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Big Trouble In Little China

For months, pundits have claimed that China's economy and markets have bottomed. It’s a shame they keep doing this because, simply put: they’re wrong. China has continued to fall with stocks getting slammed this morning to the tune of a -1.5% drop.

 

Our macro team notes that China’s economy is in the process of bottoming, but has yet to hit the floor. Land sales by area are down mid-teens percentages on a year-over-year basis and the spot price of Chinese Rebar (see below) is well below 2009 lows with the ability to go lower. Rebar is a unique yet useful barometer of China's economy which is why we've monitored it so closely over the last few years.

 

Big Trouble In Little China - chinaREBAR


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


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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


Cliffhanger

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.



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