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CHART DU JOUR: BYD DOUBLE DIPS ON LOWER OIL

The positive impact of lower gas prices on regional gaming revenues is well-known but BYD benefits from low jet fuel costs too.

  • BYD’s Hawaiian travel business (rolled up in the Downtown LV region) benefits from lower jet fuel costs – downtown EBITDA margins and jet fuel at -0.55 correlation
  • Q2 to-date jet fuel is down 8% sequentially and YoY
  • We calculate $0.01 per share positive impact each quarter for the next 4 quarters if jet fuel prices stay at current levels, beginning with Q2

 

CHART DU JOUR: BYD DOUBLE DIPS ON LOWER OIL - BYD


IDEA ALERT: LONG SAFM

Sanderson Farms is a company with long term top line tailwinds, easing input costs, and a best-in-class balance sheet operating in an industry that is consolidating.  Keith just bought the stock in the Hedgeye Virtual Portfolio. Please refer to our note “IDEA ALERT: LONG SAFM” from 6/7/12 for the thesis.  The levels are below; Keith sees it as a good spot to buy it here on red.

 

IDEA ALERT: LONG SAFM - SAFM levels

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


SPAIN: Burning down the house

Perhaps the Talking Heads originally predicted the fate of global housing markets once upon a time, but we’ll leave that up to you. Spain has BIG problems on its hands, including the cost of borrowing (10-Year bond yield just hit 7%), stagnant growth and a high unemployment rate that’s fast approaching 25%.

 

SPAIN: Burning down the house - spanish housing prices

 

But perhaps one of the more overlooked concerns about Spain is – wait for it – its housing market. Yes, similar to the United States in 2007-2008, Spain has a rapidly deteriorating housing market. Another leg down in Spanish home prices sees very likely. Hedgeye Director of Research Daryl Jones lays out why Spain is following the lead of the US:

 

Spain actually had two bubble periods with the first beginning in 1985.  From 1985 – 1991 home prices basically tripled, from 1992 – 1996 they basically remained flat, and from 1996 – 2008 prices more than doubled.   So far, from the peak, Spanish home prices are in aggregate only off about 20%.” 

 

As recently as February 2012, Spanish housing transactions were down 30% year over year. If you think that isn’t slowing growth, then we don’t know what else to say. The pressure on Spain is already here and it’s about to get a lot worse as we move into the summer.

 

 


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WEEKLY COMMODITY CHARTBOOK

Despite the dollar trading down over the last week, many of the commodities we monitor continue to decline in price as economic concerns impact demand expectations. Softer top line trends due to economic weakness are obviously a negative for restaurants but when those softer top line trends are accompanied by all-time high cost of sales growth, the impact on the bottom line can exceed expectations.

 

General Overview

 

Clearly, “Softer top line trends and all-time high cost of sales growth” was referring to Buffalo Wild Wings.  Estimates are holding firm here, for 2012, even as wing prices are up 133% year-over-year.  Beef costs were down over the last week as demand concerns continue to weigh on prices.  Supply dynamics remain bullish for prices, but our view is that supply data points highlighting the shrinking herd size in the U.S. have been known for some time.  Coffee costs continue to come down which is a positive for SBUX, PEET, GMCR, and other coffee companies.  In line with the Hedgeye Macro team’s stance, for a broad overview of where commodity costs are going in our space, we pay particular attention to the US Dollar. As Keith likes to say, “get the US Dollar right, and you’ll get a lot of other things right”, and anchoring off our Macro team’s work on the dollar has helped us to better understand the commodity complex for the restaurant space.  Per the second chart, below, the inverse correlation between the dollar the CRB foodstuffs Index is quite strong at -0.81 over the past nine months.

 

WEEKLY COMMODITY CHARTBOOK - commod614

 

WEEKLY COMMODITY CHARTBOOK - usd crb food correl

 

 

Gasoline Prices


For the week ended June 8th, gasoline demand in the U.S. fell 0.5% to a five week low despite prices at the pump falling lower.  Fuel use over the four weeks prior to June 8th fell 1.9% below the same period in 2011, a record 64th consecutive drop in that measure.

 

WEEKLY COMMODITY CHARTBOOK - gas prices

 

 

Coffee

 

Coffee costs lead to the downside over the past week.  Here is a refresh on the most recent commentary, by company, on coffee costs.

 

SBUX: With the commodity markets today and again this is primarily dominated for us by coffee, it is clear that we have a tailwind coming certainly in fiscal 2013 as we've locked most of those prices in for coffee through 11 months of our coffee needs in our fiscal 2013 and directionally we expect tailwinds again in 2014, now we've not locked much of our coffee prices for 2014. We have done some buying for 2014 already, but directionally everything looks like we will face certainly 12 months and I expect 24 months or longer of now – of more favorable commodity cost environment.

 

HEDGEYE: This coffee tailwind should mitigate some of the dilution to EPS that is expected as a result of recent acquisitions.  However, FY12 and FY13 costs being largely locked and given that the company bought all the way down from the peak in coffee costs just over a year ago, the tailwind starting in FY13 should be modest.

 

 

Chicken Wings

 

BWLD [from the most recent 10-K]: “A 10% increase in the chicken wing costs for 2011 would have increased restaurant cost of sales by approximately $3.8 million.”

 

HEDGEYE: We estimate that a 10% increase in chicken wing prices would account for $0.14 of EPS pressure.  1Q inflation was 57%.  If we assume 120% inflation for 2Q and a possibly-conservative 70% for the year overall, that would imply $0.95 of FY12 EPS pressure.  We do not think that the Street's estimates have been adjusted accordingly.

 

WEEKLY COMMODITY CHARTBOOK - egg sets wing prices

 

Correlation Table

 

WEEKLY COMMODITY CHARTBOOK - correl table

 

Charts

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - imlk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


BET ON RED: Gaming revenue a concern

Hedgeye Gaming, Lodging and Leisure Sector Head Todd Jordan has released a chart that will make anyone who was long traditional gaming think twice.

 

The truth of the matter is that established domestic gaming markets are under severe pressure due to multiple factors. They include the faltering economy, an aging customer base and of course, new competition. May is looking really ugly for the five regional gaming states. Same store sales are expected to take a hit of 3%, as indicated on the chart. The upturn that occurred in February is considered to be cyclical as the economy heavily influences this market.

 

BET ON RED: Gaming revenue a concern - jordan gamingboat3m


INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW

Claims Continue to March Higher 

Claims move notably higher again this week, up 9k WoW to 386k. Excluding the normal weekly revisions, which this week were 3k, claims were higher by 6k (377k vs 380k). This data series continues to play out very consistently with our framework for thinking about the seasonal distortions taking place in the economic data. As a reminder, we think the data will continue to get worse for approximately two more months before starting to get better. Rolling claims rose 3.5k to 382k. On a non seasonally adjusted basis, claims were 9% lower YoY. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Raw

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Rolling

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - NSA

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - NSA rolling

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - S P

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Fed

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - YoY

 

The Yield Curve Continues to Get Steamrolled

The 2-10 spread tightened another 10 bps last week to 130 bps as of yesterday. The ten-year yield decreased 6 bps to 160bps. To put this in perspective, if spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11, an ominous sign for bank margins. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - 2 10

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Subsector performance

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Comapnies

 

Joshua Steiner, CFA

 

Robert Belsky

 

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