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EAT STILL GOING STRONG AFTER THREE YEARS

Our bullish stance on Brinker remains firmly in place as the Investor & Analyst Conference was starkly different in tone to the unsettling Darden Analyst Meeting the couple of days prior.  Here are our summary thoughts on EAT:

 

  • Consistent with other industry players, Brinker said that Chili’s quarter-to-date same-restaurant sales are down 2-3%.  This implies industry sales are down more than -3.5% if the Gap-to-Knapp this quarter has remained constant versus that of 2QFY13. 
  • EAT guided FY 2013 to the low end of its prior guidance for EPS of $2.30-$2.45 but in line with consensus expectations.
  • The strong margin trends are insulating the company’s earnings from the current top line softness
  • Brinker indicated that it could meet its long standing $2.75-$2.80 EPS target in FY 2014, a year earlier than the initial goal that was set back in 2010.
  • Brinker's disclosed goal to double EPS again to $4 per share by FY 2017, driven by familiarity, variability and the continued benefit of new technology.
  • To reach that goal the company will drive 3-4% revenue growth and 10-15% EPS growth.
  • EPS will also benefit from the share repurchases are expected to exceed $1 billion over the next five years or 40% of the market cap of the company.
  • The company highlighted a diversified business model comprising of Chili’s and Maggiano’s, franchising royalty streams and the 2nd largest casual dining company in the world.
  • Management has earned the respect of Wall Street delivering 330bps of a targeted 400bps improvement in Chili's stet back in 2010.
  • EAT remains of the best run companies in the restaurant industry and a LONG on the Restaurant Position Monitor.

 

Conclusion

 

We believe that Brinker is well poised to deliver on its stated goals and remains one of our favorite names in the restaurant space.  The company is offering investors a differentiated focus on returns with a clear capital allocation strategy.  EAT is one of our favorite names in the restaurant space, even after this past three years.

 

 

EAT STILL GOING STRONG AFTER THREE YEARS - chili s pod 1

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


Initial Claims & GDP: Preparing for the Turn

Takeaway: Claims continue to look good alongside the peak tailwind in seasonal adjustments. GDP Revision light of estimates, supported by net exports

Investment Positioning Review:  With the Housing and Labor Market data remaining positive alongside a strong dollar and commodity deflation, we remain positive on equities (US/Asia, consumption focused) and negative on gold & commodities at current prices

 

4Q12 GDP – 1st Revision:  This morning’s first revision to GDP for 4Q12 registered a +20 bps improvement, shifting the growth reading from marginally negative (-0.1%) to marginally positive (+0.1%).   The Consumption, Investment and Government components were all revised down small while the downward revision to imports & upward revision to exports provided upside to the net export figure which drove most of the positive change in the aggregate revision. 

 

Residential and Nonresidential Fixed Investment growth were both revised higher while National Defense Consumption & Investment, the largest discrete drag in 4Q12, was largely unchanged at -22% Q/Q.  Inflation estimates were revised higher with the GDP Price Index revised +30bps to 0.9%. Overall, despite the miss to consensus at +0.5%, we'd characterize today's print as benign from an investment or catalyst perspective.   

 

Initial Claims & GDP:  Preparing for the Turn - GDP Revision Summary

 

Initial Claims:  Headline Initial Claims declined 18K taking the 4-week rolling average down 6.75K to 355K.  The direction trend in the 4-week rolling average of NSA claims remains positive but the rate of improvement declined sequentially, coming in at -2.6% y/y this week vs. -3.9% Y/Y in the prior week.  As a reminder, the seasonal distortion tailwind in the reported data  peaks in February before reversing course and serving as a headwind over the March – August period (more detail below).

 

 

Below is the weekly detailed analysis of the claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact

 

 

One Away

Everything's coming up roses with the recent initial jobless claims data, this morning's better than expected print included. This should come as no surprise to anyone who's been following our work. The end of February marks of the peak of the seasonality distortion tailwind. Next week will mark the final tailwind datapoint. Then, beginning in March, we'll start to see the effect reverse and the market's perception around the momentum in the labor market will begin to weaken and ultimately will turn bearish as the reverse effect peaks in August. It's also worth noting that the sequester takes effect tomorrow, and may result in a notable short-term spike in jobless claims if Congress doesn't take action.

 

For reference, the XLF dropped 20% in 2010, 32% in 2011 and 15% in 2012 beginning in the late February through mid-April timeframe in each of those years. We think a major factor component of the decline is this labor market seasonality dynamic. It's important to note that the effect is getting steadily smaller over time due to weighting methodology in the government's seasonality models. It's also important to note that last year's decline was conspicuously smaller, and shorter in duration, than the previous two years. We think this owed to the ongoing strengthening housing recovery coupled with the lessening effect of the distortion. We think those two factors will again be present this year, likely making the pullback more comparable to that of 2012 than 2011.

 

For those with a longer-term view, looking past the next 3-6 months, they should take some comfort in the fact that the latest week's data, on a non-seasonally adjusted basis, showed continued improvement. The YoY change in NSA claims was better by 8.0%, the largest YoY improvement in the last 5 weeks. However, the rolling 4-week average of NSA claims improved YoY by 2.4%, which was modestly worse than the 3.2% improvement in the previous week. The bottom line is that the real labor market is still improving, just not by as much as the market thinks.

 

Prior to revision, initial jobless claims fell 18k to 344k from 362k WoW, as the prior week's number was revised up by 4k to 366k.

 

The headline (unrevised) number shows claims were lower by 22k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 355k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -2.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -3.9%

 

Initial Claims & GDP:  Preparing for the Turn - JS 1

 

Initial Claims & GDP:  Preparing for the Turn - JS 2

 

Initial Claims & GDP:  Preparing for the Turn - JS 3

 

Initial Claims & GDP:  Preparing for the Turn - JS 4

 

 

Joshua Steiner, CFA

 

 

Christian B. Drake

 


Jobless Claims: The Turning Point

We’re coming to a focal point in the initial jobless claims game. While today’s print of 344,000 was a positive (initial jobless claims fell 18,000 from 362,000 week-over-week), the seasonal adjustment factor will soon morph from a tailwind into a headwind. Beginning in March, we'll start to see the effect reverse and the market's perception around the momentum in the labor market will begin to weaken and ultimately will turn bearish as the reverse effect peaks in August. It's also worth noting that the sequester takes effect tomorrow, and may result in a notable short-term spike in jobless claims if Congress doesn't take action.

 

 

Jobless Claims: The Turning Point - 1

 

 

For reference, the XLF dropped 20% in 2010, 32% in 2011 and 15% in 2012 beginning in the late February through mid-April timeframe in each of those years. We think a major factor component of the decline is this labor market seasonality dynamic. We’ll continue to monitor the labor market to see how the recovery continues but we expect big changes to come now that March is right around the corner.

 

Jobless Claims: The Turning Point - 2

 

Jobless Claims: The Turning Point - 3


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 80.32%
  • SHORT SIGNALS 78.48%

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Client Talking Points

Dollar Holler

Yesterday's rally probably got some bears really riled up. After all, we did have a big down day during the Italian elections. That sort of thing was a one-time event though and you have to look at the bigger picture. A stronger US dollar is going to help boost stocks and the economy. How? Stronger dollar = Strong America. Commodity prices come down like oil and gas and food and then people consume more. Growth in consumption helps drive the bottom line at various companies. Get the dollar right and you can get a lot of other things right, too.

Asset Allocation

CASH 38% US EQUITIES 24%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

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

"U.S. Q4 GDP growth revised up to +0.1% from -0.1%" Yay." -@moorehn

QUOTE OF THE DAY

"Committee--a group of men who individually can do nothing but as a group decide that nothing can be done." -Fred Allen

STAT OF THE DAY

Initials claims for regular state unemployment-insurance benefits dropped 22,000 to 344,000 in the week ended Feb. 23.


INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN

Takeaway: We're at the inflection point in claims. Take note of the trend over the last three years in thinking about the next three months.

One Away

Everything's coming up roses with the recent initial jobless claims data, this morning's better than expected print included. This should come as no surprise to anyone who's been following our work. The end of February marks of the peak of the seasonality distortion tailwind. Next week will mark the final tailwind datapoint. Then, beginning in March, we'll start to see the effect reverse and the market's perception around the momentum in the labor market will begin to weaken and ultimately will turn bearish as the reverse effect peaks in August. It's also worth noting that the sequester takes effect tomorrow, and may result in a notable short-term spike in jobless claims if Congress doesn't take action.

 

For reference, the XLF dropped 20% in 2010, 32% in 2011 and 15% in 2012 beginning in the late February through mid-April timeframe in each of those years. We think a major factor component of the decline is this labor market seasonality dynamic. It's important to note that the effect is getting steadily smaller over time due to weighting methodology in the government's seasonality models. It's also important to note that last year's decline was conspicuously smaller, and shorter in duration, than the previous two years. We think this owed to the ongoing strengthening housing recovery coupled with the lessening effect of the distortion. We think those two factors will again be present this year, likely making the pullback more comparable to that of 2012 than 2011.

 

For those with a longer-term view, looking past the next 3-6 months, they should take some comfort in the fact that the latest week's data, on a non-seasonally adjusted basis, showed continued improvement. The YoY change in NSA claims was better by 8.0%, the largest YoY improvement in the last 5 weeks. However, the rolling 4-week average of NSA claims improved YoY by 2.4%, which was modestly worse than the 3.2% improvement in the previous week. The bottom line is that the real labor market is still improving, just not by as much as the market thinks.

 

Prior to revision, initial jobless claims fell 18k to 344k from 362k WoW, as the prior week's number was revised up by 4k to 366k.

The headline (unrevised) number shows claims were lower by 22k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 355k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -2.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -3.9%

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 1

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 2

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 3

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 4

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 5

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 6

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 7

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 8

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 9

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 10

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 11

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 12

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 13

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 14

 

Yield Spreads

The 2-10 spread fell -9.9 basis points WoW to 165 bps. 1Q13TD, the 2-10 spread is averaging 167 bps, which is higher by 24 bps relative to 4Q12.

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 15

 

INITIAL CLAIMS - TAILWINDS ARE PEAKING, PREPARE FOR THE TURN - 16

 

 

Joshua Steiner, CFA

 



What Keith's Reading

Asia Stocks Poised for Biggest Advance Since September (via Bloomberg)

 

Central Banks Spewing Cash Must Plan Exit Timing, Rohde Says (via Bloomberg)

 

WTI Oil Set for First Monthly Drop Since October as Supply Rises (via Bloomberg)


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