MNST - Friday Rumor Mill Grinds Some Shorts

It simply doesn't get any more spivvy than Friday rumors before a long weekend and into a short week where many investors will be on winter break with their children.  With MNST scheduled to report earnings a week from today (2/22) and a wall of worry for investors to climb regarding slowing top line and pricing in the U.S., today's speculation of a takeout just reeks of someone saying "get me out!" before the print.


While the timing of such speculation makes us "highly suspect" (I watched "Ratatouille" with my daughter last night), the notion isn't all that absurd (we have mentioned it from time to time).  Beverage companies struggle to find growth in today's environment, and MNST is working toward becoming a global growth story.  The size of the deal would be more than manageable for any of the multinationals in our coverage.


Having said that, we don't put much faith in this particular rumor given its timing (we have seen this movie more than once, just like "Ratatouille").  People don't want to be short going into a long weekend and the recent HNZ news has likely only made people more jittery regarding potential M&A activity.  We are also seeing call buying across multiple strikes as people position themselves for a possible deal or (more likely), buy some protection for their short position.


We think we are going to get a shot at this name lower, and so we are simply going to watch the headlines this weekend.


Have a good long weekend,



Robert  Campagnino

Managing Director





Goodbye Gold

 Over the last week, the US dollar has strengthened significantly, taking down the price of gold with it. In the last three months alone, gold has fallen from $1750/oz to just above $1600/oz today. Strong Dollar = Strong America. Gold and bonds are feeling the heat from #GrowthStabilizing.


Goodbye Gold - GLDUSD


In preparation for MAR's 4Q earnings release Tuesday, we’ve put together the recent pertinent forward looking company commentary.




  • "Planners are increasingly concerned about tight availability and are consequently booking meetings earlier."
  • "For the full year 2012, we expect to add roughly 28,000 rooms, including the 8,100 rooms from Gaylord."
  • "We expect REVPAR to remain strong in North America even as we shift from a leisure-heavy quarter to one more driven by business travel. Our fourth quarter guidance reflects 5% to 7% growth in system-wide REVPAR in North America. While our group booking pace is up nearly 9%, the fourth quarter includes a U.S. Presidential Election Week and a midweek Halloween, both of which will likely temper last-minute business-related demand in the quarter."
  • "We also expect fourth quarter G&A to decline, with less noise compared to last year."
  • "Our run rate for interest expense should increase modestly in the fourth quarter. At the beginning of the quarter, we issued $350 million of 10-year bonds with a 3.25% coupon. We had not expected to issue bonds until 2014, but we were attracted by the low yields in today's market. Given where short-term interest rates are today, this should increase our interest expense by about $4 million in the fourth quarter."
  • "We expect to return roughly $1.1 billion in share repurchases and dividends in 2012."
  • "Better understood as the continued government pressure to cut cost by focusing on travel, the GSA recently announced flat government per diems for 2013. Fortunately, at many full-service hotels in the United States, business is strong enough that we will probably replace this government business with other customers paying higher rates. In Washington, we expect occupancy rates to increase in 2013 as the politicians and lobbyists get back to the city."
  • "We estimate that the inauguration alone should increase annual REVPAR growth in the Downtown D.C. market by 150 to 200 basis points. With this strong Downtown performance, we expect REVPAR for Greater D.C. to grow at a mid single-digit rate in 2013. You may recall that roughly 5% of our North American room distribution is in the D.C. area."
  • "Nationwide, annual GDP in 2012 is growing at a pace slightly north of 2%. Assuming that pace continues into 2013, our system-wide North American hotels would likely remain in the 5% to 7% REVPAR growth range that we expect for the fourth quarter of this year. PwC, Smith Travel, and Lodging Econometrics are all forecasting less than 1% supply growth in 2013. This, combined with nearly peak occupancy levels, positions us to drive room rates higher."
  • "Our group booking pace for the North American company-operated Marriott brand for 2013 is up over 7%, with nearly 4% improvement in room rates over a strong 2012. Meeting planners and transient guests are booking earlier, and some customers are requesting multiple-year contracts. Given this climate, we are targeting corporate negotiated rates to increase at a high single-digit rate in 2013. In short, we expect North America to be steady as she goes. North America represents about 75% of our annual fee revenue."
  • "In Europe, the big 2013 story will likely continue to be the economy as many countries struggle with sovereign debt burdens, austerity programs, and modest economic growth. We will also face tough comparisons to many 2012 special events including the Olympics, the Euro Cup Championship, and a record-breaking 2012 fair schedule in Germany. Given all this, we are expecting flattish constant dollar REVPAR performance in our European hotels in 2013."
  • "In Asia, in addition to more moderate GDP growth, 2013 REVPAR should reflect significant supply growth in a few markets and slower inbound traffic from Europe. However, as in Europe, we have a meaningful concentration of hotels in better-performing gateway markets.  Overall, netting the pluses and the minuses, we expect REVPAR in the Asia Pacific region will increase at a mid to high single-digit rate on a constant dollar basis in 2013."
  • "In 2013, the Caribbean and Latin American market should benefit from economic growth throughout the region, stronger leisure business in the Caribbean, and a newly renovated hotel for us in São Paulo. Here, we are targeting constant dollar REVPAR growth in the region will increase at a mid single-digit rate."
  • "In the Middle East, we've already seen a pickup in demand at our Red Sea resorts, although absolute occupancy rates are likely to remain low in 2013. Dubai by contrast should remain strong, and infrastructure development should help business in Saudi Arabia. While quite difficult to forecast, we are assuming constant dollar REVPAR growth at a mid single-digit rate in 2013."
  • "Given the cost inflation since 2007, we expect hotel industry operating margins won't be back to 2007 levels until 2014 or 2015. And, once the economics support new construction, it could take anywhere from 24 to 60 months to develop a new hotel. So, it will be some time before we see many new full-service hotel openings. At the same time, transactions for existing hotels are increasing."
  • "Today, CMBS new issue market is quite robust, with low interest rates available for existing properties with solid cash flow. We haven't seen a lot of foreclosures. Recapitalizations are more the rule."
  • "In contrast to full-service development, new construction of our limited-service brands in the U.S. is picking up....we don't see meaningful near-term risk of overbuilding in most markets."
  • "Transient will bounce back faster and the group will still be held back a little bit by the length of the booking window and by the fact that the rates on the group business reflect rates that are put on the books at weaker times in the cycle. The longer we get into a recovery cycle, the more that
    factor ought to dissipate."
  • "When you look at fourth quarter, I suspect we'll see incentive fee growth at lower rates than we've experienced in Q3, and that's fundamentally can be driven by that 3%-ish REVPAR expectation for international hotels in Q4."
  • "We are seeing a modest increase in expected demand from our special corporate customers."We do have an internal goal... high single-digits rate increase. I think that is driven though both by pricing growth in like-for-like accounts and I suspect some of the lower-rated special corporate accounts we will essentially not play with or we will play with fewer hotels with those accounts. And that will give us a little bit more risk with rack-rate business, which is not special corporate and not last room."
  • "We typically run a 3% to 4% G&A increase on a run rate basis year in and year out and we try to be disciplined and manage to that." 
  • "I wouldn't be surprised to see us end the year at a point or two, maybe two or 3 points more of our group business on the books as of the first of the year than we would have had a year before. But, it won't be a dramatic shift from the year earlier."
  • "The obvious point is the supply growth in New York is... as high as any big urban market we have in the United States, has been the last couple of years, is likely to continue to post supply growth numbers in 2013 and 2014, which are at or near the top of the big markets in the United States."
  • "1.5% of the system is the right kind of deletion number for the foreseeable future."

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

UAL & Airlines: Out of Catalysts

  • Big Catalyst Gone:  With the merger news now out, airline investors may need to wait some time for the merger to close and route integration to start.  Courts and regulators will no doubt make the wait abnormally long and we suspect many investors will lack the patience.  Further consolidation may face increased antitrust scrutiny, so this is likely the last consolidation catalyst.  


  • We Expect Consolidation to Fail:  We do not expect consolidation at post-AMR/LCC levels to support industry pricing.  There are many more consolidated industries that struggle. We have previously noted Accuride, which went bankrupt with >50% market share in truck wheels and Canadian airlines, but there are many others.  General Motors had a ~40% market share in the 1980s, but was eventually done in by significant legacy liabilities, low cost competition, expensive/inflexible unionized labor and product quality issues, among other factors.  Sound like anyone we know?  Consolidation is neither necessary nor sufficient for a healthy industry structure.


  • Low Barriers to Entry:  Even if consolidation does support pricing, those high prices may attract new low cost carriers to the market.  Low barriers to entry and high prices do not mix in the long run.  The current airline valuations are only attractive if the group were to remain profitable in the long-term, as equity valuations are heavily determined by post 2015 results/terminal values.  Betting on a temporary pop in airline profitability from consolidation is more speculation than investment, in our view, and we note that the last six months have shown the opposite - weak pricing and margin declines.

HNZ: Berkshire Buys a Little ADM

This note was originally published February 14, 2013 at 23:57 in Consumer Staples

On a day where we saw Berkshire Hathaway’s appetite for global consumer brands manifest itself as a $72.50 per share bid for Heinz (HNZ), a much smaller investment, but an investment that is no less consistent with Berkshire’s investment philosophy, may have escaped investor notice.  In a 13-F filing, Berkshire Hathaway reported a 6 million share position in Archer-Daniels Midland (ADM).

With the overarching investment principle a focus on long-term value, Berkshire has also displayed an interest in infrastructure when it ventures out beyond insurance.  We believe that part of the long-term investment thesis surrounding ADM (and Bunge, BG, as well) is the capital investment that both companies have made in global, agricultural infrastructure and the likely potential future returns associated with those investments.

The assets at ADM and BG are unique and leveraged to what we view as a powerful, long-term investment thesis – feeding an expanding global population and the associated need to get the crops from where grown to where consumed.

We expect that ADM shares will get a boost from this news and continue to see upside to the mid-$30’s in the name as we move through the start of the crop year in the U.S.  Similarly, we see upside to shares of BG, despite a recent quarterly result marred by the performance of the company’s risk management operations.



Panera’s ability to drive same-restaurant sales via mix has ebbed and flowed over the past few years.


We are going to be posting on PNRA more regularly going forward.  The company has no real competition but we believe that 2013 same-restaurant sales targets could be difficult to achieve in light of a challenging operating environment in which to maintain sufficient average check growth.


Panera’s company same-restaurant sales growth has become increasingly dependent on price and mix over the past few quarters.  Our fear for shareholders, at this point, is that management’s ability to sustain mix is waning and that meeting FY13 comparable sales growth guidance may prove difficult. 


During the 4Q11 earnings call, management broke out components of FY12 SSS guidance; during the 4Q12 earnings call, the same detail was not provided for FY13.  That management provided less detail is not a good sign, in our view.  We think that the outlook for mix growth is negative for Panera:

  • The company is lapping the positive mix impact of higher sales of salads in 1Q12, which were boosted by warm weather.  Guidance for 1Q12 mix growth was expected to be primarily catering-driven.
  • Management is planning on raising prices 2-3% in 2013 with a total comparable sales growth target of 4.5-5.5%.   We believe that there is high risk of mix growth turning negative in the first couple of quarters of 2013.  With traffic growth decelerating as average check growth has accelerated, we believe 1H13 could be difficult for PNRA.
  • Catering sales growth, while still impressive, has been decelerating and we expect that deceleration to continue as the initiative becomes a larger portion of PNRA’s total sales.  

PNRA MIX TAPPED OUT? - pnra sss components




Howard Penney

Managing Director


Rory Green

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.