KEY IDEAS AND LEVELS

As we head into 2013, our perspective on casual dining versus quick service remains unchanged; we continue to favor QSR as over-supply, higher fixed-cost structures, waning consumer perceptions, and changing competitive dynamics hamper the performance of casual dining.  Add to these original components of our thesis the fact that Darden has signaled its intention to begin a price war, and we believe that investors should be highly selective when taking long positions in casual dining.

Below we go through some of the calls we made in 2012 and what our view is on those stocks from here. 

SHORT SIDE

Buffalo Wild Wings was the first call we made in 2012.  Our timing left a lot to be desired but, as the chart below illustrates, the stock underperformed over the course of the year.   Our thesis ultimately played out and, while we would wait for a higher entry point, we still believe there is more downside to this name.  The current price target being forecast by the street seems overly optimistic and we expect more opportunities in this name, on the short side, down the road.

Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  BWLD is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $73.66 and $76.64, respectively. 

KEY IDEAS AND LEVELS - bwld index vs cd

 

KEY IDEAS AND LEVELS - bwld share price

Darden Restaurants is a great company but we identified its shares as being overvalued in July when we published our highly-contrarian blackbook, “DRI: THE UNTHINKABLE SHORT CASE”.  While management has highlighted one possible solution that we highlighted in our blackbook, the company’s heretofore-over-protected margins, it will likely take several quarters for the turnaround to take hold.  The rate of unit growth, specifically, is counter-productive to delivering strong returns on incremental invested capital.  We remain bearish on DRI although the easy money has been made with the dividend yield now at 4.44%.

Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  DRI is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $47.54 and $51.17, respectively. 

KEY IDEAS AND LEVELS - dri index vs cd

 

KEY IDEAS AND LEVELS - DRI levels

LONG SIDE

Yum! Brands is our most recent long idea in the restaurant space.  We held a conference call on 11/29 which outlined our bullish stance.  We continue to see YUM as an attractive opportunity on the long side in 2013.  The company is better-diversified than SBUX and MCD, in our view, and the recent sell off provides a compelling entry-point for investors looking for an intermediate-to-long-term position in global retail.  An improving US business should continue to complement strong international unit growth in 2013.  Recent news related to a KFC China chicken supplier and its excessive use of antibiotics in its feed has pushed YUM shares lower but we see the most important fundamentals related to the stock as positive from here.

Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  YUM is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $67.45 and $68.81, respectively. 

KEY IDEAS AND LEVELS - yum index vs cd

 

KEY IDEAS AND LEVELS - yum levels

Jack In The Box was our favorite quick service stock this year.  From May, we were highlighting what we saw as an asymmetric setup for JACK shares over the next three years.  We still believe that the core components of that thesis are firmly intact and, as a bonus, skepticism of our thesis is as high as ever.  After the most recent earnings call, we published on 11/20 that we believe there is upside in the stock to $40 over the next three years, by our fundamental analysis.   

Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  JACK is in a bullish formation with near-term TRADE and intermediate-term TREND support at $27.88 and $27.11, respectively. 

KEY IDEAS AND LEVELS - jack index vs cd

 

KEY IDEAS AND LEVELS - jack levels

Brinker has been one of our best ideas over the last couple of years but, of late, it has not been working as well as we would like.  EAT remains our favorite stock in casual dining but, given industry-wide factors, we would advise patience on the long side as the full impact of Darden’s price war and other factors are felt across the group. 

Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  EAT is in a mixed formation with near-term TRADE support at $30.21 and intermediate-term TREND resistance at $31.93. 

KEY IDEAS AND LEVELS - eat index vs cs

 

KEY IDEAS AND LEVELS - eat levels

Howard Penney

Managing Director

Rory Green

Senior Analyst