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THE M3: GAMING SALARY

The Macau Metro Monitor, August 24, 2012

 

 

SALARY GROWTH IN GAMING BEATS INFLATION Macau Business

In June, average earnings of full-time employees in the gaming industry stood at MOP17,740 (US$2,218), up by 7.8% YoY--increasing faster than CPI (6.44%).  At the end of the first half of 2012, the gaming sector had 52,800 workers, up by 11.6%.  The figure doesn’t include junket promoters and junket associates.  Overall, there were over 1,800 job vacancies in the gaming industry.


BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE

Takeaway: The ability of restaurant companies to manage earnings has boosted stock prices but cannot continue in perpetuity.

Now that earnings season is over, we decided to examine the trend in top- and bottom-line results versus expectations over the last couple of years.  Conclusive takeaways are difficult to make in this case, but it certainly seems that restaurant companies have succeeded in managing EPS results over the the majority of the past eight quarters of reported earnings.

 

The restaurant stocks we have included in this note have produced earnings results that have, in general, exceeded consensus EPS expectations by a greater margin than sales expectations over the last eight quarters.  From a price reaction perspective, it seems that sales beats/misses have possibly been more important to investors.  We would add that we are not comfortable making that assertion definitively given the arbitrary duration – three days - of the price reactions we have aggregated and the broader market and industry moves that can obscure investors’ reaction to earnings results.  That aside, we do think that the charts below make for interesting viewing. 

 

The stocks included are as follows: 

 

Casual Dining: RUTH, TXRH, DRI, BJRI, CAKE, DIN, BWLD, RT, EAT, CBRL

Quick Service: MCD, SBUX, WEN, GMCR, CMG, SONC, PEET, DPZ, PZZA, YUM, PNRA

 

 

EPS Surprises Far-Outstripping Sales Surprises in Recent Quarters


Companies within the restaurant industry seem to have succeeded in managing the bottom line over the last eight quarters.  As the charts below illustrate, casual dining, in particular, has been able to pull levers either within operating costs or other expenses, in order to exceed EPS expectations more consistently than top-line expectations. 

 

BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE - qsr cd beat miss

 

 

QSR Earnings Callouts

 

CMG: Chipotle Mexican Grill reported 2Q earnings that were in line from a sales perspective and 13% above EPS expectations.  Nevertheless, due to comparable sales growth in 2Q lagging expectations, the stock traded off -21.5% over the three days following the announcement.

 

GMCR: Green Mountain Coffee Roasters reported EPS of $0.52 versus $0.49 consensus for 3QFY12 but missed the top-line number and struck a cautious tone on future sales trends.  The stock sold off on the news but recovered and traded sharply higher, we believe on short covering, based on comments from management on a new demand forecasting model.  We still believe that the bull case for Green Mountain’s stock is fanciful at best and will be publishing detailed work on the difficult pricing environment the company could face as its patents expire and competition intensifies in the single-serve category.

 

 

Casual Dining Earnings Callouts

 

BWLD: Buffalo Wild Wings missed the Street’s 2Q top- and bottom-line expectations and traded off almost 6% over the following three days.  The bottom line miss was more meaningful, in terms of magnitude, than the top line as commodity costs continued (and continue) to pressure the P&L.

 

TXRH: Texas Roadhouse reported a strong EPS beat of 18% ($0.28 versus $0.24) but top-line results were only in line and beef inflation commentary also likely weighed on investor sentiment.  We believe that this stock is one to stay away from on the long side given the commodity outlook and slowing industry sales.  Additionally, the company’s Return on Incremental Invested Capital is decelerating.

 

BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE - txrh roiic

 

QSR Beat/Miss Trends

 

BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE - QSR EPS SURP

 

BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE - QSR SALES SURP

 

 

Casual Dining Beat/Miss Trends

 

BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE - CASUAL DINING EPS SURP

 

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Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


Idea Alert: BA - Decline On Cancellation

Takeaway: $BA - The Australian market for commercial aircraft is small and Qantas' cancellation has more to do with its own operating challenges.

Boeing: Hard Sell-off on Cancellation

 

Levels:

Long-term TAIL support of 69.91 holds; immediate-term TRADE upside to 73.11 

 

Boeing sold off today following a cancellation by Qantas.  We note that Qantas has its own operational issues, in addition to needing a “u”.  The Australian market for commercial aircraft is about 1/10th the size of the US’s, which is only ~15% itself.  Today’s decline highlights the risk of being in consensus long names.  While it may not mean we will be wrong longer-term, it may increase downside volatility.

 

Rationale

  • Cycle:  Boeing is in the midst of a long up cycle in commercial Aerospace, with 7 years trailing revenue in backlog.  The company also has a major product cycle in the 787.
  • Industry Structure:  Boeing has a largely unassailable competitive position in a highly consolidated industry.
  • Valuation: The valuation of Boeing is attractive at these levels on a sector relative basis, in our view, both in a DCF and on screening metrics like relative EV/S (0.5 standard deviations below the trailing 8-year mean).
  • Sector Relative: With growth slowing and estimates in the industrial sector under pressure, we believe BA remains an attractive destination for investors.
  • Sentiment:  Unfortunately, consensus seems to agree with us.  We note that consensus can be right.

Idea Alert: BA - Decline On Cancellation - 5

 

  • Global aircraft fleet aging has set-up robust backlogs for commercial aircraft makers
  • Strong deliveries in the late 1980s/early 1990s were partly driven by deregulation (US, UK, Japan in the 70s and 80s and, in the early 90s, Europe), which drove demand growth
  • Late 1980s/early 1990s deliveries are now retired or approaching retirement (20 to 25 year sum)
  • Boeing and Airbus have very high backlogs as deliveries have trailed orders for much of the last decade 

Fleet aging is particularly noticeable in the US.  Though only about 15% of commercial aircraft orders, the US aircraft fleet will need to be replenished over time. 

 

Idea Alert: BA - Decline On Cancellation - 6

 


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IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD

Takeaway: Our outlook for US monetary policy over the TRADE and TREND durations remains counter to consensus expectations.

CONCLUSION: We shorted $GLD and bought $UUP in our Virtual Portfolio yesterday afternoon based largely on our view that Chairman Bernanke will not announce further easing at Jackson Hole.

 

As Shakespeare once wrote, expectations are the root of all heartache.  Next week, expectations heading into Jackson Hole by equity investors are heightened to say the least.  As incremental economic growth data continues to slow, there is really little reason left to justify the recent ramp in U.S. equity markets other than the perceived panacea of a potential monetary easing announcement in Jackson Hole.

 

To be fair, the FOMC minutes from yesterday certainly did leave the door open:

 

“A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

 

Nonetheless, we still believe that the next two monetary policy catalysts that are on the horizon that investors are hyper focused on (i.e. the AUG 31-1 annual central banker bonanza in Jackson Hole, WY and the SEP 13 FOMC Announcement) are likely to disappoint. While the manic media is likely to do its best to perpetuate expectations of additional “accommodation” among investors, we expect little to no change in US monetary policy out of both events. Needless to say, our outlook for US monetary policy over the TRADE and TREND durations remains counter to consensus expectations.

 

Looking back to Jackson Hole 2010 when the Fed overtly signaled QE2, we can safely conclude that the conditions are not in place for the Fed to pull the trigger at either of these upcoming events. Moreover, the OCT 24 FOMC meeting is far too close the election for the Fed to act, in our opinion. The caveat here is that the FOMC, a presumed-to-be-independent board of unelected bureaucrats, can do whatever they please.

 

That said, however, we anticipate that rising political scrutiny about the stagflationary impact of their recent policies will force them to become more, not less, prudent with regards to their decision making. As we demonstrated yesterday in our note titled, “FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA”, quantitative easing amounts to a highly regressive tax on the poor, begging the key political question: why is Obama such an avid Bernanke supporter?

 

Regarding the aforementioned conditions, we parse the Fed’s mandate into its three pillars to show just how aggressive and politically compromised the Fed would look in the event it introduces yet another LSAP over the immediate-term. For reference, Obama’s reelection odds correlate tightly with the SPX per our proprietary Hedgeye Election Indicator, as well as those provided by sources such as Intrade.

 

MANDATE #1: Inflate the Stock Market

The S&P 500 had completely broken down to the mid-to-low 1,000s ahead of Jackson Hole ’10. At ~1,400 on the SPX, the argument that the stock market requires additional stimulus loses a great deal of credibility.

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - SPX

 

MANDATE #2: Full Employment

Heading into Jackson Hole, we had seen two consecutive months of negative MoM Nonfarm Payroll growth and a total of four consecutive declines by SEP ’10. No such negative trend exists currently.

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - PAYROLLS

 

MANDATE #3: Price Stability

Core CPI was threatening the economy with the specter of deflation, slowing all the way to +0.9% YoY in JUL ’10 and then down to +0.6% YoY by OCT ’10. We’re at +2.1% YoY per the latest data point (JUL) – in line with the Fed’s +2% target. Additionally, the Fed’s own 5yr forward breakeven inflation rate is at 2.57% currently – well above the low of 2.17% we saw on AUG 24th, 2010.

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - CPI

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - BREAKEVEN

 

Our quantitative levels on Gold are included in the chart below. Specifically regarding the etf GLD, we see heightening risk of forced sales over the intermediate term as John Paulson & Co., the etf’s largest owner at 5.14% of shares outstanding, may be forced to get incrementally liquid following the news that Citi Private Bank will redeem $500 million from Paulson’s flagship Advantage funds.

 

Daryl G. Jones

Director of Research

 

Darius Dale

Senior Analyst

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - GOLD


Idea Alert: PCAR - Top Industrials Idea

Takeaway: We think $PCAR offers the best exposure to reduced pre-buy activity in the US Class 8 market. $PCAR may also benefit from NAV's troubles.

Idea Alert: Paccar - Our Top Industrials Idea

 

Levels:

TRADE support = 39.82

TREND support = 38.55

 

Class 8 Truck Cycle:  For decades, Class 8 truck demand has been driven by the imposition of expensive safety and emissions regulations.  However, the current round of regulations should actually decrease the total cost of ownership for commercial vehicles, aligning the interests of truck operators and regulators.  This may eliminate the costly pre-buy cycles that have historically distorted underlying demand.  More stable demand should result in higher OEM capacity utilization, an older fleet and more stable used truck prices.  Those factors should contribute to higher margins and valuations.

 

Industry Structure:  The Class 8 truck OEM industry is consolidated and has a history of profitability.  Recent execution missteps at Navistar may allow Paccar to add market share.

 

Valuation:  We see Paccar as the most attractively valued OEM offering exposure to the improved US truck pre-buy dynamics. 

 

Trade & Trend:  We expect the EPA to promulgate revised non-conformance penalties for Navistar within the next two to twelve weeks.  If significantly more punitive, Navistar’s competitors could benefit significantly.  Into 2013, we expect Navistar to struggle with its ICT+/SCR combined 13L engine in the market place.  Further, we think that the incorporation of the Cummins 15L engine may take longer than expected.  This may also benefit Paccar.

 

Tail:  As industry capacity adjusts to a market without pre-buy activity, the OEMs may generate more stable profits.  That should result in higher valuations.

 

Please see our August 16th Black Book and conference call for additional details.


WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA?

Takeaway: Some countries have more room to stimulate than others.

CONCLUSION: While certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.

 

If you are also using this latest no-volume melt-up to sell/short into, then you’re likely on the same side of the coin as us with respect to global growth – specifically that it is likely to continue slowing over the intermediate term in the face of potential negative catalysts such as the Fiscal Cliff/Debt Ceiling Drama in the US, a resurgence of European sovereign debt risks and/or an incremental round of tightening in the Chinese property market.

 

If we are indeed in a 2007-esque perch atop lower-highs across many equity markets globally, then perhaps consensus is right: the bull case is, in fact, bailouts. Much like valuation for single stocks, we do not anchor on stimulus as the deciding factor for any thesis on a country’s equity market. Rather, we try to identify opportunities where expansionary POLICY can lead improvements in a particular economy’s GROWTH outlook without materially compromising the INFLATION outlook. Reflexivity remains core to our fundamental research process.

 

In that light of this process and our negative intermediate-term fundamental outlook for global economic growth, we decided to score countries based on a few key metrics to determine which  of them had the most/least space to stimulate going forward. It’s important to note that this score does not replace our policy expectations for each county in the sample, as those individualized conclusions continue to be driven by our forward-looking G/I/P framework and real-time market signals. Nor is it an attempt to predict who’s going to announce incremental stimulus efforts over the intermediate term. Rather, this is our best first attempt at determining which countries have room to stimulate the most/least  without imposing incremental risk upon their currency and bond markets.

 

METHODOLOGY

For the 17 countries in Asia and Latin America we were able to find comparable data sets for, we gathered 10yrs of sovereign budget balance and debt metrics (as percentages of GDP; annual) as well as TTM YoY CPI readings. Secondly, we statistically analyzed each data set to determine where the latest data point was relative to its mean from a standard deviation perspective. Lastly, we tallied each of the three metrics together for each country, inverting the debt/GDP and CPI readings (i.e. higher values here should be interpreted negatively).

 

RESULTS

As the table and chart below show, there’s a sizeable discrepancy between those countries with the most space and the least space in our sample. The median score of 0.58 points pales in comparison to the 6.89-point delta between the country with the most room to stimulate (Peru) and the country with the least space (Mexico). While certainly not to be used as a one-factor investment thesis, we are pleased to see two countries we’ve been most positive on in recent quarters (Philippines, Thailand) on the right side of the latter chart and outperforming in the YTD, while two countries we’ve been most negative on recently (Australia, Japan) on the left side of that same chart and underperforming on that same duration.

 

WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA? - 1

 

WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA? - 2

 

Moreover, the country-level micro data points support our findings as well: Filipino policymakers are planning an incremental $16 billion worth of investments on roads, schools and airports and ruling Thai policymakers are looking to continue spending upwards of 11% of their federal budget on their 1yr-old rice price-fixing scheme, designed to inflate the incomes of the country’s farmers. Conversely, Australian policymakers are currently implementing the largest fiscal tightening since at least 1953, while Japanese policymakers have recently passed a contentious VAT hike bill – the first of its kind since 1997.

 

All told, while certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.

 

Darius Dale

Senior Analyst


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