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Takeaway: $MCD is facing difficult top-line compares through February. Despite the attractive 4% yield, we are staying on the sidelines - for now.

McDonald’s reports its 3Q results on Thursday before the market open.  The sales results, and outlook, will likely drive the stock price reaction.  Global growth slowing is a significant headwind for McDonald’s.  We believe that September same-restaurant sales in the US grew in line, or slightly ahead of, what consensus is expecting. 



Plenty Becoming Concerned About “Plenty To Be Concerned About”


The sell-side has gradually become less bullish on MCD since April 23rd, when we highlighted our concerns about the macro environment and lack of a new product pipeline in the US that could maintain sales momentum through the summer.  We wrote that there was “plenty to be concerned about” for MCD going forward and saw JACK as a better long idea at the time.  Six months later, we believe that we are nearing a point where MCD becomes attractive on the long side, but would reiterate our call to remaining on the sidelines through this print and for the time being. 


We expect further negative revisions to McDonald's earnings estimates as several headwinds come into view.  Difficult compares in the US for 4Q and 1Q, driven by strong underlying performance and favorable weather, and continuing macro headwinds in Europe, are the primary pillars of the bear case.  We believe that there could come a point where, from a US sales perspective, consensus becomes too bearish.  In general, McDonald’s finds a way to translate economic growth in the US into consistent sales and profit growth in its business by virtue of its omnipresence throughout the country and management’s continuing investment in the product pipeline and asset base.  As the chart below indicates, industrial production has led the general trend of MCD US comparable sales growth over the last few years.  This is not useful from a quarter-to-quarter perspective, but we use this metric when considering consensus expectations 6-12 months in the future.  In conjunction with other analysis, we using this chart to ascertain if and when consensus becomes too bearish on McDonald’s trends.


MCD 3Q & SEPT SALES PREVIEW - mcd us indus prod



Sales Preview


Below we go through what we would view as good, bad, or neutral comparable restaurant sales numbers for McDonald’s three regions in September.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).


Compared to September 2011, September 2012 has one less Thursday, one less Friday, one additional Saturday, and on additional Sunday.   We expect this to have a positive impact on September’s headline numbers.  On average, we expect the impact to be in the region of 1.5%. 


United States – facing a compare of 5% including a calendar shift of +0.4% to +1.2%, varying by area of the world:


GOOD: A print above 3.0% would be received as a strong result by investors as it would imply calendar-adjusted two-year average trends in line with August.  Additionally, following negative traffic in August with a sequential improvement to flat-to-positive guest counts would be encouraging.  We are anticipating a print of 2.5-3.0% for McDonald’s US business in September.


NEUTRAL: Same-restaurant sales growth of 1.5-2.5% would be received as neutral by investors as it would imply roughly flat calendar-adjusted same-restaurant sales and traffic growth versus August.  Consensus estimates misrepresent the true expectations of the sell-side, in our view, due to consistent outliers to the downside month after month.  We think investors are anticipating a print of 2.5% versus 2.1% Consensus Metrix.


BAD: A headline comp of less than 1.5% same-restaurant sales growth would be negative for MCD, especially given that the company is taking roughly 3% price in the US. 


MCD 3Q & SEPT SALES PREVIEW - mcd us comps preview



Europe – facing a compare of 6.9% including a calendar shift of +0.4% to +1.2%, varying by area of the world:


GOOD: A print of more than 1% would be received as a strong result by investors as it would imply acceleration in calendar-adjusted same-restaurant sales growth from August to September.  We expect continuing strength in Russia, the UK and France but, even in the event of an upside surprise versus consensus, we expect investors to proceed with caution where Europe is concerned.  We expect a print of between 0-0.5% for McDonald’s Europe business in September


NEUTRAL: A print of 0-1% would be a neutral result for Europe as it would imply trends roughly in line with expectations and would provide some reassurance of MCD’s ability to take share on an ongoing basis.


BAD: Negative growth in Europe for the month of September would imply the second such disappointment of 3Q.  McDonald’s has not printed two negative months in the same quarter in Europe for 29 quarters. 


MCD 3Q & SEPT SALES PREVIEW - mcd eu comps preview



APMEA – facing a compare of 6.8% including a calendar shift of +0.4% to +1.2%, varying by area of the world:


GOOD: Same-restaurants sales growth of 1.5% or more would be received as a good result as it would imply an acceleration in calendar-adjusted two-year average trends versus August.  With the backdrop of negativity on China’s economic outlook, an acceleration in trends into the end of 3Q could be encouraging.  We are anticipating a print of 1.0% for McDonald’s APMEA business in September.


NEUTRAL:  A print between 0.5% and 1.5% would be considered neutral for investors as it would be roughly in line with consensus, per Consensus Metrix.


BAD: Below 0.5% would imply continuing weakness in calendar-adjusted two-year average trends. 


MCD 3Q & SEPT SALES PREVIEW - mcd apmea comps preview



Howard Penney

Managing Director


Rory Green



UAL: Margins Under Pressure

United Continental (UAL) faces margin pressure going forward into 2013 if it doesn’t do something about the pricing of airfares. The airline has seen fuel costs increase +8% year-over-year to $3.44/gallon for September of 2012 as well as a +6.5% increase in salary plus related costs year-over-year for Q2 2012. UAL has yet to pass many of these costs on to the consumer via ticket prices, which will ultimately put pressure on 2013 EPS estimates. With UAL facing a more competitive American Airlines, you can see why our Industrials coverage remains bearish on UAL.


UAL: Margins Under Pressure  - fares

Fun: SP500 Levels, Refreshed

Takeaway: Less than 3 trading days ago (after 6 consecutive down days), no one wanted to buyem. Now +2.3% higher, no one wants to sellem.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)


Less than 3 trading days ago (after 6 consecutive down days), no one wanted to buyem. Now +2.3% higher, no one wants to sellem.




Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1466 (lower-high vs Bernanke Top SEP14)
  2. Intermediate-term TREND support = 1419


In other words, the risk range is widening – and that’s not a good thing, particularly if the VIX holds 14 for the umpteenth time in the last 5 years. If you ask anyone who is long Tech how the market feels (-3% for OCT), they see the risk more clearly.


Risk tends to be more clear in the rear-view,



Keith R. McCullough
Chief Executive Officer


Fun: SP500 Levels, Refreshed - SPX

Early Look

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On an apples-to-apples basis, we think we are below the Street.


Our Q3 EBITDA and EPS projection is $187 million (excluding pre-opening and Maryland lobbying expenditures) and $0.57, respectively.  PENN management had previously guided to $0.55 which included pre-opening expense (estimated at $0.08) but excluded Maryland.  On an apples-to-apples basis to management’s guidance, our estimate is $0.49.  We believe consensus is somewhere below the guidance but above our estimate – again, on an apples-to-apples basis.


The whisper number is probably a slight miss.  We’re not sure how much of a catalyst a slight miss would be so guidance may be the focus.  We’re generally negative on domestic gaming.  Recent results adjusted for seasonality have been on a sequential downturn.  In other words, gaming revenue for the last three months have fallen below what the sequential trend, adjusted for seasonality, would’ve suggested.  Even if PENN maintains Q4 guidance, that guidance would be at risk, in our opinion.


Of course, PENN management has done a fantastic job with margins so that cost side will be the wild card.  We think most of the heavy lifting on cost cutting has been completed and it should be all about demand going forward.

Brent Versus ANS

As of this morning, the spot price of Brent Crude oil is trading at a near $7 premium to Alaska North Slope spot. This is a bullish signal on the immediate-term TRADE duration for refining margins based on the West Coast, which process ANS and sell products based largely off of Brent. Energy Analyst Kevin Kaiser likes Tesoro (TSO) as a long play here, as it’s the most heavily levered to West Coast refining margins. 


Brent Versus ANS  - brent ans

Check 'Em







In the days leading up to last night’s presidential debate, there was much a stir about the choice of Candy Crowley as moderator of the debate. She said she would defy rules and rephrase questions as she saw fit. That’s like a replacement ref in the NFL making up stuff as they go along - it’s not right. She was clearly going out of her way last night to drum up a brouhaha over her work and she got it. She interpreted the debate as she saw fit and that’s not what the American people deserve. What happened to truth and fairness?




We bought gold into the close yesterday because when the dollar is down, gold goes up. When Obama does well in a debate, the dollar goes down and vice versa when Mitt is killing it. Gold is still in a long-term bubble but the point is that on the immediate-term side of things, if you get that US dollar right, you’re going to get a lot of other things right. Keith pointed out a factoid on the USD that’s worth sharing this morning because it has huge implications:


A)  IF the US Dollar snaps its TAIL line of support ($78.11)

B)  AND the Euro (vs USD) breaks out above its TAIL risk line of resistance ($1.31)

C)  THEN the market is probably telling you that Obama is going to win the Election






Cash:                Flat


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: DOWN  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“The media simply don't hold Obama to a high standard. I call it the soft bigotry of low expectations.” -@TPCarney




“Nothing is so admirable in politics as a short memory.” -John Kenneth Galbraith




Pepsi’s Q3 earnings fells 4.9% amid a decline in food and beverage sales. Higher commodity prices at work, folks.

Daily Trading Ranges

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Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.