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BKW DOWNSIDE REMAINS

Burger King is reporting 4Q12 earnings on Friday.  We believe that this release will add credence to our thesis that the company was never “fixed” during its stint as a private company, as the bulls are claiming.

 

The performance of the U.S. & Canada store base (60% of total) continues to carry the most weight for the BKW investment thesis.  The outlook in this division, for Burger King, is not positive from a comparable sales growth perspective. 

 

We estimate that 4Q12 comparable sales growth was roughly 2% versus consensus of 3.4%.  January comparable sales among some North America franchisees are tracking as low as -4%, versus consensus for 1Q franchisee comps of +1.6%. 

 

1H13 is when the company will have to prove the sustainability of its sales growth and, if early indications are correct, some concern may be warranted on that front.  We believe the shares could trade below $13 over the intermediate-term, based on the cash flow multiple contracting by two points.  As the chart below illustrates, consensus is very bullish on 1Q13 comps.  The Street is assuming a 230 basis point sequential acceleration in 1Q13 two-year average trends.

 

 

BKW DOWNSIDE REMAINS - bkw pod 1

 

BKW DOWNSIDE REMAINS - ev to ebitda bkw dpz sbux etc

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


Best Consumer Ideas: Short UA

Takeaway: Here’s a look at one of the short ideas from the call, courtesy of our Retail team.

SHORT Under Armour (UA)/Retail – Brian McGough

 

Brian recently came down on the short side of Under Armour, Inc. (UA) a leading sports apparel company.  Brian says the brand “came out of nowhere” and now owns a 12% market share in sports apparel – flanked by Adidas (8%) and Nike (25%).  Brian says UA has “done a great job,” but the perception  driving stock price now is at odds with reality. 

 

The company describes itself as a designer, developer and distributor of “apparel, footwear and accessories for men, women and youth worldwide.”  Brian says they really dominate one segment: males ages 12-30 in the US.  To get to the next level, UA needs to grow, and McGough cautions there are challenges the market does not recognize.

 

Growing this business will be expensive.  Very expensive.  And as UA spends to grow, a gap will quickly open between their growth rate and their operating profit.  Brian says when the market recognizes this, there will be a significant move to the downside.

 

Brian points out that UA’s core consumer will buy apparel associated with any sport.  And men in the 12-30 age group are notoriously not finicky shoppers.  They want to get in, get their shoes, Ts and sweats, and get out.  UA can sell just about anything, just about anywhere.  But to really grow, UA needs to succeed in two markets: international, and women.

 

The international market is focused on one sport: soccer, a market dominated by Adidas and Reebok which between them have over 90% share.  It will be difficult and expensive to break into this market, and the takings are likely to be extremely small.  And, says, McGough, the “killer” is that, after five successful years, UA still doesn’t even have 1% of the domestic footwear market.  How will they stand up to these established global footwear giants when they try to expand overseas?

 

The female consumer is very different from the male.  Men hate shopping.  Women connect to shopping.  Women shop preferred locations.  They look for store ambience – compare the inside of a Lululemon with Dick’s Sporting Goods.  And women look for fit and fashion, not just comfort, even in athletic wear.

McGough thinks the company has a capital problem which will become evident as they spend more to push sales growth. 

 

One final word of caution: Brian thinks the company has orchestrated very good looking quarterly comparisons.  He would definitely not be short the stock with an earnings report due out soon.  But once that report hits the tape, he thinks the game will change significantly for UA, and the rest of the year will be very tough for them.


Best Consumer Ideas: Long CAG

Takeaway: Here’s a look at one of the best long ideas from the call, courtesy of our Consumer Staples team.

LONG ConAgra (CAG)/Rob Campagnino – Consumer Staples

 

Rob highlights his Long call in ConAgra (CAG), one of North America’s leading food companies serving both the Consumer and the Commercial markets.  CAG has been making new highs in recent weeks, but Rob says it remains undervalued on a number of fronts.

 

Since 2008, it has consistently traded at about a 10%-15% discount to the consumer staples sector.  CAG is close to finalizing its deal to acquire Ralcorp (RAH), a private-label food producer.  The acquisition, which has cleared both US and Canadian regulatory hurdles, will be transformative allowing CAG to deleverage its operations, while building a higher earnings base. 

 

Hedgeye’s Global Macro team sees a bubble building in commodities.  Rob says CAG – already a strong player in its space – will be a major beneficiary when that bubble bursts, dramatically lowering its cost of inputs, and also mitigating the inventory issues RAH struggled with last year.  In a nutshell: there is valuation support for higher prices right here; the company is on the brink of closing a transformative deal that will create significant synergies; CAG will benefit tremendously from what we see as the coming deleveraging of commodities. 

 

Rob says the earnings base could nearly double as a result of these developments.  We note the stock has a low Beta (0.47) and pays a $1 dividend, nearly 3%.


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WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA?

Takeaway: Our factor analysis of performance across Asian & Latin American equity and FX markets reveals both intuitive and less-obvious trends.

SUMMARY CONCLUSIONS:

 

  • Over the short-to-intermediate term, factors associated with currency weakness is a common theme among outperforming factors across Asian and Latin American equity markets. The reverse holds true over the long term.
  • Over the short-to-intermediate term, factors associated with the global search for yield is a common theme among outperforming factors across Asian and Latin American currency markets. More traditional fundamentals such as rates of economic growth and fiscal sobriety are more commonly associated with currency outperformance over the long term.

 

METHODOLOGY:

 

  • In the brief prose below, we walk through the key takeaways from our 17-factor performance model across the 40 country-level equity and currency markets (20 apiece) we track across Asia and Latin America.  
  • To calculate outperformance, we compare the average % change of the respective equity and currency markets where the factor scores below the first quartile to those where the factor scores above the third quartile.  
  • It should be reiterated that the factor scores are all relative to the sample, such that any “high” or “low” reading is associated with the respective quartile and not an arbitrary absolute figure(s).
  • Lastly, the analysis below is not being presented in any way as causal – i.e. the factors aren’t the drivers per se, but rather as common characteristics of leaders and laggards within the samples of market performance.
  • We focus on the top three outperformance deltas across each of the three performance durations, as we believe the factors associated with the most meaningful outperformance may, in fact, be driving the associated market deltas to some degree – likely well beyond what we’d be able ascertain from performing a simple full-sample regression analysis.

 

EQUITY MARKETS:

 

  • On a 1M basis, the top three factors associated with outperformance are: a low sovereign debt/GDP ratio, high growth (YoY real GDP) and expectations of currency weakness over the near term.
  • On a 3M basis, the top three factors associated with outperformance are: expectations of currency weakness over the near term, cheap equity market valuation and a low dividend yield.
  • On a 1Y basis, the top three factors associated with outperformance are: a low sovereign budget balance/GDP ratio, expectations of currency strength over the long term and recent currency strength.
  • Easy mean reversion opportunities (LONG screen = 1M outperformance w/ 3M and 1Y underperformance; SHORT screen = 1M underperformance w/ 3M and 1Y outperformance): N/A

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 1

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 2

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 3

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 4

 

FX MARKETS:

 

  • On a 1M basis, the top three factors associated with outperformance are: high inflation (YoY CPI), high 10Y sovereign yields and high 2Y sovereign yields.
  • On a 3M basis, the top three factors associated with outperformance are: high 10Y sovereign yields, high 2Y sovereign yields and relative equity market weakness.
  • On a 1Y basis, the top three factors associated with outperformance are: high growth (YoY real GDP), expensive equity market valuation and a low sovereign debt/GDP ratio.
  • Easy mean reversion opportunities (LONG screen = 1M outperformance w/ 3M and 1Y underperformance; SHORT screen = 1M underperformance w/ 3M and 1Y outperformance): N/A

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 5

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 6

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 7

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 8

 

KEY TAKEAWAYS

Over the short-to-intermediate term, factors associated with currency weakness is a common theme among outperforming factors across Asian and Latin American equity markets. The reverse holds true over the long term.

 

Over the short-to-intermediate term, factors associated with the global search for yield is a common theme among outperforming factors across Asian and Latin American currency markets. More traditional fundamentals such as rates of economic growth and fiscal sobriety are more commonly associated with currency outperformance over the long term.

 

INVESTMENT THEMES

We currently hold the following biases across Asian and Latin American asset classes:

 

  • BULLISH bias on Singapore’s equity market (since 12/21/12; TREND duration)
  • BULLISH bias on Chinese consumer-oriented equities (since 12/10/12; TREND duration)
  • BULLISH bias on Hong Kong’s equity  market (since 11/16/12; TREND duration)
  • BEARISH bias on the Japanese yen (since 9/27/12; TREND and TAIL durations)
  • BEARISH bias on Australia’s equity market and the Aussie dollar (since 6/5/12; TAIL duration)
  • BEARISH bias on the Argentine peso (since 11/4/10; TAIL duration)

 

If a particular country or asset class isn’t on this list, it’s because we either wash out neutral on it from a fundamental perspective or we simply don’t hold enough fundamental conviction in either a long or short thesis at the current juncture.

 

Additionally, we could also be waiting on time decay (i.e. specific catalysts closer to materializing) and/or specific price signals (such as our eventual positive view on Indian equities post a [continued] near-term correction).

 

Please email us if you’d like to dive deeper into any of these ideas and/or if you’d like to further discuss the takeaways and implications of the aforementioned factor study.

 

Darius Dale

Senior Analyst


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

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