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EYE on Commodities - Soybeans

Argentina is the world's third-largest soybean producer after the U.S. and Brazil. Last month, Argentine farmers went on strike to overturn a sharply higher export tax on soybeans and other products. On Friday, Argentina's government failed to resolve the farmers' dispute over export taxes, raising concerns of more protests that could slow grain shipments. As a result, Soybean futures surged 50 cents a bushel.

If rice and soybean prices stay where they are PFCB will feel the pinch in 2009.

CBRL - Guess What? - People are driving less!

According to AAA, 37.9 million people will travel at least 50 miles from home from May 23rd through May 26th - The Memorial Day holiday, unofficially is the start of the U.S. summer driving season. While the traveler total is the second-highest ever, it's 1% fewer people than last year and is the first drop since 2002. The Sept. 11 attacks caused many people to drive more and not fly, helping CBRL's same-store sales trends.

Recent data points suggest that things are not so good for CBRL. What could be a sign of things to come for CBRL, the Federal Highway Administration said yesterday that U.S. motorists cut their driving by 4.3 percent in March.

The biggest monthly drop ever....

Yum Brands - China Intelligence

This is what we know so far from Research Edge postings....

Chinese market is down 43% since October...

Daily trading volumes are down 60% from the peak...

Chinese toy exports dropped like a stone....

Due to the quake, migrant workers are not showing up to work...

This is what we know from the popular press...

The confirmed death toll rose to 55,740 and an additional 24,960 remained missing 12 days after the quake, said the State Council, the government's cabinet .

12 million are homeless

Chinese banks were told Friday to forgive debts owed by survivors in an effort to revive the shattered economy, and the government warned that it was cracking down on price-gouging by merchants in the disaster area.

PENGZHOU, China: Emergency crews worked Friday to secure 15 sources of radiation buried in the rubble from the devastating earthquake that hit China this month, the government said as it evacuated thousands of survivors downstream from rivers dammed by landslides

Already, the Sichuan earthquake is being seen here in generational terms. As widely observed, it is the first time China has suffered a natural disaster on this scale since the Tangshan earthquake in July 1976, when at least 250,000 people died.

The sound of grief was heard all across China. For several minutes, at the exact time in the afternoon the quake struck in Sichuan Province one week ago, cars stopped and blared their horns. Chinese people came out on the streets and bowed their heads, in remembrance of the quake victims. One Beijing shopkeeper said he paid his respects, even though he has no relatives or friends in Sichuan, which is 1500 kilometers away.

This is what we know From YUM...

...A limited number of restaurants have been damaged, including several that remain closed or with limited service. The Company plans to reopen them as soon as it is safe to do so.

The limited information from the company is haunting. Yum's growth model depends on China. Given the recent tragic events and the other macro issues China faces, it's amazing that nothing seems to slow the YUM China story. Maybe it should be trading at 15x EV/EBITDA.

I can almost write the press release now!

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Don't Mistake Footwear for Consumer

A smart guy I know (my Partner, Todd Jordan) just asked me whether he should read into the upwardly-trending comps reported by Foot Locker and Hibbett's Sporting Goods as a sign of an improving consumer.

My answer is 'No'.

I'd argue that better than 75% of any 'strength' we're seeing in yy footwear sales is due to low inventory levels, reduced clearance activity versus last year, and subsequent improvement in price points. As noted yesterday afternoon, price points are still up mid-single-digit, which is helping fuel the fire.

Don't get me wrong, I think this is a net positive for the footwear industry, as margins are looking solid for a couple of quarters (until our 'Supply Chain Vice' theme sucker-punches the industry in another 2-3 quarters).

But for those looking for any positive read-through to the consumer overall should probably keep searching.

WEN/TRY - Trying to get to $50.....

What $50 implies for WEN....

We have not had the privilege to talk to Bill Ackman about his thoughts on WEN, but here is my take on the Wendy's situation. Upon completion of the WEN deal, Pershing square will own TRY, which is trading at the low end of the valuation matrix we created. On a pro-forma basis, TRY is being valued in line with other domestic QSR companies that are experiencing declining traffic and margins. See the valuation matrix chart.

To summarize, I think the Ackman model for creating value at Wendy's requires the company to sell off assets and focus on the core business of being a franchisor. For Wendy's, this means selling the company's real estate portfolio and/or re-franchising the company store base. At this point, the market will value the company at a higher multiple due to the stability of the high margin, high return royalty stream.
  • Research Edge thoughts:In isolation, sale leaseback transactions do not create significant value. At the completion of a given transaction the company swaps valuable real estate for increased leverage. If the proceeds are used to re-purchase shares, the incremental interest expense offsets the benefits of the lower share count.
  • Both the Arby's and Wendy's chain are roughly 70% franchised. For competitive reasons, it's important for a QSR franchisor to own 10-15 of the store base. It was not long ago that Arby's was nearly 99% franchised, so we don't think management is headed down that road again. So there are not that many stores to sell to create significant value. In addition, selling company-owned stores is dilutive to EPS and reduces EBITDA.
  • In the end there is some financial engineering to do, but it's not a game changer for TRY. It all boils down to operations and can management get WEN margins back to historical levels. While operationally there may be some low hanging fruit that can improve margins, most of the margin issues rest outside of management's control.

SAFM - Comments on the current commodity environment

Sanderson Farm reported EPS and the company commented that it does not see any relief from the current commodity environment. The following are comments from Joe Sanderson, Chairman and Chief Executive Officer, Sanderson Farm, Inc.

Market prices for both corn and soybean meal have remained high and volatile and I expect that trend to continue through this fiscal year and into next year. The March Planning Intentions report indicated a move away from corn to soybeans. In addition, recent planning progress reports indicate that the corn crop is not getting into the ground as fast as usual. This fact will contribute even more volatility. The volatility in the grain markets does not surprise us, and I believe the conditions are such that there remains a significant risk of feed grains going even higher through the summer. Any weather event anywhere in the world this summer that threatens the yield or quality of this year's grain crop could trigger a run up in the price of grain, as could any event that results in even higher crude oil prices. With respect to soy bean meal, the planting intentions and planting progress reports indicate a tight supply of soy bean meal as well. Like corn, price for soy beans have risen and we expect continued volatility in the soy bean meal market. The bottom line is that our feed ingredient costs will be significantly higher in fiscal 2008 than during fiscal 2007.

Needless to say, SAFM wants chicken prices to higher.

The restaurant industry does not!


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