Chicken wing prices are, like last year, moving sharply higher to start the year.  The difference in 2012 is that prices are moving above $2 per pound for the first time with a possibility of further upside.  We continue to see risk to BWLD’s multiple.





In 2012, during the first 24 days of the year, chicken wing prices gained 14%.  For much of the remainder of last year, prices stayed within a range of roughly 180-190 cents per pound.  Year-to-date in 2013, wing prices are again moving higher: +7.2% YTD.  During the 3Q earnings call, management warned that the price of wings was trending to $2.07 for the first two months of the fourth quarter and stated that they expected it to exceed that level heading into the super bowl. 


The question is whether or not this expectation is baking in the possibility of McDonald’s expanding its testing of wings, currently in being sold in Chicago after a successful run in Atlanta, to its national system.  BWLD’s guidance for earnings growth of 20% seems dependent on a number of factors, one important one being some moderation in wing prices in 2H13, per remarks from CFO Mary Twinen in October.  MCD getting in on the act won’t help that happen.




  • We still believe that BWLD’s multiple needs to reset much lower as earnings move lower
  • Wing prices moderating in 2H13 could be difficult given industry conditions, wing demand, and potential weather impact on corn
  • Moderating wing prices seem to be central to the bull case
  • Selling wings by weight, rather than number, is likely to damage the brand and management knows this
  • The first six weeks of 1Q12 saw co-op SSS increase 12.9%, presenting a difficult compare for the same period in ’13.  If the switch is made to selling wings by weight, that could make comping last year’s strong first quarter even more difficult.




PERFECT TIME TO PANIC AT BWLD - chicken wings 6mo




Howard Penney

Managing Director


Rory Green

Senior Analyst

Hedgeye Best Ideas: Federal Express (FDX)

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We believe FedEx has the ability to improve margins in its Express division.  With a large revenue base at a near 30-year low in margins, the division could be a value driver over the next two years.  Further, we see FedEx Ground as a winner in the US ground parcel market.  That division offers exposure to fast growing e-commerce package volumes.   Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.



INTERMEDIATE TERM (the next 3 months or more)

We believe we are past the trough in FedEx Express margins.  Cost improvements are already underway and the macro environment appears likely to be more supportive of express services demand.  Estimates for fiscal 2014 should benefit from that momentum, in our view, and fiscal 4Q 2013 guidance may well be positive at the next report. We view an expanded network in Europe as a positive for FedEx Express, should the FDX end up acquiring TNT at an attractive price.


LONG-TERM (the next 3 years or less)

FedEx is a long-term position, in our view.  Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made.  Cost reductions build through FY2016 and the long-run result may surprise to the upside.  FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.  In our view, shares of FDX could offer 50% upside to fair value should the margin expansion at FedEx Express match its competitors'.



Hedgeye Best Ideas: Federal Express (FDX) - he bi FDX chart



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And they played unlucky!



As we wrote about in our Macau preview notes (“MACAU MODEL UPDATES”, 1/6/13 and “MACAU: EXAMINING THE Q4 HOLD IMPACT”, 1/7/13), MPEL should report 4Q EBITDA well above the Street on an actual and hold adjusted basis.  The stock has had a phenomenal run so most of the beat is probably reflected.  However, if we’re right on our adjusted EBITDA projection, full year 2013 consensus needs to go higher as well.


We are projecting that MPEL will report $1,080MM of net revenue and $261MM of EBITDA, 2% and 10% ahead of consensus, respectively.  On a hold adjusted basis (using each property's historical hold rate), our EBITDA estimate goes to $272 million.    





We estimate that City of Dreams will report $772MM of net revenues and $227MM in EBITDA; impressive considering the low hold at the property.

  • Our net casino win projection is $752MM
    • VIP net win of $399MM
      • Assuming 15% direct play, we estimate $22.7BN of RC volume (up 11% YoY) and a hold rate of 2.66%
      • Using CoD’s historical hold rate of 2.91%, EBITDA would be $15MM higher and net revenues would be $53MM higher
    • $312MM of mass win, up 50% YoY.  A record for CoD.  Mass revenues reached a record $118MM in December alone and were also north of $100MM in November based on our estimates.
    • $41MM of slot win
  • $20MM of net non-gaming revenue
    • $24MM of room revenue
    • $16MM of F&B revenue
    • $24MM of retail, entertainment and other revenue
    • $44MMM of promotional allowances or 69% of gross non-gaming revenue or 5.8% of net gaming revenue
  • $433MM of variable operating expenses
    • $373MM of taxes
    • $47MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.11%)
  • $24MM of non-gaming expenses
  • $87MM of fixed operating expenses up 3% YoY and $2MM QoQ

We project $273MM of net revenues and $43MM in EBITDA for Altira

  • We estimate net casino win $270MM
    • VIP net win of $245MM
      • $11.8BN of RC volume (5% YoY decrease) and a hold rate of 3.01%
      • Using Altira’s historical hold rate from the last 11 quarters of 2.9%, we estimate that EBITDA would be $4MM lower and that net revenues would be $12MM lower
    • $25MM of mass win, flat YoY
  • $3MM of net non gaming revenue
  • $193MM of variable operating expenses
    • $149MM of taxes
    • $41MM of gaming promoter commissions in addition to the rebate rate of 94bps (we assume an all-in commission rate of 1.29%)
  • $3MM of non-gaming expenses
  • $33MM of fixed operating expenses in-line with 3Q

Other stuff:

  • Mocha slots revenue and EBITDA of $36MM and $9MM, respectively
  • D&A:  $94MM (guidance of $90-95MM)
  • Interest expense:  $22MM (guidance of $23-25MM)
  • Corporate expense:  $18MM (guidance of $18-20MM)

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Stocks Celebrate The Good Times

The market has treated bulls well with a great start to 2013. Several equity indices have hit multi-year highs and have put up extraordinary performance thus far considering that  it’s still only January. Here’s a breakdown of several indices and their year-to-date performance:


S&P 500: +4.88%

Nasdaq Composite: +3.94%

Russell 2000: +6.11%

Dow Jones Industrial Average: +5.53%


Stocks Celebrate The Good Times - INDEXS


The S&P 500 alone has been up for six consecutive days and is up +10.4% from its mid-November 2012 closing low. The bears have been killed and anyone who's fighting the broader market is in for a rough ride as fund flows continue to pour into US equities. Growth stabilizing is good for stocks, bad for bonds.


With the S&P 500 hitting 1500 today, a level not seen since December of 2007, traders are wondering how low the CBOE Volatility Index (VIX) can go. Currently, the VIX is at 12.6 after touching 12.43 earlier this week; a low not seen since April of 2007. The S&P 500 is overbought and the VIX is close to being oversold at our immediate-term TRADE level of 12.19 and the upside in US equities looks to continue with volatility remaining depressed.



Is Chancellor Merkel’s Support Waning?

On Sunday, Germans in the state election of Lower Saxony (Niedersachsen) narrowly voted down Chancellor Angela Merkel’s party, the Christian Democratic Union (CDU). Below we explore the implications of the defeat and conclude that although this is a meaningful blow to her party, and will tilt the Bundesrat (upper house of parliament) to the opposition, it will not break the Chancellor’s back in terms of her chances of reelection this September. However, it will likely spell a change in the CDU’s coalition partners, and legislative gridlock until then. 


The center-left coalition of the Social Democratic party (SPD) and its allies the Greens party (known as the red-green coalition) won a one-seat majority over the center-right coalition of Merkel’s CDU party and the Free Democratic Party (FDP), or a combined 69 seats vs 68, in the state parliament of Lower Saxony on Sunday.  


Despite optimism leading up to the vote from the incumbent Lower Saxony CDU state premier David McAllister (a half-Scot) on a “come-from-behind victory”, the CDU garnered only 36% of the votes cast, or a loss of -6.5% versus its past performance of 42.5% in the previous state election of 2008. Notable share gains came at the hands of the Greens +5.7% to 13.7%; SPD +2.3% to 32.6%; and FDP +1.7% to 9.9%.


Is Chancellor Merkel’s Support Waning? - Niedersachsen u Bundesrat


It’s important to note that there were fears going into the vote that the FDP would not garner at least 5% of the vote, the minimum needed to win seats in the state parliament, many would-be CDU voters tactically voted for the FDP. This in fact changed the complexion of the state vote enough to favor the red-green coalition and with it tipped the balance of the Bundesrat (upper house of parliament) to an absolute majority in favor of Merkel’s opposition. 


The shift in the upper house does have teeth. Essentially it means that the opposition in the Bundesrat can block major legislation that Merkel’s coalition, which has a majority in the Bundestag (or lower house of parliament), tries to pass.


Practically speaking, we expect Merkel’s policy maneuverability to be limited going into federal elections in September, which could result in a much more cautious tone on such international issues as the ongoing Eurozone debt crisis and atomic energy as well as her domestic agenda. In conclusion, we are expecting legislative gridlock into September which will only be perpetuated if Merkel’s center-right coalition manages to retain power in September – a not so unfamiliar set-up for Americans to envision given the disunity across the U.S. houses of congress. 



Merkel’s Contender, Steinbrück

The results of the Lower Saxony vote have a few broad implications as we look down the road to September.


First, the inaction or gridlock we expect to see on the policy front across the upper and lower houses should keep Merkel tight lipped which could play into the hands of her main contender, Peer Steinbrück.  Steinbrück was nominated to lead the SPD in October and originally proved his worth as Merkel’s finance minister during the 2007-2009 financial crisis.


Second, the win in Lower Saxony for the SPD-Greens will remain a psychological tailwind, if nothing else. A quick refresher on the recent German political scene shows that in the span of a few months Steinbrück made repeated political gaffes, which most speculated would cost his party the election in Lower Saxony.


In particular, Steinbrück proclaimed that German Chancellors were underpaid, a severe misstep given his highly publicized earnings for speaking engagements over the last three years (estimated at €1MM) and especially given the SPD party platform as one representing the working class. 


In fact, Steinbrück’s gaffes directly led to an evaporation of the center-left’s approval in the months leading up to the election in Lower Saxony, so much so that state Premier McAllister even suggested that Steinbrück should continue to visit the state more often.


Therefore, it’s the ability of the party to succeed despite him, rather than because of him, that could give him and his party momentum into September. Steinbrück has outlined a campaign platform including a cap on housing rent increases, the introduction of tougher banking rules, a push for a minimum wage, and tracking down wealthy tax evaders. However, his key initiatives have been criticized from members inside and outside of the party as too tax and finance related, which again may also be at odds with the working class ideals of the SPD.  Finally, it’s still a toss-up if his sharp and sometimes combative personality (in contrast to Merkel’s more cautious demeanor) will prove an asset or liability into September.



The popular, trusted Chancellor

What is clear is that Merkel still remains a strong favorite to win a third term. A Forsa public opinion survey released last week put the SPD at 23%, its lowest rating since mid-2011, versus 43% for Merkel's conservatives. Further, when asking pollsters who they would vote for if chancellors were elected directly, only 18% of respondents said they would pick Steinbrück, whereas 59% chose Merkel.


Merkel’s support has been largely anchored on German approval of the way in which she has handled the Eurozone crisis, but there’s room for concern that Merkel may be resting too much on her laurels and not pushing a directed campaign. From what has been issued, Merkel supports creating equal opportunities for all, including immigrants; delivering job security and fair wages; and ensuring equitable living standards for seniors and those living in the “depressed” east.


Yet Merkel must be careful to not further alienate party supporters that charge her with a leftward shift in the party in recent years – one aimed at winning more cosmopolitan voters through policies to better support childcare facilities and monetary assistance to child bearing couples.


While Merkel's CDU-FDP has now lost to the SPD and Greens in five states over the past two years, including in the long-time southern stronghold of Baden-Wuerttemberg and in the northern industrial powerhouse of North Rhine-Westphalia, it’s clear Merkel and her CDU party still command a decided rating advantage, which she can likely maintain even without the support of the upper parliament and even if her campaign massaging lacks “teeth”. From today’s vantage point it appears less likely that the CDU can afford to keep its pro-business FDP coalition partners (unless a coalition agreement can be made along with the Greens) and more likely that the CDU returns to a “grand coalition” with the SPD. Although such a coalition arrangement could spell legislative friction, it would be advantageous versus the current gridlock of opposing coalitions across the upper and lower houses of parliament.  


Matthew Hedrick

Senior Analyst

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.