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BLMN TOP LINE TRUMPING BEAR CASE

Takeaway: We remain bearish on casual dining but, at this point, do not see BLMN as the best way to play that theme.

Last week, Bloomin’ Brands reported a strong 3Q12 with some of the more impressive same-restaurant sales trends in the industry.  The company also raised 2012 earnings guidance to at least $0.95 and SRS guidance of “in excess of 3%.

 

We have been cautious on Bloomin’ Brands for the following reasons:

  • We were not convinced of the potential of adding lunch for top line or margins
  • Margin accretion was doubtful given top-line and inflation outlook
  • Long-term demographics unfavorable for the industry

While we remain cautious on casual dining, as a category, we think that BLMN is likely to buck the trend over the near-term given traffic trends in excess of 400bps above industry at Outback during the third quarter.  The lunch initiative, along with enhanced marketing and an aggressive four-course-for-$15 promotion, drove same-restaurant sales in excess of our expectations. 

 

We believe that the stock, at these levels, has given the company credit for the margin story (300bps improvement in adjusted EBITDA margins) and has adequately discounted the potential for slowing sales.  From a consensus perspective, we believe that the Street may be too pessimistic in its same-restaurant sales projections over the next 3-4 quarters.  While we do not believe that the stock is going much higher from here, the downside is also limited if top-line trends remain at these levels.  We would look elsewhere (TXRH, BWLD) for opportunities to short casual dining.

 

 

Top-Line Strength

 

During 3Q12, Outback Steakhouse and Carrabba’s beat consensus same-restaurant sales estimates by 270bps and 30bps, respectively.  Even with difficult comparisons, every concept under the Bloomin’ umbrella, with the exception of Carrabba’s, accelerated top-line sales on a two-year average basis.   Outback’s outperformance was likely driven by an effective four-course-for-$15 promotion, expanded lunch service, and continued remodels. 

 

Any slowdown in trends from 3Q, at Outback, will be a red flag given the current initiatives that the company is implementing to drive sales.  Over the next two quarters, the Street is modeling a slowdown in same-restaurant sales at Outback.  Carrabba’s is operating in a particularly difficult segment of the casual dining industry, given that the chain competes directly with Olive Garden and its value-focused marketing message. 

 

BLMN TOP LINE TRUMPING BEAR CASE - outback SSS

 

BLMN TOP LINE TRUMPING BEAR CASE - Carrabas SRS

 

BLMN TOP LINE TRUMPING BEAR CASE - bonefish SRS

 

BLMN TOP LINE TRUMPING BEAR CASE - Flemings SRS

 

BLMN TOP LINE TRUMPING BEAR CASE - roys SRS

 

 

Margin Outlook Uncertain

 

The long BLMN investment thesis depends heavily upon the margin story materializing.  There is a basis for skepticism: if the expansion is so attainable, why was it left on the table prior to the initial public offering?  That aside, there was little progress made in 3Q12, from a margin standpoint, as COGS and labor expenses gained as a percentage of sales.  Labor costs were impacted by deferred comp expense. 

 

Management guided to 3-5% inflation in FY13 with the risk, in our view, to the upside given the ongoing supply concerns around beef supply in the United States.  

 

Over the next two quarters, Bloomin’ Brands and its peers face difficult top-line compares.  For BLMN, the COGS comparison is particularly daunting; we believe that lower labor costs are essential for the company to drive $0.20 in EPS for 4Q. 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Further Downside For MGM

We shorted MGM in our Real Time Alerts yesterday at $9.95 a share. MGM's TRADE and TREND resistance is at $10.29 and $10.76, respectively. We think the stock has room for further downside; Hedgeye Gaming, Lodging and Leisure Sector Head Todd Jordan notes that MGM faces a difficult macroeconomic environment combined with a decline in slot demand and volumes. 

 

MGM is one of the gaming names with the most exposure to Vegas and these days, the Strip is hurting while Macau is flourishing. We’re below the Street on Q4 earnings and 2013.

 

Further Downside For MGM  - MGMstock


XLE: Bearish Formation

The Energy Sector ETF (XLE) is now in bearish formation according to our quantitative setup. It has broken both TRADE and TREND lines of resistance at $72.79 and $71.03, respectively. Our oversold line of support is at $68.84, so keep an eye out for when the XLE  trades around that level.

 

XLE: Bearish Formation  - XLEchart


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Client Talking Points

The Keynesian Cliff

With each passing day, people become more obsessed and worried about the outcome of the Fiscal Cliff. Here at Hedgeye, we’re keen on calling it the Keynesian Cliff. The latest report from the CBO suggests a complete plunge over the cliff would have an estimated impact of $503 billion and $684 billion in FY13 and FY14, respectively. Ouch.

 

Since we have a better chance of the Dow hitting 20,000 than getting Republicans and Democrats to work together, it’ll be interesting to see what kind of solution America comes up with. Kicking the can down the road is not a reasonable solution. Debt downgrades, the elimination of tax cuts and spending cuts will be a painful thing to deal with when we face reality in the coming weeks.

Treasury Trove

Investors have been rushing back to US Treasuries since the election ended and the trend continues this morning. The 10-year is testing its August low of 1.58% and is quite capable of going lower should the market get “spooked.” We’ll have to wait and see if the 1364 level holds on the S&P 500 today; that’ll be the arbiter of things to come.

Asset Allocation

CASH 55% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 18% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

IGT

There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.

HCA

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.

Three for the Road

TWEET OF THE DAY

“ML's November Fund Manager Survey is out and notes that HF net exposure to equities of 40% is at its highest level since June 2007” -@HedgeyeDJ

QUOTE OF THE DAY

“To be willing to die for an idea is to set a rather high price on conjecture.” -Anatole France

STAT OF THE DAY

Chinese stocks -16.8% since #GrowthSlowing started, globally, in March.



KEYNESIAN CLIFF-HANGING

“When you get to the end of your rope, tie a knot and hang on.”

-Franklin D. Roosevelt

 

Much ado has been made about the Fiscal Cliff in recent weeks and rightfully so. As we outlined in the Keynesian Cliff section of our 4Q12 Macro Themes presentation, it’s only the biggest fiscal retrenchment in US history; the latest report from the CBO suggests a complete plunge over the cliff would have an estimated impact of $503 billion and $684 billion in FY13 and FY14, respectively.

 

Moving along, the aforementioned “plunge” comes at a time where underlying real GDP growth has crept to a near stall speed, slowing to an adjusted +0.9-1.3% QoQ SAAR rate in 3Q12, as we detailed in our 10/26 note titled: “BREAKING DOWN THE US GDP REPORT: THE ODDS OF A RECESSION JUST INCREASED”.

 

Needless to say, going over the cliff – proverbial or actual – could actually tilt the US economy into recession into and through the event, joining what are highly likely to be confirmed recessions in the European Union (confirmation pending the 3Q GROWTH data) and Japan (confirmation pending the 4Q GROWTH data).

 

While it may be trivial to suggest that having three of the world’s four largest economies mired in recession at the same time is not a bullish catalyst, we’ll gladly do so at this time. Someone has to take ownership of flagging Global Macro risks before they happen.

 

This we know: corporate management teams and sell-side analysts will almost-universally blame any negative guidance and/or estimate revisions on the Fiscal Cliff in the coming weeks. Even if we don’t actually traverse the cliff in the US, the sell-side will simply find some other “exogenous” catalyst for everyone to attribute further bottom-up weakness to. They’ll have to; the latest survey data suggests hedge funds are still very exposed to the long side of equities.

 

For now at least, few beyond the Hedgeye Macro client base will point to mean reversion within asymmetrically stretched corporate profit margins, broad-based corporate cost cutting and/or the continued popping of Bubble #3 (commodities and mining CapEx) as the likely culprits.

 

Keynesian Cliff Update

It’s worth stressing that the US, Japan and China are each dealing with some version of their own Keynesian Cliff, as each country’s government debt-fueled GROWTH model faces political headwinds to varying degrees.

 

Below, we summarize where each country is in its respective process (email us if you’d like to engage in a deeper discussion regarding anything you see below):

  • US: This has morphed into nothing short of a Manic Media gong show despite the event just getting kicked off post last Tuesday’s election. The news flow in recent days has centered on the willingness to compromise on tax reform emanating from both President Obama and House Speaker John Boehner. Specifically, there seems to be a newfound willingness to extend the Bush-era tax cuts for the wealthy in exchange for “broadening the base” by tightening up loopholes and deductions. Outspoken fringe parties within both camps continue to be polarized on possible solutions, with unions largely in support of Obama playing “hardball” and not caving in to Republican demands and Senate Budget Committee chairwoman Patty Murray saying that the Democrats would agree to go over the cliff before agreeing on an unfair deal. Senate Minority Leader Mitch McConnell was recently out reaffirming the GOP mandate to “not raise taxes” and his lack of trust in the Obama administration, while some 60-80 Republican representatives have allegedly told Boehner that they would not support him on any backdoor deal struck with the White House without their consent.
  • Japan: In recent weeks, Japan’s Finance Minister Koriki Jojima has repeatedly reminded investors that the Japanese sovereign will run out of money in late NOV, rendering it unable to pay its bills without the ability to issue more debt – an ability that had been previously delayed by partisan protest of the FY12 deficit financing bill. This morning, we received some directionally positive news on this front as Japan’s two main political opposition parties (the LDP and New Komeito Party) agreed to approve the deficit financing legislation in exchange for the ruling DPJ agreeing to call snap elections by late DEC or early JAN – after the previous impasse slowed public expenditures enough to begin causing increasing disruptions in funding at the regional and local levels. It’s worth noting that Japan’s Real GDP GROWTH slowed in 3Q to -3.5% QoQ SAAR from 0.3% in 2Qwithout public consumption being a net drag on the economy in the quarter! Any further delays to ratifying the legislation would surely have equated to Japan reporting its second recession in the last two years when the 4Q12 GROWTH figures are published. It still might.
  • China: We continue to think the Chinese economy is in the later stages of a bottoming process, with GROWTH slowing for the better part of the last three years to levels more consistent with the revised political objectives of those atop the Chinese Communist Party leadership. Over the past ten years, China’s investment-fueled GROWTH model – a model perpetuated by GDP targets at the State, provincial and municipal levels – has accounted for 23.6% of global real GDP growth vs. only 9.8% in the ten years preceding the Hu-Wen administration. Heightening concerns about macroeconomic sustainability and general asset quality throughout the purposefully-repressed Chinese financial system amid broad-based vertical and horizontal malinvestment have compelled Chinese officials to focus intently on heading off excesses and rebalancing their economy – gradually scaling down the Keynesian Cliff in the process. That process appears to be nearing completion from a GROWTH rate perspective, but we continue to warn that it’s too early to put capital to work largely on the premise the Chinese economy has bottomed. In fact, since a large swath of pundits and analysts decided to lock arms and agree to agree that China bottomed on OCT 18, the Shanghai Composite has fallen another -3.9% and remains in a Bearish Formation on our quantitative factoring.

All told, we will continue to let the market tell us how to risk manage the confluence of the aforementioned POLICY scenarios.

 

Domestically speaking, a confirmed break out above the S&P 500’s 1,419 TREND line would be a signal to us that the “can” is likely to be sufficiently kicked down the road in a way that will not upset the bond market from a sovereign credit risk perspective.

 

A confirmed break down below the S&P 500’s TAIL line of 1,364 suggests Obama and Boehner are likely unable to lead their respective Parties to a grand compromise and/or they were able to and the bond market does not like the solution.

 

It’s worth noting that a domestic sovereign credit risk scare is not at all out of the band of probable outcomes – especially given the likely JAN ‘13 timing of the debt ceiling breach. That would put a summer of 2011-type scenario in play in our opinion. Per the latest commentary from credit ratings agency Fitch:

 

“Washington needs to put in place a credible deficit-reduction plan to underpin the economic recovery and confidence in the full faith and credit of the US… As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner, as well as securing agreement on credible deficit reduction, would likely result in a rating downgrade in 2013.”

 

Best of luck out there handicapping the world’s increasingly compromised political event risk.

 

Our immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper and the SP500 are now, 1, 105.32-109.69, 80.56-80.44, 1.26-1.28, 1.58-1.71%, 3.41-3.49 and 1,  respectively.

 

Darius Dale

Senior Analyst

 

KEYNESIAN CLIFF-HANGING - Chart of the Day

 

KEYNESIAN CLIFF-HANGING - Virtual Portfolio


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