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MCD JUNE SALES PREVIEW

McDonald’s is releasing 2Q12 earnings before the market open on Monday morning.  Investors will be listening keenly for commentary on the global economy.  Our view is that MCD is likely to miss the Street’s expectations for sales in June. 

 

On April 24th, 2012, we wrote, “we see plenty to be concerned about” regarding McDonald’s top-line trends going forward.  Price is running at roughly 3% in the United States and 2-3% in Europe.  While the price points at McDonald’s are compelling for consumers relative to much of the competition, when we consider that Food Away from Home CPI in the U.S. is running at ~3% this year, McDonald’s may be taking less share this year on account of its price points than in years past.  The company is now pricing in line with Food Away from Home CPI whereas last year, that difference was roughly -50 basis points.  We remain unconvinced that traffic trends will be sufficient to bring the overall June comp in line with consensus for the U.S. division.

 

Callout

 

On the topic of "Growth Slowing", which Hedgeye Macro was ahead of the competition on, we want to highlight the two charts below.  We won't be calling comps on a month-to-month basis on the back of these charts, the numbers are trailing twelve month averages, but they clearly highlight how economic activity does impact the fundamental performance of the McDonald's business. 

 

MCD JUNE SALES PREVIEW - mcd growthslowing


 

Below we go through our take on what comparable restaurant sales numbers will be received as good, bad, and neutral by investors.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to June 2011, June 2012 had one less Wednesday, one less Thursday, one additional Friday, and one additional Saturday.  We expect a positive calendar shift impact in McDonald’s June results.

 

U.S. – facing a difficult compare of 6.9%, including a calendar shift of between 0.2% and 0.5%, varying by area of the world:

 

We expect that MCD U.S. same-restaurant sales grew +1.0-1.5% in June.

 

GOOD: A print of higher than 2.5% would be strong results, in our view, as it would imply a sequential acceleration in the calendar-adjusted two year average trend.  Commentary across the restaurant space indicates that the operating environment for restaurant companies has been deteriorating in the United States.  While a +2% print would imply negative traffic/mix, we believe that investors are taking that as a given considering the extremely strong traffic trends posted last year as a result of the beverage line offering.

 

NEUTRAL: A print of +1.5% would be considered a neutral result as it would imply roughly flat calendar-adjusted two-year average trends on a sequential basis.  

 

BAD:  A result of less than +1.5% growth in same-restaurant sales would imply a significant slowdown in two-year average trends on a calendar-adjusted basis and would likely cause the stock to sell off further.  While we do believe that McDonald’s sales trends are slowing, we do not believe that the number will be below +1%.

 

MCD JUNE SALES PREVIEW - mcd sales preview

 

 

Europe - facing a difficult compare of +9.1%, including a calendar shift of between 0.2% and 0.5%, varying by area of the world:

 

We expect that MCD Europe same-restaurant sales declined by between -1% and -1.5% in June.

 

GOOD: A positive same-store sales number would, in our view, be positive for MCD Europe as it would imply a sequential acceleration in calendar-adjusted two-year average trends.  Other companies in the consumer space have cited lower-than-expected sales lift from the Euro 2012 soccer tournament. 

 

NEUTRAL: A print of between -1% and 0% would be considered a neutral result as it would imply two year average trends picking up slightly from trough levels in May.  Investors will be eager to see some stability in the Europe business’ trends.

 

BAD: Same-restaurant sales below -1% would imply little or no sequential improvement in calendar-adjusted two-year average trends from low levels in May. 

 

 

APMEA - facing a compare of +4.8%, including a calendar shift of between 0.2% and 0.5%, varying by area of the world:

 

We expect that MCD APMEA same-restaurant sales grew by +1% in June.

 

GOOD: Same-restaurant sales growth of more than 1% would be a strong result, in our view, because it would imply a sequential acceleration in the calendar-adjusted two-year average trend following three consecutive months of decline.  Macro concerns around China were assuaged, to a degree, by YUM meeting analyst expectations of 9.8% comps in 2Q with a 10% print. 

 

NEUTRAL: A print between 0% and 1% would be a “neutral” result as it would imply a sequential stabilization of two-year average trends.  That said, the low level of growth would remain a concern.

 

BAD: Comparable restaurant sales growth below 0% for McDonald’s APMEA division would imply a continuation of sluggish two-year average trends.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


The Bearish Case For Oil

Yesterday, we shorted oil in the Hedgeye Virtual Portfolio. Our case is simple: the US dollar, which has been in a bullish formation since April, is about to rip higher. In turn, oil will go down and has dropped over -1.5% today, confirming our thesis.

 

It appears that pundits and analysts are worried about the situation in the Middle East. Tensions with Iran and Israel are high, the Strait of Hormuz might close,  the civil war in Syria is worsening and suicide bombers are on the loose  in Bulgaria. None of that really matters. It’s all about what the dollar does. As our CEO Keith McCullough says: “Get the dollar right and you get a lot of other things right.” We are bullish on the dollar and bearish on global growth, which continues to slow.

 

The Bearish Case For Oil  - USD BrentChart


Big Money: Valuing Sports Dollars

We all know there’s big money in sports, but do you know just how big? Manchester United, the world’s most popular sports team, has 400 million fans worldwide. There’s only ~310 million people in the US and no one outside our borders cares what Jeter and the Yankees do this season, despite being the third most valuable sports franchise.

 

 

Big Money: Valuing Sports Dollars  - Nike Endorsement Values

 

 

What this boils down to is team value. Forbes values ManU at $2.23 billion, Real Madrid at $1.88 billion and the Yankees at $1.85 billion. There’s big money in sports. We’ve plucked out five facts we think are notable in the world of valuation:

 

  1. The most notable point, by far, is that the two teams with the greatest increase in value are both in Los Angeles. The next two teams on the list are in Spain (FC Barcelona and Real Madrid). We get the California angle, but is Forbes watching what’s going on in Spain? Not so sure about that.
  2. As bullish as a $1.4bn valuation might sound for the Dodgers, the team was purchased by Guggenheim Baseball in April for $2bn which was based on an impending local TV deal that is expected to be worth nearly $3.5bn in cash and equity. Steve Forbes is probably getting several angry phone calls this week questioning valuation math.
  3. Despite the Juventus Football Club moving into a new stadium this year with a 49% increase in capacity, it fell off the top 50 list and was replaced by the Texas Rangers. Now valued at $674mm, the Rangers won the AL West only to lose in the World Series for the second straight year in game 7. Regardless, attendance reached Franchise history highs and the team struck a 20yr cable deal with Fox Sports Southwest beginning in 2014 valued at $3bn.
  4. Only 5 of the top 20 clubs are Football/Soccer.
  5. 12 of 20 are US rules (NFL) Football. There’s a  little snippet for NFL fans that hate soccer.

 

So who’s the big player in all of this? If you guessed Nike (NKE), you’d be correct. Endorsements are serious business and the company pays the big bucks ($40 million for ManU alone) to replicate uniforms for resale to the public. It is anticipated that come 2015 when Manchester United’s current deal with Nike expires, they will be looking to ink a deal worth up to £600m over 10 years, which breaks down to about $95 million annually.

 

Best of luck to ManU and their upcoming $300 million IPO. 


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CLIENT TALKING POINTS

 

THE JAPANESE DON’T LIE

While the US market is busy getting squeezed amid tepid volume and earnings, the Japanese are showing us how it’s really done. The Nikkei has continued to open post-US close with a solid gain, only to be slammed down into negative territory, closing down -1.4% this time around. The global industrial slowdown is among us and it is quite noticeable.

 

GET SHORTY

You can wax poetic all you want about particular names in stockpicking, but the reality is unless you backup your call with a timestamp, it’s just another idea. We have been short the S&P 500 since 1375 – yes it’s at 1376 now. We’re off by a point. This “rally” will not last, and please keep in mind that hope is not a risk management process.

 

LEAVING OIL BEHIND

It’s about that time. The US dollar has been in a bullish formation and we’ve been liking it since about April. We went short oil yesterday in the Hedgeye Virtual Portfolio. Yes, the US dollar is ready to rip higher. Never mind the bollocks associated with the turmoil in the Middle East, threats or suicide bombings. It simply doesn’t matter. All that talk of $200 a barrel  oil is nothing but laughable at this point.

 

 

ASSET ALLOCATION

 

Cash: Down U.S. Equities: Flat

 

Int'l Equities: Flat Commodities: Flat

 

Fixed Income: Up       Int'l Currencies: Flat

 

TOP LONG IDEAS

 

PSS WORLD MEDICAL (PSSI)

The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.

                             

TRADE: LONG

TREND: LONG

TAIL: NEUTRAL

 

HCA (HCA)

SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.

 

TRADE: NEUTRAL

TREND: LONG

TAIL: NEUTRAL

 

UNDER ARMOUR (UA)

The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.

 

TRADE: LONG

TREND: LONG

TAIL: LONG

 

THREE FOR THE ROAD

 

Tweet of the Day: “Indeed it looks like a free fall abyss @ekathimerini: Greece, Portugal & Spain are staring into the same economic abyss dlvr.it/1tQPQx”        -@Nouriel

 

Quote of the Day: “When a person can no longer laugh at himself, it is time for others to laugh at him.” –Thomas Szasz

 

Stat of the Day: 4500 jobs to fill at the Solaire Manila Resort & Casino. 


THE M3: BLOOMBERRY; TAIWAN; MGM COTAI; CPI

The Macau Metro Monitor, July 20, 2012

 

 

BLOOMBERRY POACHES FILIPINOS IN MACAU FOR CASINO: SOUTHEAST ASIA Bloomberg

Bloomberry Resorts is poaching Filipino talent from Macau as it prepares to lure Chinese gamblers from Macau to its $1BN casino resort in Manila.  Bloomberry has already enticed more than 400 Philippine nationals from Macau and Singapore to work at its Solaire Manila Resort & Casino, which will target Chinese and local players.  Solaire needs as many as 4,500 workers and will open in 1Q 2013.

 

COO Michael French said locals will make up a majority of Bloomberry’s patrons in the first year, and it will take 2-3 years to increase the share of international gamblers.  His ideal client mix is an even split of local and foreign gamblers, who are mostly interested in high-stakes betting who can bet as much as $1MM per trip and at times, per hand in baccarat.

 

French said a lower charge or levy for casino operators in the Philippines than in Macau and Singapore will help Bloomberry and other Manila casinos.  The Philippines collects a regulatory fee of 15%-17% on revenue from so-called high rollers compared with Macau’s 40% and Singapore’s 25%.

 

The Philippines estimates the Manila casino development will add 1MM tourists each year and employ 40,000.  Bloomberry plans to hold one more job fair each in Macau and Singapore to fill the remaining 150 management positions in the group, targeting Filipinos who have gained experience working in casinos, hotels and luxury liners.

 

NO TAIWAN SCARE Macau Business

Secretary for Economy and Finance Francis Tam said the Macau government is not worried about the prospects of new jurisdictions in Asia opening casinos and there is still further room for the regional gaming industry to expand.  He added that he believes it is possible for Macau to sustain the actual GGR levels and to ensure a sustainable development for the casino industry in the future, even with more regional competition.

 

MGM CHINA STILL CONFIDENT IN COTAI APPROVAL Macau Business

MGM China CEO Grant Bowie said again that the company is confident about getting a foothold in Cotai.  Bowie told reporters that the government is still handling the application.  MGM China is already in talks with bank syndicates to seal a loan for the Cotai project, but he stressed the gaming operator has not yet finalised any deal.

 

CONSUMER PRICE INDEX FOR JUNE 2012 DSEC

Macau CPI for June 2012 increased by 6.19% YoY.


 


 

 


WEEKLY COMMODITY CHARTBOOK

What news reports are calling “the most expansive U.S. drought in more than a half century” intensified this past week, sending already-high grain prices higher still.  Almost all of the other food-related commodities we track followed suit as the dollar also declined. 

 

With regard to corn, in particular, the response in Food Processor stocks has been as one would expect.  PPC and SAFM have underperformed the group, likely due to the chicken industry’s exposure to corn prices. 

 

Before our post on July 10th, titled “BWLD: WINGSTOP COMPS POINT TO UPSIDE”, we would have argued that this was also a strong negative for Buffalo Wild Wings coming into the quarter, given the food cost headwinds it is facing.  It remains a negative but an upside surprise to comps of the magnitude that our post outlines would likely trump any inflation concerns, at least in the immediate term. 

 

One commodity that has been somewhat surprising to us is beef.  The weak economy is dragging U.S. beef exports lower but, when we consider the impact that last summer’s drought had on the size of the U.S. herd, the fact that rebuilding that herd is becoming more and more difficult, and the continuing loosening of restrictions in Japan on U.S. beef, there are reasons to believe that beef prices could climb higher over the next few months.  The relationship between the two seems quite tight, as the chart below shows.  If corn prices keep gaining or remain at these levels, we would expect beef to rise which would be a negative for TXRH, JACK, CMG, and WEN.

 

WEEKLY COMMODITY CHARTBOOK - beef corn indices

 

WEEKLY COMMODITY CHARTBOOK - commod

 

GAS PRICES

 

WEEKLY COMMODITY CHARTBOOK - RETAIL GASOLINE

 

 

CORRELATION

 

WEEKLY COMMODITY CHARTBOOK - correl

 

CHARTS

 

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 - milk

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - rough rice

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 

 


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