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An earnings beat is expected but we’re way above the Street.  



MPEL should beat even the recently rising consensus EBITDA estimates by a nice margin.  MPEL has been on a recent tear but could continue to run into the print as estimates keep going higher.  Of course, all bets are off once the numbers are out, since there was high hold once again.   


We estimate high hold contributed approximately $25MM to the quarter’s EBITDA.  Analysts with sell or neutral ratings will surely use the high hold to downplay the quarter’s results.  Overall, we are projecting $239MM of EBITDA for Q1, which is 14% above consensus of $210MM.  Some of the estimates comprising consensus no doubt have factored in the high hold but our estimate is still above consensus on a hold adjusted basis - $214MM vs. $210MM.


While most investors have been focused on the potential slowdown in the Macau VIP market, we would point out that MPEL’s Mass business has continued its momentum with over 60% YoY growth in Q1 and as well as for FY11.  MPEL remains the cheapest concessionaire with operations on Cotai Strip and a big project in the pipeline, trading below 9x 2013 estimates.



1Q Detail


We estimate that City of Dreams will report $715MM of net revenues and $194MM in EBITDA

  • Our net casino win projection is $691MM
    • VIP net win of $405MM
      • Assuming 15.5% direct play we estimate $19.1BN of RC volume (a 2% YoY increase) and a hold rate of 3.02%
      • Using CoD’s historical hold rate of 2.86%, EBITDA would be $12MM lower and net revenues would be $31MM lower
    • $249MM of mass win, up 71% YoY
    • $37MM of slot win
  • $24MM of net non-gaming revenue
    • $22MM of room revenue
    • $13MM of F&B revenue
    • $18MM of retail, entertainment and other revenue
    • $29MMM of promotional allowances or 55% of gross non-gaming revenue
  • $411MM of variable operating expenses
    • $337MM of taxes
    • $62MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.22% or 40.5% on a rev share basis)
  • $24MM of non-gaming expenses
  • $86MM of fixed operating expenses compared to $85MM in 4Q

We project $260MM of net revenues and $53MM in EBITDA for Altira

  • We estimate net casino win $253MM
    • VIP net win of $227MM
      • $10.75BN of RC volume (a 15% YoY decrease) and a hold rate of 3.07%
      • Using Altira’s historical hold rate of 2.80%, we estimate that EBITDA would be $13MM lower and that net revenues would be $29MM lower
    • $26MM of mass win, up 33% YoY
  • $7MM of net non-gaming revenue
  • $173MM of variable operating expenses
    • $139MM of taxes
    • $30MM of gaming promoter commissions in addition to the rebate rate of 96bps (we assume an all-in commission rate of 1.24% or 40.3% on a rev share basis
  • $3MM of non-gaming expenses
  • $31MM of fixed operating expenses, in-line with 4Q

Other stuff:

  • Mocha slots revenue and EBITDA of $36MM and $11MM, respectively
  • D&A: $95MM (guidance of $90-95MM)
  • Interest expense: $27MM (guidance of $25-30MM)
  • Corporate expense: $19MM (guidance of $18-20MM)


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.



Overall, RCL was in-line with our expectations even though guidance was lowered.  This should've been expected.  Here is the report card evaluating actual results against management's assertions. 

    • WORSE – 1Q came in at the high end of guidance.  Midpoint FY 2012 EPS guidance was lowered by 15 cents.  FY 2012 constant currency yield guidance was lowered by 1% on the high end to 1-4


    • SAME – slow and steady improvement from Costa Concordia incident.   Cumulative bookings since early February are down mid-single digits.  During the 4Q call, RCL mentioned new reservations dropped in the low-to-mid teens.  North America bookings are improving at a faster pace than European bookings.


    • BETTER – More normal revenue management environment than 3 months ago


    • SAME – European summer itineraries continue to cloud the outlook but consistent with expectations


    • BETTER – Expect Caribbean yields to surpass 2008 level


    • SAME  –  Cruise sales and pricing remain very weak. Good performance from the Pullmantur tour groups lessens the blow a bit


    • SAME–  Australia and Brazil continue to be robust markets. Voyager of the Seas is generating some interest out of Asia


    • WORSE–  Even though FY2012 fuel expenses were only $2MM higher than previous guidance higher drydock, maintance, and tour-related expenses drove up NCC ex fuel guidance by 1% point.


    • SAME –  Still wary of booking


Kind of what we thought. Stock giving up what it gained yesterday.



"First quarter results were satisfactory given the difficult and uncertain operating environment and we continue to see gradual improvement in the demand for our great vacations. We did not expect the impact of the tragedy to be long term and we are seeing evidence the effects are waning."


- Richard D. Fain, chairman and chief executive officer



  • So far they are actually tracking nicely against the guidance that they set out in February.  Bookings are slowly improving.  Outlook hasn't changed much from their February guidance with the exception of fuel.
  • Even so, they have seen enough positive evidence to increase the lower end of their yield range by 1%
  • Southern Europe is seeing the biggest impact in terms of booking origination.  Q3 and Q4 are pretty weak in that region right now.  1Q wasn't really impacted since so much of the bookings were booked pre-incident
  • Strength of their developmental itineraries
    • Brazil was strong
    • Australia is nicely absorbing a large capacity increase
    • Asia is improving from the Tsumani impact
  • Guess that 50% of their guests will come from outside the US in 2012
  • Rate of global expansion will slow going forward as births/population growth also slows
  • 1/3 of their footprint is allocated to Europe.  Arab Spring and the Concordia incident has had an outsized impact on their results.  However, longer term, their exposure will help them.
  • Their recent credit upgrades puts them 1 notch below being investment grade. Being investment grade won't necessarily reduce their cost of borrow since they already benefit from cheap financing sources.
  • Some of their highest yields came from their developmental markets
  • Onboard spending surprised to the upside this quarter  
  • Demand is still somewhat volatile and there is plenty of uncertainty, especially for summer European itineraries
  • Cumulative bookings are now down mid-single digits.  US YoY bookings are exceeding prior year levels.  4Q and 2013 are ahead but 2Q and 3Q are still below.
  • At this time last year, the Arab spring was in progress but they didn't feel the impact until May.  They expect some yield improvement in the Eastern Med but overall European pricing will be down YoY.  All other products/ itineraries will be up YoY.
  • Europe accounts from 32%, 54%, 27% of their capacity in the 2Q, 3Q, and 4Q, respectively.  Therefore 3Q will feel the largest impact of European weakness.
  • Shifted some marketing expenses out of the first quarter because of the Concordia incident. 
  • Pullmantur better tour sales accounted for some of the outperformance this quarter
  • They are just now returning to last years' booking levels. 
  • Expect Caribbean yields to be higher in 2012 than they were in 2008 for their Royal Caribbean brand
  • Although they reduced their European capacity by double digits from 2011, their pricing will still be down 
  • Voyager of the Seas has moved to Asia and sparked some interest in that market.  Asia is a last minute booking market though so they have less visibility in that market.
  • Celebrity Reflection is going to be delivered in October 2012.  They are also working on a program to upgrade onboard activities and dining options. 
    • Alaska product is performing well
    • Performance for summer Europe program is mixed but are starting to see the benefit from ongoing promotional factors
    • Load factors are up and pricing is encouraging
    • Solstice is coming to New Zealand and Australia this year



  • They don't have any scheduled ship sales planned
  • How much lead time do their European itineraries have?
    • Peak holiday season is July/August
    • April - June is the key booking period for Europe
  • Overall, with the exception of Europe, their itineraries are pricing at or above year ago levels. 
  • Most of their promotional activities have been focused on Europe but the rest of their activities haven't been really promotional
  • It's pretty clear today, that their historical promotional activities work to lift bookings as they have in the past. They are in a much more normal type of revenue management environment.
  • Quarterly yields:
    • They are confident that they will have YoY yield improvement in 2Q and 4Q, however, there is a lot of uncertainty on whether yields will be positive or negative in 3Q. 
  • Strength of onboard spend is mainly outside of Europe. Onboard spend has been pretty good across most categories: shore, beverage.  Casino has been a laggard though.
  • Too early to really guide to what Europe could recover back to in 2013.  While 4Q and 2013 bookings have been 'healthy' so far - they are just too small to draw conclusions from.
  • They have been trying to source more passengers for European cruises from North America.  Much of it depends on which ports their customers fly from.  They have been bundling airfare with some promotions to attempt to stimulate demand. 
  • See Asia and China as strategic market, but in the near-term, it is a money losing proposition.  But they do believe that the investment will pay off in a decent time frame. They are not that far away from breaking even in Asia today
  • Higher fuel costs from environmental compliance standards are not going to have an impact on 2012. 
  • Longer term cost reduction initiatives?
    • While they are looking at ways to reduce costs they are also looking at ways to enhance their revenues - for example, the product enhancement features and international strategies. Cost cuts are focused in areas that don't impact the guests.
  • They are really looking for margin growth in the future vs. just volume growth. 
  • Have seen an uptick from Pullmantur's tour activity which is basically break-even (50bps from higher tour sales)
  • Seeing a lot more hesitancy from the first time cruiser vs the repeat cruiser in the quake of the Concordia incident
  • They are continuing to operate their pricing systems in a methodical and disciplined way
  • They are still looking at $1.5BN of EBITDA, so their cash flows aren't really impacted by this's years' events.  Look at a 3.75x leverage rate as a bench mark for getting investment grade rated. Most sellsiders have them getting there in 2013/14.
  • If you take a rolling 12 months projection, they are about 50% booked in a linear progression. 
  • The $100MM increase in Capex was due to the Sunshine order



    • "Despite the extraordinary disruptions to our booking patterns this year, thus far the recovery is consistent with our forecasts.  The Caribbean and Alaska remain healthy and as expected, a wide range of outcomes still persist regarding Europe this summer. While the marketplace is still volatile and uncertain, we are narrowing our yield and EPS ranges to reflect our best estimates at this time."
    • "Booking activity has continued to gradually improve over the last several months"
    • "Overall, booking trends and pricing have been consistent with prior guidance"
    • "Pricing reductions within the range of the company's previous guidance have been implemented to address booking shortfalls on certain products through the end of the third quarter. Nevertheless, Constant-Currency booked APD's remain ahead of the same time last year in all quarters. Overall, pricing remains in line with or higher than the same time last year for all major itinerary groups with the exception of Europe."
    • "Bookings for the fourth quarter of 2012 and for 2013 sailings remain strong, with both load factors and pricing running ahead of same time last year. In addition, the company has seen an increase in summer demand for its Pullmantur brand's tour product."
    • "Forecasted consumption is now 56% hedged via swaps for the remainder of 2012 and 51%, 33% and 20% hedged for 2013, 2014 and 2015, respectively. For the same four-year period, the average cost per metric ton of the hedge portfolio is approximately $525, $545, $593 and $580, respectively...The company also has fuel options to further protect against escalating fuel prices. The company currently has options expiring in 2013 at a strike price of $90 bbl that cover an estimated 9% of 2013 consumption."


    • "Approximately 350bps of the Net Yield improvement and approximately 500bps of the NCC excluding fuel increase during the quarter related to previously announced deployment initiatives and changes to the company's distribution system.... these factors are expected to increase Net Yields by approximately 200bps and NCC excluding fuel by approximately 300bps for the full year 2012."
    • "Since the company's earnings announcement on February 2, 2012, the price of oil has risen which, at current levels and net of hedging, would increase bunker expenses $0.15 per share for the year."
    • "Debt maturities for 2012, 2013, and 2014 are $600 million, $1.6 billion, and $1.9 billion, respectively."
    • "Projected capital expenditures for 2012, 2013, 2014 and 2015 are $1.3 billion, $600 million, $1.1 billion and $1.0 billion, respectively."
    • "Capacity increases for 2012, 2013, 2014 and 2015 are 1.5%, 1.1%, 1.4% and 6.9%, respectively."

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Earnings Week at Hedgeye: Spotlight on Energy


The next two weeks will be busy in the energy sector, with dozens of upstream, midstream, downstream, and oilfield services companies reporting 1Q2012 results, as well as their outlooks for the rest of the year.  The macro backdrop for the quarter is muddled – Brent crude averaged $118.70/bbl in the quarter, +13% YoY and +9% QoQ; NYMEX natural gas averaged $2.50/Mcf, -40% YoY and -28% QoQ; rig count growth slowed in North America to +12% YoY (vs. +19% YoY in 4Q11); and worldwide rig count growth slowed to +9% YoY (vs. +15% YoY in 4Q11).  Our proprietary US E&P inflation index shows that costs for producers were +8.1% YoY in 1Q12, the lowest level of inflation since 4Q10. 


Given those trends, we expect the oil-weighted E&Ps to deliver strong 1Q12 numbers and have positive outlooks on the rest of 2012; that is the only sub-sector we are interested in on the long side at this point.  Our overall view on the energy sector is negative, primarily because we are bearish on global growth and oil prices.  Brent crude has snapped TRADE line support, and we see further downside risk in one of the most-consensus commodity longs.  Should oil prices continue lower, there will be little in the way of macro tailwinds to take the energy sector higher.  That has started to play out with energy (XLE) down 8% over the last month, the worst performing sector in the S&P500.  The XLE is also the only sector that is bearish TRADE and TREND on our quantitative model, with resistance at $70.03 and $72.11, respectively.



Earnings Week at Hedgeye: Spotlight on Energy  - Screen Shot 2012 04 20 at 10.47.39 AM



Below is our outlook for what we think will be the three most interesting sectors to play this earnings season: oil-weighted E&Ps, natural gas-weighted E&Ps, and oilfield services.


Oil-weighted E&Ps:  Oil prices hanging in +$100/bbl coupled with cost pressures finally starting to ease is a recipe for margin expansion for the oil-weighted E&P group.  We expect rigs and equipment to continue to move out of gas plays like the Haynesville, Barnett, and Woodford shales, and into oil/liquids plays like the Eagle Ford, Permian, and Cana; the additional capacity in those plays will lead to lower cost inflation.  In terms of production growth, we expect big 1Q12 numbers and 2012 guidance from the group, particularly from those with production focused in the Eagle Ford and Bakken, where producers are moving from exploration to more efficient development drilling.  A non-consensus way to play this consensus sub-sector long is via SM Energy (SM).


Gas-weighted E&Ps:  NYMEX gas averaged $2.50/Mcf in 1Q12 and is hitting new lows today at $1.90/Mcf; there may not be a dry gas play in North America that is EPS breakeven at the current prices.  While the dry gas E&Ps have gotten beat up recently (KWK and UPL are down 40% YTD), we think that there is more to come, as consensus estimates and current multiples do not reflect even strip pricing.  Look for gas-weighted E&Ps to slash 2012 capex budgets and production guidance, especially those that have little liquids exposure in their production mix – SWN, UPL, and ECA are on the top of that list.


Oilfield Services:  Halliburton (HAL) kicked off the earnings season yesterday with a better-than-awful quarter and outlook, though concluded the conference call with this reply to a question on what could go wrong this year, “I would say the biggest single risk [to hitting forecasted margins] probably is more around ensuring – well, I'd say, not that we can ensure it, but it's more around the continued expected progression of rig count through the balance of the year than any other factor. It looks good right now, but we have been disappointed before by the amount of growth.”  In other words, macro matters more than anything else to HAL (and the OFS industry in general).  We are negative on global growth and oil prices, and think that rig count trends lower over 2012.  While many argue that these names look “cheap,” the most cyclical subsector in energy always looks cheap at the top of a cycle.  Stay away from this group, particularly small cap pressure pumpers and land drillers.



Earnings Week at Hedgeye: Spotlight on Energy  - Screen Shot 2012 04 20 at 10.47.48 AM















THE HBM: MCD, CMG - subsector





MCD: McDonald’s reported 1Q12 EPS of $1.23 versus $1.23 and global same-store sales of 7.3%.  Overall, we thought the quarter was not great but not terrible.  We believe that the market was pricing in a worse quarter than what transpired; during the first quarter of the calendar year, MCD traded down 2% versus the 10% gain that the S&P 500 posted. 


THE HBM: MCD, CMG - mcd us


THE HBM: MCD, CMG - mcd eu


THE HBM: MCD, CMG - mcd apmea


THE HBM: MCD, CMG - mcd ww



CMG: Chipotle reported another great quarter with EPS coming in at $1.97 versus $1.93 with strong top line trends helping the company to gain leverage over its costs.   Same-store sales continue to exceed lofty expectations and the growth profile of the company, with the ShopHouse concept showing good promise.  The same-store sales chart is below.


THE HBM: MCD, CMG - cmg pod 1 white




PNRA: Panera declined on accelerating volume.  The market does not like the COO departure news.


SBUX: Starbucks declined on accelerating volume.







PFCB: P.F. Chang’s declined on accelerating volume.


TXRH: Texas Roadhouse declined on accelerating volume.


THE HBM: MCD, CMG - stocks



Howard Penney

Managing Director


Rory Green




Last week, we expressed our concerns about the casual dining sector’s sales trends in March and early April.  Almost any exposure to the category has returned handsome gains to shareholders over the past six months.  We think taking a little money off the table is a wise move at this point.  Below we run through our thoughts on several names including our (relative) favorite longs and which stocks we see as the best shorts at this time.


There has been a significant amount of volatility in the casual dining space over the past three and six months, in particular.  We will begin by looking at the category’s recent price action together with sentiment, valuation, the macroeconomic outlook and – in the last section of this post – our current view on company-specific factors we see as important for several individual stocks.


Casual Dining


Our Casual Dining Index has appreciated greatly since the equity markets bottomed in October 2011.  The chart below shows how tightly correlated (on an inverse basis) the Casual Dining Index is to Initial Jobless Claims.  If Hedgeye’s call on growth slowing is correct, then a softer employment market could bring a sustained correction in casual dining stocks.  Furthermore, the “Ghost of Lehman” effect on jobless claims that has been boosting headline numbers because of a distortion in the seasonal adjustment factor for much of this year-to-date has dissipated and is set to reverse in a few months.  We wrote about this topic in early March after the Financials team, led by Josh Steiner, first published on it in great detail. 


CASUAL DINING CAUTION - initial claims vs casual dining



In terms of the near-term sales outlook, we would highlight the recently released Blackbox Intelligence data that shows 1Q12 casual dining same-store sales increased +1.7% including a -1.2% move in traffic.  The March numbers were particularly disappointing, coming in at -0.2% and -3.4% for same-store sales and traffic, respectively.


CASUAL DINING CAUTION - casual dining blackbox





Looking at the divergences shown in the table below, we can see that several stocks have seen substantial outperformance versus the broader equity market over the last six months and, given Hedgeye’s view on growth slowing, along with the fact that the industry outlook is deteriorating, it is worth refreshing our thoughts both on casual dining and some individual stocks.  We will focus on PFCB, BWLD, and EAT in our company commentary at the end of the note.  







In terms of valuation, we can see that with the exception of KONA, DIN, and BBRG, consensus has valued the casual dining space significantly higher over the past six months.  BWLD is the standout from the chart below with its EV/EBITDA NTM multiple increasing by almost three turns over the past six months.  PFCB has also seen a large appreciation in its multiple along with RUTH and TXRH.  The contraction of DineEquity’s multiple is notable; a heavily-franchised industry leader should not have traded as poorly as this stock has over the past six months, particularly when a competitor – EAT – has traded so well. 







Sell-side analysts have been cautious on casual dining for some time, remaining so despite the generally strong price action.  Buy-side investors, too, have preferred QSR and Fast Casual as a means to gain exposure to restaurants and this shows in our Casual Dining Sentiment Scorecard, below.  With so much upside apparent, it seems that there could be some risk to adopting an overtly bearish stance at this point; it is possible that the macroeconomic fears currently weighing on sentiment could be dismissed or postponed if employment growth continues to be positive and gas prices fail to impact the American summer driving season as much as many seem to be anticipating.  In that scenario, investors that have been looking to QSR rather than Casual Dining may change course and boost the group higher.  We are not anticipating that as we see restaurant industry data corroborate our macro team’s view that growth is slowing as inflation accelerates, but we believe it is worth highlighting the risks to our current stance.  Being selective on the short side, however, we see several attractive opportunities that we will discuss below.


PFCB and EAT are still the undesirables of the casual dining space and we view that as a positive for the longer-term TAIL story of both of these stocks.  DRI remains the bellwether for the space with investors generally remaining neutral-to-positive on the stock.  


CASUAL DINING CAUTION - casual dining sentiment



P.F. Chang’s


P.F. Chang’s has been a favorite name of ours since February 6th.  In that note, “PFCB – TURNING THE QUEEN MARY”, we wrote: “We’re confident that the current consensuses of $1.61 for 2012 is not reliable in that there are several estimates included in that number of $1.80 where, our guess would be, the analyst responsible has not updated his/her model for a while.”  That turned out to be correct, and the FY12 EPS estimate is now at a much more realistic $1.56.  In that same note, we also said that we would be buyers of PFCB on down days for the ensuing three months.


While we expected the three month period starting February 6thto be positive for PFCB, it is fair to say at this point that the ~14% gain since then has been above our expectations at the time.  At this point, we remain positive on the longer-term TAIL but would not be buyers here. 


From a price perspective, as we mentioned, the 14% gain since we turned positive on February 6thhas exceeded our expectations.  Relative to the S&P 500, the stock has outperformed by ~1100 bps. 





Our style does not anchor heavily on valuation but back in late 2011 when we began considering this name as a possible long, it traded as low as 5.5x EV/EBITDA NTM (consensus).  At that point, we were seeing a business that was clearly in disarray but also a management team that was no longer skirting around the issues.  With a sum of the parts analysis indicating at that point that downside was limited and management’s change in tone, improving macro trends led us to turn positive on the stock in February. Now, the situation has changed.  The stock is valued a turn higher and while steps are clearly in place to fix the business, there is now some downside risk and less likelihood, in our view, of incremental positive news over the next three months or so. 


CASUAL DINING CAUTION - pfcb evebitda hist



For P.F. Chang’s, like most casual dining concepts, employment growth is an important driver of its business.  Excluding the impact of self-inflicted wounds, the realization of which led investors to exit the stock en masse for the first nine months of 2011, this stock has largely followed inverted rolling claims, as the chart below shows.   The correlation over the duration of the chart below is weak but, as the investment community gained clarity on the company’s plan going forward, the stock traded more in line with the space.  From October to present, the correlation between the two data sets shown in the chart below is -0.87 (the scale on the left axis is inverted) and has been getting progressively tighter.   


CASUAL DINING CAUTION - claims vs pfcb



In short, we believe that the dislocation that existed between P.F. Chang’s and the rest of the casual dining space has largely been corrected.  From a sentiment perspective, there is more fuel in the tank; the sell-side remains bearish on the name and short interest, although has varied between 36% and 19% over the last three years, is currently at the low end of that range. 


Going forward, how the stock trades from here is largely dependent on the impact of the new lunch initiative at the Bistro together with the overall macro environment (typified by initial claims).  P.F. Chang’s reminds us in many ways of Brinker in mid-2010.  Obviously Brinker’s subsequent resurgence depended on market conditions, several other well-executed initiatives, and other company-specific factors.  We will continue to frame our view of P.F. Chang’s in the same way.



Buffalo Wild Wings


Buffalo Wild Wings is our favorite short in the casual dining space.  The top line is what hurt us, and other investors and analysts with a bearish stance on the stock, when the company announced 4Q results earlier this year.  The first six weeks of the year were strong for the company; same-restaurant sales came in at 12.9% and this data point overshadowed the fact that the fourth quarter of 2011 saw operating margins contract despite much higher than expected sales growth and benign commodity inflation. 


At this point, investors know that the top line numbers for 1Q will be strong for Buffalo Wild Wings.  Wingstop, a company that we believe offers a good proxy for Buffalo Wild Wings’ from a same-restaurant sales perspective, reported 1Q12 comps of 10.5%.  If BWLD’s comps come in where we expect them to, also at 10.5%, that would imply a sequential slowing of comps through 1Q. 





What will really move the stock, however, will be the forward-looking commentary that management provides.  How much weather was in the 1Q comps?  How much will traditional wing price inflation impact 2Q, 3Q, and FY12 EPS versus prior guidance?  From the second chart, below, it seems that constrained chicken supplies could persist for some time.  This risk-reward is highly skewed to the downside, here, in our view.  From a price perspective, BWLD has outperformed the S&P 500 by almost 30% over the last three months.  Additionally, the EV/EBITDA multiple that consensus is awarding the stock has increased by two turns.  With the headwinds facing the industry and BWLD specifically, we believe that this stock could fall to $75 or lower.


CASUAL DINING CAUTION - chicken wings1 


CASUAL DINING CAUTION - egg sets wing prices 




Brinker has been one of our favorite names in casual dining for the last eighteen months.  As the chart below indicates, the employment picture is extremely important for the company.  As we wrote earlier, our view on P.F. Chang’s is similar to that which we had on Brinker back in 2010.  Now that the stock has ran up this high, the obvious question becomes whether or not it is time to take some money off the table.  Depending on duration, we think it could be the right move. 


Over the longer term TAIL, three years or less, we believe that this company is doing the right things to take share.  The primary competitor of Chili’s is Applebees and that is a company that we believe is facing some top line headwinds over the next year in addition to any that may be facing the industry.  Chili’s should continue to take share and reap the rewards of its upgraded kitchen and asset base.


Over the Trade and Trend durations, which are three weeks or less and three months or more, respectively, we have reservations about buying the stock at this price.  Coming into the quarter, we are concerned that traffic may not be strong enough to indicate that the company is on track to meet FY12 comparable restaurant sales guidance.  Following the company reporting 2QFY12 earnings, the stock sold off on concerns that top-line trends were suggesting that the company may not hit comparable restaurant sales targets for the full year.  While the stock has more than recovered from those concerns, we believe that the recent industry trends are likely to revive investor anxiety as the next catalyst, 3QFY12 EPS on 4/27.


In terms of the Trend duration, there are two factors giving us pause.  Firstly, the macroeconomic outlook has been softening.  The improvement in initial claims data has reversed: claims are now rising.  Secondly, we need to find evidence that Chili’s is seeing positive traffic as it laps the impact of the lunch combo introduced on January 10th, 2011.  Weather may distort that picture, but we expect the Street to press management for comments on the 4QFY12 trends-to-date. 


Macro has been a significant factor for Brinker’s strong performance.  The correlation between claims and EAT has been 0.95 since the equity markets bottomed in October.   Given our outlook on the macro environment, industry trends, and hesitance on the company’s traffic being positive at this point, we have change with the facts.





Howard Penney

Managing Director


Rory Green





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