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MCD OCT SALES PREVIEW

Takeaway: We are not expecting an upside surprise from MCD October sales data.

McDonald’s reports October sales tomorrow morning before the market open.   Consensus is calling for a sequential deceleration in two-year average global trends in October.  We are expecting US comps to miss already-subdued expectations. 

 

As we have recently written, 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 are looking for reasons to become more constructive but, as yet, especially given managements tone on the recent 3Q12 earnings call.  Global macroeconomic factors are suggesting continuing sluggish conditions and, as we wrote earlier this week, FX headwinds are also set to impair earnings growth in the immediate-to-intermediate term.

 

MCD OCT SALES PREVIEW - mcd macro

 

 

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

 

Compared to October 2011, October 2012 had one less Saturday, one less Sunday, one additional Monday, and one additional Tuesday.  We expect this to have a positive impact on October’s headline numbers.   Our estimate of this impact, on average, is -1.5% during the month of October.

 

United States – facing a compare of 5.2% including a calendar shift of -1.6% to -0.7%, varying by area of the world:

 

GOOD: A print above -1% would be received as a strong result as it would offer the best possible clarification of management’s guidance of “negative” global comps in October.  While the guidance was not specific to the US, the domestic business is McDonald’s largest division and was likely trending negative at the time management provided the aforementioned guidance.  It is also worth noting that guidance was offered before the onset of Hurricane Sandy and all of the resulting disruption in the North East.  We are anticipating comps of -1.5% in October. 

 

NEUTRAL:  Same-restaurant sales growth between -1% and -2% would be received as neutral by investors as it would imply roughly flat calendar-adjusted same-restaurant sales and traffic growth versus August. 

 

BAD: A headline comp of less than -2% same-restaurant sales growth would be negative for MCD, especially given that the company is taking roughly 2.7% price in the US.

 

MCD OCT SALES PREVIEW - mcd us sss

 

 

Europe - facing a compare of 4.8% including a calendar shift of -1.6% to -0.7%, varying by area of the world:

 

GOOD: A same-restaurant sales growth number greater than zero for Europe would be deemed a positive result by investors.  October is a sequentially easier compare for the Europe division versus September.  We are expecting comps in Europe to come in at roughly -1%.

 

NEUTRAL: A print of between 0% and -1% would be received as a neutral result for Europe as it would come in close to consensus and would imply only slightly-negative-to-flat calendar-adjusted two-year average trends from September.

 

BAD: A result of less than -2% would imply two-year average trends, on a calendar-adjusted basis, at the lowest levels of 2012. 

 

MCD OCT SALES PREVIEW - mcd europe sss

 

 

APMEA – facing a compare of 6.1% including a calendar shift of -1.6% to -0.7%, varying by area of the world:

 

GOOD: A result better than -2.5% would be received positively by investors as it would imply sequentially stable-to-improving two-year average trends even as concerns about Chinese economic growth persist.

 

NEUTRAL: A print between -2.5% and -3.5% would suggest a stabilization in calendar-adjusted two-year average trends within APMEA.  Management highlighted the “uneven” recovery in Japan and the Chinese slowdown as negatively impacting sales for the APMEA division as recently as October 19th.

BAD: Same-restaurant sales growth worse than -3.5% would imply trough AMPEA calendar-adjusted two-year average trends in October. 

 

MCD OCT SALES PREVIEW - mcd sss apmea

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


Much Ado About Nothing

This note was originally published November 07, 2012 at 08:20 in Early Look

“A fool thinks himself to be wise, but a wise man knows himself to be a fool.”

-William Shakespeare

 

Depending on your political affiliation this morning, last night was either a Shakespearean tragedy or a Shakespearean comedy.  Republicans are obviously sad and Democrats are clearly quite happy.  But, did anyone really win? The President was re-elected with a very small margin and Congress remains in gridlock with a Republican House and Democratic Senate. 

 

We went into this election launching our Hedgeye Election Indicator (HEI), which attempted to assign a probability to the President getting re-elected based on real time market prices.  In our Q4 themes presentation, we then flagged that all the consensus polls were pointing against Romney.  The key discrepancies we saw to this consensus were the potential for a relatively higher turnout for Republicans and an economy that, based on historical standards, should not have led to a re-election for the incumbent.  In the end, neither Republican turnout nor the economy mattered as much as we expected.

 

When the political scientists write the story of this election, it will likely come down to a few failures by the Republicans.  First, they didn’t make the economic case strongly or clearly enough against Obama.  Second, a number of demographic groups turned sharply against the GOP, namely women. 

 

Obama, on the other hand, did a few things very effectively.  His re-election team consistently painted Romney as unfit to be President and the characterization largely stuck -- or at least stuck enough to matter on Election Day.  More importantly, Obama implemented a number of policies that aided him. Indirectly loose monetary policy aided the stock market and inflated some asset classes, which as we show in the Chart of the Day of the Hedgeye Election Indicator aided his re-election chances.  The second key policy was the auto bailout, which mattered disproportionately in the key battleground states.

 

But now the election is behind us.  To the victors go the spoils, or at least the gloating tweets and Facebook status updates, and to the stock market operators comes another day of playing the game in front of us.  Some questions to consider as a result of this election are as follows:

 

1)      How will the Fiscal Cliff ultimately play out? The timing on this step up in taxes and step down in government spending is January and no resolution is imminent.

 

2)       Will the Republicans hold the economy hostage over the debt ceiling again? Based on our analysis, the U.S. is slated to hit the debt ceiling again in early 2013.  With less of a mandate for Obama, it’s unlikely the Republicans in Congress acquiesce on this.

 

3)      Who will replace Treasury Secretary Tim Geithner?  We’ve made our stance clear on Geithner, we aren’t big fans.  But based on the proverbial writing on the wall, he is on his way out and who takes his spot is very much an open ended question. 

 

4)      What will Obama’s economic policy look like in 2013 and beyond?  Regardless of your partisan affiliation, you must admit this was and is a very tepid recovery.  Early in his first term, the President will have pressure to do more to stimulate.  How will he juxtapose this with the need to cut government spending?

 

5)      Is this Chairman Bernanke’s last term? On some level this is irrelevant in the short term as his term doesn’t end until January 2014, so we should expect to see absurdly loose monetary policy until at least then.  As always though, markets will price in a new Fed Chairman before it happens, so determining Bernanke’s replacement will be key to thinking about the future of monetary policy.

 

We will be digging into these questions and more this morning at 11:00am with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund.  By his own admission, Barofsky is a life-long Democrat and as a former senior official in the Treasury Department will have some keen insight into the future of policy in the Obama administration.

 

One of our favorite quotes from Barofsky, who wrote “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street”, is the following:

 

“We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of our financial system.”

 

Regardless of the specific policy path, it is hard not to agree with that quote.

 

In terms of your portfolios, the biggest immediate term factor to focus on is the U.S. dollar.  As long as Chairman Bernanke is leading the Federal Reserve, monetary policy will remain implicitly dovish.  This is and remains bearish for the U.S. dollar.  Conversely, this is positive for those asset classes that are inversely correlated to the dollar.  Chief among these is gold, which currently has a high 90-day inverse correlation to the dollar. 

 

Dollar down  and commodities up, sound familiar? As Yogi Berra famously said, “It’s déjà vu all over again.”  Unfortunately for corporations and the stock markets, dollar down means increased input costs and earnings headwinds. 

 

As my colleague Darius Dale highlighted yesterday, for the 3Q12 earnings season to-date, 59.8% of S&P 500 companies have missed on the top line and 28.7% have missed on the bottom line (388 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. Similar to the political landscape, we would expect more of the same in terms of our Q4 theme of #EarningSlowing.

 

Our immediate-term risk range for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1701-1733, $108.46-111.44, $3.46-3.53, $80.24-80.85, $1.27-1.29, 1.67-1.75%, and 1419-1432, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Much Ado About Nothing - Chart of the Day

 

Much Ado About Nothing - Virtual Portfolio


EZPW: Going For The Gold

EZ Corp (EZPW) reported fiscal Q4 earnings this week and while profit rose 6.1%, the pawn lender noted that weakness in the gold market is going to put pressure on earnings. Guidance for the december quarter was a full 30% below Street expectations and FY2013 guidance was 13% below expectations.

 

EZPW: Going For The Gold  - image001

 

EZ Corp has two big issues it must deal with. In addition to adverse payday lending regulations in Texas, the company also faces headwinds from gold in their pawn lending business. EZPW noted that jewelry scrapping sales fell 10%, indicative of the weakness in the gold market in terms of volume. Notes Hedgeye Financials Sector Head Josh Steiner:

 

“We’ve recently come to the conclusion that rising gold prices are actually now a negative for the pawn lending industry, a reversal of the trend over the last decade. This is because rising gold prices give rise to growing competition, mainly in the form of “buy-here” gold shops. These pop-up stores are sprouting up everywhere and, on average, pay a slightly higher rate for gold than the traditional pawn operators, which is pressuring volume trends significantly.”

 

We think it’s probably best to steer clear of EZPW, even after today’s titanic sell-off.


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CONFERENCE CALL DIAL-IN: WHAT WILL OBAMA DO NOW?

Hedgeye's Macro Team is hosting a call today with Neil Barofsky, former Inspector General of the Troubled Asset Relief Fund (TARP).  Details for the call, including the dial-in information, are below.

 

"We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of [our] financial system."

                  -Neil Barofsky 

 

We will be hosting an Expert Conference Call with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund (TARP). The call will be held today, November 7th at 11:00am EST, to discuss the future path of fiscal, monetary and economic policy under the Obama administration. 

 

Barofsky is intimately familiar with the inner workings of Washington; in late 2008 he was appointed to oversee the Treasury Department's administration of the $700 billion Wall Street/TARP bailout where he remained until his resignation in March 2011. He has become known for his relentless criticism of Treasury officials, including current Secretary of the Treasury, Tim Geithner.  Barofsky has officiated as an aggressive and outspoken overseer monitoring for waste and fraud at the federal level. During his time at the U.S. Treasury, more than $550 million in fraud losses were avoided and $150 million in fraudulent earnings were recovered for taxpayers. Given his extensive experience, we see Barofsky as being well-suited to offer a salient analysis of the policy implications of yesterday's election. 

 

Please dial in 5-10 minutes prior to the 11:00am EST start time using the number provided below.

 

Contact  if you have any further questions.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 345918#

 



Today's Conference Call: What Will Obama Do Now?

Today's Conference Call: What Will Obama Do Now? - Obamabanner

 

"We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of [our] financial system."
                  -Neil Barofsky 

 

 

We will be hosting an Expert Conference Call with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund (TARP). The call will be held today, November 7th at 11:00am EST, following the Obama victory to determine the future path of fiscal, monetary and economic policy. By his own admission, Barofsky is a life-long Democrat and as a former senior official in the Treasury Department will have some keen insight into the future of policy in the Obama administration. 

 

Barofsky is extremely familiar with the inner workings of Washington; in late 2008 he was appointed to oversee the Treasury Department's administration of the $700 billion Wall Street/TARP bailout where he remained until his resignation in February 2012. He has become known for his relentless criticism of Treasury officials, often highlighting Tim Geithner as a particular problem. Barofsky officiated as an aggressive and outspoken overseer monitoring for waste and fraud. During his time as with the U.S. Treasury more than $550 million in fraud losses were avoided and $150 million fraudulent earnings were recovered for taxpayers. Given his experience and knowledge of the treasury it will be invaluable to hear his brutally honest thoughts on the outcome of the election and his insider's perspective on how it will economically effect our country moving forward.

 

 

Please dial in 5-10 minutes prior to the 11:00am EST start time using the number provided below. Contact   if you have any further questions.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 345918#

 


MPEL 3Q REPORT CARD

Takeaway: If you like Macau as we do you have to like MPEL. While the stock could consolidate over the near-term, we'd be looking for entry points

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

  • BETTER:  Overall EBITDA beat the Street and our expectations.  While hold was high, luck adjusted EBITDA was right in-line with our adjusted EBITDA estimate.  The outlook is bright and management ws very optimistic about Macau's near-term performance.

TABLE OPTIMIZATION 

  • BETTER:  COD had significantly improved table yields compared with prior quarter.  MPEL sees further upside on table productivity.
  • PREVIOUSLY: "Our rolling chip segment continues to be impacted by our table optimization strategy. This strategy has resulted in further tables being shifted from Altira to City of Dreams, as well as the movement of some tables from VIP to mass during the second quarter of 2012. While somewhat disruptive as it is happening, this initiative should set us up favorably going forward."

HIGH-END MASS MARKET

  • SAME: Despite supply additions (SCC), MPEL's mass table games segment grew 30% YoY.
  • PREVIOUSLY:  "The market-wide mass market table game segment continues to demonstrate strong year-over-year growth, expanding over 33% during the second quarter of 2012. This once again reinforces our mass market focus strategy, particularly at the higher end of the market, which we believe will provide a more stable, loyal, and profitable customer base for the foreseeable future."

STUDIO CITY

  • SAME:  They have entered the syndication stage of their financing for MSC and are also contemplating a high yield financing once the bank debt closes.
  • PREVIOUSLY:  "So again, we're very confident to have gaming as part of this exciting, integrated resort. And I would like reemphasize that after the land grant stage, whether it's us or any of our competitors, we are going down the same route in terms of applying for gaming or gaming tables."

COD MASS HOLD RATE

  • SAME:  3Q mass hold rate came in at 27.4%.  MPEL reiterates mass hold guidance of 25-30%.
  • PREVIOUSLY:  "We said 25% to 30%, and we're quite confident in COD will be very, very high end of that range going forward because of our enhancement of the efficiency on the floor during the last few quarters."

5TH TOWER (PHASE 3) AT COD

  • SAME:  It is a 1.5 million sq ft development (50% larger than Altira).  They are waiting for government approval but hope to start construction on the project by mid-2013. 
  • PREVIOUSLY:  "We are short of rooms at City of Dreams, and tower five has always been in the plan. And given our strength in mass and also the fact that we do need more rooms going forward; we're at 90% plus occupancy every single day of the year not just on weekends. We have completed all of our conceptual designs for that tower. And I can assure you, when it's built, it's going to be the ultimate art piece in Macau....again, it's subject to the government processes because this started as a apartment hotel in the early days, so we do need to have the land re-gazetted. But as soon as that is done, we would like to begin construction of that as early as next year."

VIP

  • BETTER:  There has been no pressure on credit and liquidity remains healthy. MPEL sees some business improvement compared with the past couple of months.
  • PREVIOUSLY:  "We've really spent our time and effort into improving the product of our VIP, knowing that there's been disruption. Inevitably when you renovate a VIP room, you will disrupt the business there. We have to close off sections of it. And I think that's why, on top of the general market trends, you are seeing some slowdown in terms of some of our VIP business."

ALTIRA EBITDA

  • SAME:  Business has stabilized but expect continued improvement in the quarters ahead.  Hold-adjusted EBITDA was $36 million.
  • PREVIOUSLY:  "So with the current run rate, I think we will see some continuous improvement in the EBITDA generated by this property going forward."

MPEL 3Q REPORT CARD - mpel2


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%
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