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Missing The Point

Client Talking Points

What Me Worry?

People sure have made a lot of noise over the past two days with the market not closing in the green. It’s really funny, because the S&P 500 is still up above 1500; looks like the permabears are upset because they missed the +177 point move to the upside in the S&P 500 from the November lows. These days, people will say the craziest things just to make their position hurt a little less. We’re bullish on #GrowthStabilizing and the US dollar, which is good for consumption which helps boost stocks. We’re also bullish on US housing and US employment. As for the commodity game, that’s where our bearish stance lies. Gold, silver and food we are particularly bearish on. Perhaps the stock permabears should switch their asset class; maybe then they’d get something right.

Asset Allocation

CASH 37% US EQUITIES 24%
INTL EQUITIES 24% COMMODITIES 0%
FIXED INCOME 0% 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

“Studies show, Caffeine can cause you to be more open-minded to viewpoints that contradict your own.” -@petenajarian

 

QUOTE OF THE DAY

“The public will believe anything, so long as it is not founded on truth.” -Edith Sitwell

STAT OF THE DAY

CRB Commodities Index is down -4% for the month. Strong Dollar = Weak Commodities.


DRI STILL RIDING OUT THE STORM

In 2009, at the height of the financial crisis, the theme of the Darden Analyst Meeting was “Riding Out The Storm”.  The company could recycle that theme for this year’s Analyst Meeting but the company’s recent troubles have been self-inflicted. 

 

This morning, Darden guided to 3Q EPS of $1.00-1.02 versus the Street at $1.12.  We continue to expect EPS of $3.00 for FY13 versus $3.39 consensus.  The table below highlights the shortfall, in terms of consensus, of the pre-released same-restaurant sales results released by Darden this morning. 

 

DRI STILL RIDING OUT THE STORM - dri sss vs consensus

 

 

Capital Allocation

 

For a company of Darden’s size, following a growth mandate, it’s important for the company’s shareholders that the Return on Incremental Invested Capital metric is not declining steadily over time.  As the chart below illustrates, that has been the case.  For our position on the stock to change, we would need to see a stop to the growth of The Olive Garden and Red Lobster concepts and a slowing of the growth of LongHorn Steakhouse.  This will enable management to improve operations and restaurant-level performance.  We estimate that, since the end of 2009, Darden has spent over $2.35 billion in CapEx to generate only $198 million in incremental EBITDA.  That is not sustainable and shareholders should be seeking a change in philosophy from management: from “growth” to “prudent capital allocation”. 

 

DRI STILL RIDING OUT THE STORM - DRI ROIIC

 

 

Cutting the Fat

 

Darden has a hefty corporate structure, which is appropriate given that it manages over 2,000 restaurants within eight different concepts.  In trying to gauge whether or not the company is run efficiently, we have considered SG&A spending per store versus other operators within the industry.  While the G&A of Brinker may not be completely comparable to the SG&A line item of Darden, it is interesting to note that the aforementioned line item of Darden’s, on a per store basis, is almost twice that of Brinker, also on a per store basis.  If Darden can approach the efficiency level of Brinker in terms of its SG&A spending, we estimate that the benefit could be as much as $400 or $2.25 per share.

 

 

Whale Hunting Private Equity Firms

 

If difficult decisions are not made, it is likely that this company ends up in the hands of private equity with the company being broken into two pieces: Olive Garden and Seasons 52 (Italian) and Red Lobster, Eddie V’s and LongHorn (Steak and Seafood).  The other brands would likely be sold with Yardhouse going public.  To-date, there has been little pressure on management from shareholders to make any difficult decisions but, as the stock price goes lower, pressure is sure to follow.

 

 

The Upcoming Analyst Day

 

We are expecting management to stick with the party line during the Darden Analyst Meeting next week:

  • New Menus at Red Lobster and The Olive Garden
  • Remodel initiatives at The Olive Garden
  • Discounting
  • New leadership at the brand level
  • Inflation expectations
  • Growth initiatives
  • Supply chain efficiencies

 

We will know more about management’s vision for the future next week.  Unfortunately for those that own the shares, we don’t anticipate an increased focus on the core business and the issues therein.  We expect $3.00 in EPS for FY13 versus consensus of $3.39.  The road to recovery is not going to be easy for Darden but getting serious about fixing the core business is the sign that they are on the way.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


GENTING SINGAPORE: BIG MOVE BUT WE STILL LIKE IT

Strong quarter drives stock price in and out of the quarter.  Improving fundamentals, strong cash flow, and potential new markets keep us excited.

 

 

We think Q4 was the first of many solid quarters from Genting Singapore.  So even though the stock is up 20% since we turned bullish following our trip there in December, we remain positive.  The company is building a warship of cash as capex subsides, earnings are stabilizing, and the promise of new Asian markets may move to the forefront in the coming months.

 

While Genting Singapore’s EBITDA missed our estimate primarily due to hold, gaming volumes were better than expected.  Mass and slot revenue exceeded estimates.  VIP RC volume grew 56% vs. our estimate of 35% growth but hold was below the company’s historical average of 3.19%, so on the margin, gross VIP revenues were only 5% ahead of our estimate.  Better GGR was offset by higher rebates, GST, gaming points, comps/MVP's & other which rose to 37% of GGR from under 34% the in 2Q and 3Q12.

 

 

4Q12 Detail:

  • Gross gaming revenue of S$998MM on net gaming revenue of S$627MM
    • Rebates, GST & mass marketing points of S$371MM; equal to 37.2% of GGR , a large increase from 3Q12 at 33.7% and 27.7% in 4Q11
    • Gross VIP revenue of S$363MM and net VIP revenue of S$190MM
      • Just to clarify, when the Company says that Net RC revenues are 28% of Net Casino revenue, they are not just referring to the rebate on VIP but ALL discounts offered on gaming play (ie, Rebates, Mass points, GST, comps, MVP’s and other).
      • 56% of GGR
      • RC turnover: S$18.6BN up 56% YoY (51% market share)
      • Hold rate: 3.0%
    • Mass win of S$285MM up 2% YoY and flat QoQ
      • Drop of S$1.19BN and hold of 24%
  • Slot & ETG win S$155MM
    • Handle up 2.5% YoY to S$2.98BN
  • Non-gaming revenues were a little better than we estimated
    • We estimate that the Marine Life Park contributed $7MM of revenues to the quarter
      • $29 ticket pricing, but the actual price is closer to $23 due to the number of package deals being sold.
  • Expenses:
    • Gaming tax: S$88.6MM
    • Bad debt charge: S$43MM or 7.7% of Gross VIP which was in-line with the 2012 average but up YoY
    • Estimated fixed costs: S$206MM up from S$169MM in 3Q12 and S$195MM in 4Q11

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 22, 2013


As we look at today's setup for the S&P 500, the range is 16 points or -0.70% downside to 1513 and 1.77% upside to 1529.  

                                                                                                                             

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.74 from 1.73
  • VIX  closed at 15.22 1 day percent change of 3.68%

MACRO DATA POINTS (Bloomberg Estimates):

  • 10:30am: Fed’s Powell, Rosengren speak in New York
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count
  • 6:30pm: Fed’s Tarullo speaks on regulation in New York

GOVERNMENT:                                        

    • Obama hosts lunch mtg w/ Japanese Prime Minister Shinzo Abe
    • Defense Sec Leon Panetta attends NATO mtg in Brussels
    • 8am: HHS, FDA to discuss, vote on pre-mkt approval of NeuroPace Responsive Neurostimulation System
    • 3pm: Sec. of State John Kerry meets with Japanese Minister of Foreign Affairs Fumio Kishida

WHAT TO WATCH

  • Gardner Denver to release earnings, may update on sale
  • KKR said to offer ~$3.68b for Gardner Denver
  • Bernanke said to minimize asset-bubble concern at dealer meeting
  • Boeing said to present battery redesign for 787 to FAA
  • Tosoh develops material that may help solve B787’s battery issue: Nikkei
  • Bausch & Lomb owner Warburg Pincus said to seek banks for IPO
  • BOE, PBOC discussing 3yr pound/renminbi swap arrangement
  • S&P probe by Massachusetts said to extend to post-crisis ratings
  • Euro-area economy to shrink, Spain deficit widened, EU says
  • Elan plans $1b share repurchase
  • German IFO business confidence rises more than forecast
  • China’s new home prices rise for 3rd month
  • ING to name Ralph Hamers CEO
  • Alcatel-Lucent names Michel Combes CEO; France said to weigh stake
  • EMA Preview: Glaxo, Sanofi, Pfizer, J&J, Roche, Takeda
  • 85th annual Academy Awards ceremony to take place Sunday
  • Anschutz Entertainment bids are below asking price: NY Post
  • Bernanke, Italian Election, Oscars: Wk Ahead Feb. 23-March 2

EARNINGS:

    • Enerplus (ERF CN) 6am, C$0.12
    • Gardner Denver (GDI) 6:30am, $1.35
    • Barnes Group (B) 6:30am, $0.51
    • Eldorado Gold (ELD CN) 7am, $0.15
    • Cyberonics (CYBX) 7am, $0.39
    • Interpublic (IPG) 7am, $0.53
    • Selectome REIT (SIR) 7am, $0.72
    • Abercrombie & Fitch (ANF) 7am, $1.96 - Preview
    • NV Energy (NVE) 7am, $0.07
    • Mobile Mini (MINI) 7:30am, $0.30
    • HMS Holdings (HMSY) 7:30am, $0.26
    • Warner Chilcott (WCRX) 7:30am , $0.73
    • Charter Communications (CHTR) 8am, $0.06
    • Pinnacle West Capital (PNW) 8am, $0.17
    • Washington Post (WPO) 8:30am, NA

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Nickel Narrows Biggest Drop Since 2011 as Slump Attracts Buying
  • Sugar Traders Most Bullish Since October on Ethanol: Commodities
  • Soybeans Head for Longest Rally Since April on Chinese Demand
  • Gold Cuts Third Weekly Drop as Slide to 7-Month Low Spurs Demand
  • Brent Crude Rises, Paring Biggest Weekly Decline Since December
  • Coffee Rises as Investors May Cut Bearish Bets After Price Drop
  • Soybeans Held at Brazil Ports Boost Prices in China, Wilmar Says
  • China’s Grain Supply in ‘Structrual Shortage’, Minister Says
  • Gas Curve Shows Export Profit as Obama Hosts Abe: Energy Markets
  • Crude May Fall as Weak Demand Boosts Inventories, Survey Shows
  • India Seen Raising Cooking Oil Import Taxes to Protect Growers
  • U.S. Forecasts ‘Modest Further Rise’ in Gasoline Prices at Pump
  • Gasoline Rally Seen Fueling U.S. Stock Losses: Chart of the Day
  • Record Sugar Output in India’s Top Grower Seen Curbing Imports

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 



Witness Fear

“In the taiga there are no witnesses.”

-Dersu The Trapper

 

That’s the opening volley from a book I just cracked open, The TigerA True Story of Vengeance and Survival (by John Vaillant). The “taiga” is not to be confused with the Amur Tiger. Both are to be feared, in different ways.

 

The taiga is where these killers prowl, in “the mixed broad leaf and conifer forests of Siberia.” As for the Siberian tiger itself, people “fear it, revere it, tolerate it, and sometimes hunt it.” (pg 19)

 

If you want something to scare the hell out of you, I’m betting that one of these hungry cats does it better than this market can.

 

Back to the Global Macro Grind

 

If I take you out back into the black bear bushes of Thunder Bay, Ontario (in the dark, with no crackberry or gun) I bet I can scare the hell out of you too. To be clear, there are times to fear – and yesterday wasn’t one of them.

 

After banging the top-end of our immediate-term risk range (immediate-term TRADE overbought on Tuesday, where we sold at 1530 SPX), the US stock market corrected for 2-days (from the all-time high in the Russell2000) and people were freaking out.

 

Really?

 

Or are they freaking out because they missed a +177 point move in the SP500 from the November lows, chased the February high, then got snow plowed? People have baggage, I get it. But let’s get real here – nothing about our bull case has changed.

 

To review:

  1. We are bullish on global #GrowthStabilizing (especially in Asia and the USA, not France)
  2. We are bullish on both US Housing and US Employment (Existing Homes Inventory reported -25% y/y yesterday!)
  3. We are bearish on Commodities, particularly Gold, Silver, and Food

So, if you want to get bearish on something, get bearish on something that’s actually gone down for more than 48 hours. Commodities and their related equities have been a relative train wreck for not only February, but since Bernanke’s Top.

 

Since Bernanke’s money printing top (September 14, 2012 - #timestamp it):

  1. The CRB Commodities Index (19 commodities composite) is down -8.7%
  2. And in the last 3 months, Gold and Silver are down -8.7% and -13.9%, respectively
  3. Wheat, Cocoa, and Corn are down -14.7%, -15.3%, and -6.8% in the last 3 months too

And if you don’t care on Cocoa (I don’t) and are a little shorter-term than that with a US stock market focus:

  1. For FEB to-date, Basic Materials (XLB) is down -3.3%
  2. The SP500 is +0.3% for the month-to-date

Wanna get nuts? I can get nuts. I can rip into a 40yr US Dollar Debauchery cycle rant like you have never seen. I can throw more historical data at you on what perpetuated the all-time highs in Commodities (2011) than you can shake a stick at. I can yell. I can scream. I can probably even win a butt-kicking contest versus a one-legged commodity bull on this, dammit!

 

(interviewing for Santelli’s job, so thanks for reading that)

 

Back to reality – I keep getting asked “well, Keith what about your call on US Dollar Correlation Risk from 2010-2012.” A: correlations in markets are never perpetual, and it’s 2013.

 

What do I mean by that? It’s just math. Here’s what’s happening in our immediate-term TRADE correlation model (vs USD):

  1. CRB Commodities Index vs USD correlation = -0.98! (uber negative correlation)
  2. Eurostoxx600 vs USD correlation = -0.68
  3. SP500 and MSCI Asia (Equities) vs USD correlations = +0.13 and +0.55 (note, they are positive)

So stop freaking out. Like the Reagan (1) and Clinton (1) US #GrowthStabilizing (then eventually accelerating) periods, Strong Dollar can become a pro-growth signal. Oh, and China likes Strong Dollar, down food prices too. Don’t you?

 

If you want to get scared, fear the biggest thing of all that can screw this all up - the government.

 

Out immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, and the SP500 are now $1, $112.59-117.02, $80.63-81.53, $1.31-1.33, 92.87-94.39, 1.97-2.05%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Witness Fear - Chart of the Day

 

Witness Fear - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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