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COMMODITY CHARTBOOK

The charts below illustrate some of the important commodity trends for the restaurant industry.

 

Notable Trends:

  • Beef costs have been trending down YTD, offering JACK, CMG, WEN, TXHR, and others some reason to be optimistic on COGS over the intermediate-term
  • Dairy costs have been volatile but a favorable comparison in 2H13 could support outlook for CAKE, TXRH, and others with exposure to dairy costs, if prices stay at or near current levels.
  • Corn trending lower is a good sign for the restaurant industry, although protein industry news is less than encouraging.  Cargill closed its Plainview, TX, processing plant this month as consolidation continues in an industry under significant pressure.  The cattle herd in North America is shrinking to its smallest size in 60 years.

 

COMMODITY CHARTBOOK - commod table1

 

COMMODITY CHARTBOOK - correl

 

COMMODITY CHARTBOOK - crb foodstuffs

 

COMMODITY CHARTBOOK - corn

 

COMMODITY CHARTBOOK - wheat

 

COMMODITY CHARTBOOK - spybeans

 

COMMODITY CHARTBOOK - rough rice

 

COMMODITY CHARTBOOK - chicken whole breast

 

COMMODITY CHARTBOOK - chicken wings

 

COMMODITY CHARTBOOK - coffee

 

COMMODITY CHARTBOOK - cheese block

 

COMMODITY CHARTBOOK - milk

 

COMMODITY CHARTBOOK - gas prices

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


GENTING: Q4 SHOULD BE A SOLID ONE

We got that good feeling about Genting during our trip to Singapore in mid-December, and the company’s Q4 earnings release should prove that out.

 

 

On December 12th, we summarized our thoughts on Genting in a note to top accounts “GENTING SINGAPORE LOOKING INTERESTING.”  At the time, we thought that improved earnings visibility, market stability, and low expectations could line up to produce a beat and solid commentary during the company’s Q4 release and conference call. 

 

Since December 12th, Genting Singapore has rallied 23% but a very good quarter could sustain the recent momentum.  A cash heavy balance sheet and significant cash flow generation and budding opportunities in South Korea and Japan provide a nice longer term thesis to compliment the improving earnings picture.   

 

Our confidence on the quarter is partly predicated on our proprietary analysis of Singapore betting tax data and Marina Bay Sands results.  4Q Singapore GGR looks like it will be down 4-6% YoY and up double digits sequentially.  Despite 45% YoY volume growth in their VIP RC business, MBS’s dismal luck led to an 8% YoY decline in GGR in the December quarter, which implies that RWS got a bigger piece of the pie.

 

We estimate that Resorts World Sentosa will report net revenue of S$795MM and EBITDA of S$399MM, 11% and 13% ahead of implied consensus, respectively

 

 

4Q DETAIL:

  • Gaming revenue, net of commissions of S$636M
    • Gross VIP revenue of S$531MM and net revenue of $296MM
      • We expect RC volume to increase YoY to S$16.1BN
        • This would equate to market share of 44% - equivalent with RWS’s lowest share in 3Q11.  Their share last quarter was 47%.
      • Hold of 3.3%
      • Rebate of 1.33%
    • Gross Mass table of S$278MM and S$238MM net of gaming points
      • Drop of $1.2BN, down 4% YoY
        • Market share of 47%, flat QoQ
      • Gaming points equal to 3.3% of drop or S$40MM
    • $148MM of slot and EGT win
      • S$2.9BN handle or 47% market share; flat QoQ
  • Net non-gaming revenue of S$159MM
    • Hotel room revenue of S$58MM
    • S$35MM of F&B and other revenue
    • USS revenue of S$86MM
  • Gaming taxes of S$85MM
  • Implied fixed costs of S$210MM

PM: Solid Quarter

Philip Morris (PM) put up a solid quarter for the fourth quarter of 2012, exceeding expectations for many. PM had constant currency organic revenue growth accelerating to 6.8% versus the tough comp of +8.2% a year ago. EPS exceeded expectations by $0.02 but guided below consensus (range of $5.68 to $5.78) versus consensus of $5.79 - our guidance estimate is $5.71. PM’s results in the quarter shame a number of other large cap staples names whose multiples exceed that of PM.


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Stock Report: ConAgra Foods (CAG)

Stock Report: ConAgra Foods (CAG) - HE II CAG 3 30 13

THE HEDGEYE EDGE

We see CAG as a relatively inexpensive name (16.5x calendar 2013 EPS versus the large cap packaged food group trading at 17.8x).  We believe that CAG had additional upside to earnings on a standalone basis and is now in the process of layering in a transformative acquisition that recently closed in Q1 2013 that should provide investors a path to a higher EPS profile through accretion and synergies.  The combination of synergies, accretion and deleveraging should provide a clear path to EPS growth over the next 1-2 years.

 

CAG recently closed the acquisition of RAH for $90 per share in cash. The transaction transforms CAG into the largest private label food manufacturer in North America. Private label grows faster (about 2x the growth of branded in the United States over the past decade), but is much more volatile in terms of top line trends and margins. RAH competes in a number of center of the store categories – cereal, pasta, snacks, sauces, etc.

 

Finally, as commodities continue to decline, both the branded and private label business at CAG should see gross margin tailwinds at a rate disproportionate to the balance of the staples group.

TIMESPAN

INTERMEDIATE TERM (the next 3 months or more)

The combined entity will have $18.2 billion in revenue, and should be able to grow top line in the 3-5% range, including 1 pt. from private label acquisitions. We estimate that the transaction could be between $0.15 - $0.20 accretive, conservatively and, as mentioned, above we saw upside to consensus prior to the deal with RAH.

 

LONG-TERM (the next 3 years or less)

Merger synergies alone could provide 4% EPS growth. We estimate that deleveraging could provide another 1 to 1.5 pts to EPS growth.  Bottom line, the combined business could deliver 8-10% EPS growth without the benefit of any margin expansion associated with a more benign commodity cost environment.

ONE-YEAR TRAILING CHART

Stock Report: ConAgra Foods (CAG) - HE II CAG chart 3 30 13


Flying High Again

Client Talking Points

Can You Take Me Higher?

The Russell 2000 made another all-time high on Friday as the US stock market marked its sixth consecutive week of upside. Anyone in the perma-bear camp should reconsider their game plan, as you can only fight the broader market for so long before you get creamed. With the US dollar strengthening and heading back into bullish formation, we should continue to see positive momentum in stocks. Strong Dollar, Strong America. Keep in mind that the Bernanke commodity bubble popping and the 10-year yield hovering above 2.0% are a result of #GrowthStabilizing. Provided oil doesn’t hit $130 a barrel, the bulls will continue to win. 

Asset Allocation

CASH 55% US EQUITIES 10%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 5% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“BTW very sneaky for Obama to schedule the State of the Union Address for Mardi Gras” -@harmongreg

QUOTE OF THE DAY

We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.” -Carl Sagan

STAT OF THE DAY

The CRB Commodity Index fell -1.3% last week while CRB futures/options contracts shot up +11%.


MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES

Takeaway: Tightening muni swaps and widening yield spreads are two notable positives helping to offset modestly growing weakness in Europe.

Key Takeaways:

 

* U.S. Financial CDS -  Bank of America, Citi, Morgan Stanley and Goldman all widened by 8-13 bps, reflecting the marginal deterioration in EU conditions. On the other side, we again saw mortgage insurers tighten, reflecting the ongoing positive perception around housing's recovery.

 

2-10 Spread – Last week the 2-10 spread widened to 174 bps, 2 bps wider than a week ago.

 

* Markit MCDX  – Last week spreads tightened 7 bps, ending the week at 100.49 bps versus 107.83 bps the prior week. 

 

Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 12 bps. 

 

High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 6.11% versus 5.96% the prior week.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - summary

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 8 of 12 improved / 0 out of 12 worsened / 5 of 12 unchanged

 

1. American Financial CDS -  Swaps widened for 20 out of 27 domestic financial institutions. Bank of America, Citi, Morgan Stanley and Goldman all widened by 8-13 bps. This was the largest week-over-week increase we've seen in some time among the large cap U.S. financials, reflecting the marginal deterioration in EU conditions. On the other side, we again saw mortgage insurers tighten, reflecting the ongoing positive perception around housing's recovery.

 

Tightened the most WoW: MBI, HIG, RDN

Widened the most WoW: MS, BAC, C

Tightened the most WoW: GNW, AGO, MBI

Widened the most MoM: COF, BAC, MTG

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 1

 

2. European Financial CDS - Swaps were mostly wider among European financials last week. No individual companies stuck out, but broadly speaking the Spanish, Italian, and, to a lesser extent, French banks were all wider.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 2

 

3. Asian Financial CDS - There was relatively little movement among Asian financials last week, with the exception of Daiwa, which tightened 21 bps.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 3

 

4. Sovereign CDS – Sovereign swaps were mixed last week. We saw modest further widening from Italy and Spain, while Ireland tightened. Italy and Spain have widened 46 bps and 42 bps, respectively, over the past month. The U.S., Japan, Germany and France were all essentially unchanged. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 18

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 19

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 6.11% versus 5.96% the prior week.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -3.8 points last week, ending at 1765.43.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 6

 

7. TED Spread Monitor – The TED spread fell 0.3 bps last week, ending the week at 22.4 bps this week versus last week’s print of 22.75 bps.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -0.1 points, ending the week at 11.45 versus 11.5 the prior week.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 8

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 100.49 bps versus 107.83 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 11

 

12. Chinese Steel – Steel prices in China rose 0.9% last week, or 35 yuan/ton, to 3790 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 174 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - 14

 

Joshua Steiner, CFA

 


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