share fell 50bps to 3.8%, below the property’s 2011 share of 5.3%
- Mass share was flat at 1.5% while VIP share fell 80bps
- CoD’s share fell 90bps to 8.7%; below its 2011 share of 9.3%
- Mass market share increased 60bps to 10.2%
- VIP share dropped 1.8% to 8.2%
- Junket RC fell 1.0% to 7.7%
SJM gained 70bps of share to 27.4%, which is basically in-line with their 6-month trailing average of 27.3% but below their 2011 average of 29.2%.
- Mass market share decreased 1.3% to 33.6% - an all-time company low
- VIP share increased 2.2% to 26.3%
- Junket RC share increased 40bps to 28.8%
Galaxy lost market share for the 4th month in a row after ‘peaking’ at 20.9% in October. January share of 18.5% was 70bps down MoM and below the 6-month trailing average of 19.8%.
- Galaxy Macau share declined 60bps to 9.4% below its 6-month trailing average of 9.6%
- Mass share increased 70bps to 8.7% while VIP decreased 1.0% to 9.7%
- RC share ticked fell 40bps to 9.9%
- Starworld share ticked up 10bps to 7.8% but was 1.3% below its TTM average share of 9.1% before Galaxy Macau opened.
MGM gained 50bps to 10.2% due to share gains in VIP share offset by losses in Mass market share. January share sits between MGM’s 2011 share of 10.5% and their 6-month trailing average of 10.1%.
- Mass share was down 30bps to 6.8%
- VIP share improved 90bps to 11.2%
- Junket RC fell 40bps to 10.0%
Slot revenue growth accelerated to 42% YoY, hitting an all-time record of $145MM and improving $10MM sequentially. Half the concessionaires experienced all-time high slot revenues this month.
- As expected, GALAXY slot revenues grew the most with 754% YoY to $17MM – an all-time record for the company
- LVS slot revenues had the second best growth at 43% YoY to $40MM – a record for the company
- MPEL slot revenues grew 37% YoY to $27MM – marking a new company record high
- Wynn slot revenues grew 23% YoY to $27MM
- MGM slot revenues grew 18% YoY to $20MM, down $2MM from its record month of December
- SJM had the slowest slot revenue growth at just 5% YoY to $15MM
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