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HOUSING: More Than Meets The Eye

With this morning's news that the MBA purchase demand index had fallen 10% week-over-week was quite a shocker to many after several weeks of positive outcomes. Did demand to buy houses really drop 10%? We don't think so. There was virtually no inflection on the year-over-year rate of change.This past week was up 20.5% vs. the prior year, which compares with the YoY growth over the preceding three weeks of: 22.6%, 20.3% and 20.7%. In other words, the weakness seems to be stemming from a recurrent seasonal adjustment distortion and not from a bona fide decline in demand. 

 

 

HOUSING: More Than Meets The Eye - MBApurchase1

 

 

Our bullish thesis on the housing recovery remains solidly in tact. As home prices rise, so will demand to purchase homes. We're also undergoing a cool down in refinancing activity as rates rise above 3.4% range we saw throughout most of Q4 2012 to 3.64% this week. The future of refi activity is uncertain due to the possibility of a rise in rates and President Obama's plan to help borrowers who are underwater. We'll keep an eye out on this one to see what direction refi heads.

 

HOUSING: More Than Meets The Eye - MBApurchase2


BWLD TALKING THE TALK

Buffalo Wild Wings is talking a big FY13 game but we believe they are running the risk of disappointing for a second consecutive year.  Raising guidance to 25% earnings growth (from 20%) is a big statement for a company facing some top-line uncertainty. Time will tell whether the company can walk the walk.

 

Recap

 

BWLD reported 4Q12 and FY12 earnings after the market close today.  4Q earnings came in at $0.89 versus $0.96 expected.  FY12 EPS grew by $0.26 cents year-over-year, $0.19 (73% of the full-year EPS growth) of which came from the extra week in 4Q. 

 

Buffalo Wild Wings’ comparable restaurant sales growth in the fourth quarter was slightly ahead of expectations at 5.8% versus consensus 3.6%.  The company revealed that the first six weeks of the quarter were seeing same-restaurant sales growth of -2.8% at company locations.  However, management estimates that when this number is adjusted to take into account the timing shift of college and football seasons for both seasons, the co-op comparable sales growth would be +2.6% at company locations.

 

BWLD TALKING THE TALK - bwld eps recap

 

BWLD TALKING THE TALK - pod 1

 

 

Outlook

 

We believe that casual dining trends, broadly, are likely to disappoint in 1Q and see BWLD as an attractive short at these levels.  The DFRH news was misinterpreted by the market yesterday, sending the stock on a surge; we believe that the shares should go lower from here.  Management raised its implied FY13 earnings guidance to $3.55-3.60.  We expect FY13 earnings to come in at $3.42.  

 

Call us at the number below to discuss in greater detail.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


Simply The Best

Client Talking Points

Golden Days Are Over

As employment and housing continue to stabilize, our growth thesis remains in tact. Consumption and growth are good for stocks, bad for bonds and gold. Although we're seeing gold flashing an immediate-term TRADE oversold signal at $1641/oz, it's still in bearish formation. Some people will never give up their long gold trade but eventually, they'll have to if we stay on the current path.

Our Best Ideas

After offering up our best ideas earlier this week, we'd like to reiterate two longs and two shorts that our sector heads are really passionate about. From Gaming, Leisure and Lodging Sector Head Todd Jordan comes LONG IGT. Jordan sees room for growth and a 3-5 year bull market for slot makers on the horizon. Retail Sector Head Brian McGough is LONG JCP as he thinks near-term sentiment is too bearish at current prices among other reasons.

 

On the short side, Consumer Staples Sector Head Rob Campagnino is SHORT KMB. Rob's talked about KMB before and commodity prices could become an issue in the pulp and oil areas. Restaurants Sector Head Howard Penney is SHORT BKW and has been making noise on the name with good reason: the company was never 'fixed' when it went private and the outlook for the co. isn't good.

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

"you know the stock market is on fire when I have to use the pan tool to move my charts down..." -@allstarcharts

QUOTE OF THE DAY

"About the most originality that any writer can hope to achieve honestly is to steal with good judgment." -Josh Billings

STAT OF THE DAY

Retail sales rose a seasonally adjusted 0.1% last month, or by 0.2% excluding the auto sector.


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MCD: OUR BEARISH BIAS PERSISTS

The aggressive value message MCD has been communicating to its consumer may have put a band-aid on sales trends in December and January but, it seems, the impact may be waning in February.  We estimate that McDonald’s is likely to miss current consensus expectations by 100-200 bps in 1Q13.  We are adding MCD to the short side of our Position Monitor.

 

As we have discussed in prior notes, the Street is anticipating an inflection point in McDonald’s sales trends in 2013.  In late 2003, the aggressive push for positive comparable sales growth via the dollar menu did not fix the underlying problems with the business.  The 2013 rehash of this strategy is also unlikely to work.  Sustainable top line growth will be achieved through driving efficiency in the stores; this was the core objective of the Plan to Win.  Changes in this regard will also address operational issues that are having a negative impact on store-level margins.

 

In February, the company moved fish bites onto the dollar menu to help sales gain traction in the U.S. but the consumer response has been disappointing.  We are now looking for MCD U.S. same-restaurant sales trends to be down -3.5% in 1Q13 versus consensus at -1.2%.

 

MCD: OUR BEARISH BIAS PERSISTS - mcd us hedgeye

 

MCD: OUR BEARISH BIAS PERSISTS - mcd us hedgeye vs consensus

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 



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