prev

CMG NOT A SHORT

If you have been reading out research regularly we are not shy about calling out if we the stock is a compelling short.  We have some shorts on our radar but CMG is not one!

 

Jeff Gundlach recommended CMG as a short at the Sohn Conference.  He has a simple take on the company and its competitive environment, contending, in essence that “a burrito is a burrito”.  Here is a quote from Forbes, reporting on his presentation, that goes some way toward summarizing his view:

 

“a gourmet burrito is an oxymoron... Barriers to entry aren’t all that high, when all that is needed to enter the market is a taco truck... I’m not impressed with [Chipotle’s] earnings growth or its high P/E ratio.”

 

We have a few points that are worth considering before shorting CMG alongside Mr. Gundlach:

  • P/E ratios may be artificially high because of overly-cautious earnings estimates. We think this is the case, currently, for CMG.
  • The company’s service model has redefined the industry and leads to above average margins and returns. Comparing CMG to others in QSR, in this regard, is not helpful.
  • “Food with Integrity” resonates with millennials and is clearly an early move within a much broader industry trend.
  • The barrier to entry point applies to all varieties of food, hamburgers, etc. We do not understand this point.

 

What Would Make CMG a Short?

 

We would short CMG upon gaining conviction that its growth story is faltering. New Unit Volumes are, increasingly, a key metric to follow with respect to future sales trends.  This trend seems to be improving. We were overly gun-shy in January, when this metric was showing signs of turning around, in staying on the sidelines. While earnings revisions continued lower, the stock moved higher in anticipation of better sales growth. As long as the macro environment continues to improve, we believe that this metric will continue on its current trajectory.

 

CMG NOT A SHORT - cmg new unit auv growth

 

CMG NOT A SHORT - CMG sales growth new unit auv growth

 

CMG NOT A SHORT - cmg eeg

 

CMG NOT A SHORT - CMG ROIIC

 

CMG NOT A SHORT - cmg pod 1

 

 

To sum up, here are some of the more CMG important metrics that suggest that CMG is not a short:

  1. Sell-side sentiment has deteriorated over the past year
  2. Buy-side sentiment is negative as shown by high short interest
  3. New store average unit volumes are rising
  4. ROIIC on a TTM basis has stabilized and rising
  5. EBITDA to Cap Ex is 3.0x
  6. 2013E EPS estimates are rising
  7. SSS comparison get easier for the balance of 2013 (and look to be trending positive in the current quarter)
  8. Food inflation is easing
  9. $500 million in cash and no funded debt on the balance sheet
  10. Valuation is rich, but reasonable given the growth model

CMG NOT A SHORT - cmg sentiment historical index

 

We believe investors shorting CMG here will suffer. CMG is a growth story, with easing inflation pressures, high margins and returns, that has seen sentiment sequentially deteriorate over the last year. We expect earnings expectations to increase over the next six months.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


WENdy's: TOO FAR, TOO FAST

Takeaway: Wendy's has the leadership team to bring the company back to prominence in its space, but it will take some time.

This note was originally published May 09, 2013 at 08:03 in Restaurants

In CEO Emil Brolick, and the team he has assembled, Wendy’s (CEO) have the executive leadership to bring the company back to its former place of prominence in quick service restaurants (QSR). The indications from the quarter are that the turnaround will take some time. 

 

Dublin Was Not Built in a Day

 

We believe that the turnaround at Wendy’s is going to take time. Given that this recent run has been driven largely by multiple expansion, rather than earnings revisions.  We expect the stock to “take a breather” at this point given a lack of catalysts for it to continue on its current trajectory.   The next two quarters are likely going to see a choppy top line performance from WEN.

 

First Quarter Results

 

Despite sales coming in below expectations, Wendy’s managed to print an in-line earnings number of $0.03 per share.  Management raised its Adjusted EPS Outlook to $0.20-0.22, largely due to the refinancing of its indirect wholly owned subsidiary, Wendy’s International, Inc.

 

Quarterly stats:

  • SRS gained 1% in the first quarter “despite bank holiday and weather impact” vs consensus 2.3%
  • North America restaurant-level margins improved 100 bps yoy to 12.8%
  • North America co-op comps are guided to 2-3% (back end loaded)
  • Thinning out of the franchisee base as 90-100 closures expected in FY13

Takeaways

  • Discontinued breakfast offering will negatively impact ’13 comps, offsetting positive impact of reactivations.  The offset to this is the benefits from the image activation program. 
  • Wendy’s will serve as a backstop on GE loans to franchisees with at risk capital estimated to be “some fraction of $100mm”
  • Wendy’s is struggling with value-seeking customer – McDonald's (MCD) is making life very difficult for WEN to talk about value.  We believe that SSS could decline 1-2% in 2Q13
  • Still difficult to gauge how successful Image Activation will be – Tier 1 restaurant are too expensive and not providing the require returns.  WEN still experimenting with Tier 2 and 3 design and cost package.
  • Total cost to company, of fixing the asset base, remains severe – The initial $10 million incentive program will likely more than double over time. 

 

 

 

 

 

 


SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE?

Takeaway: While the KOSPI has looked good on the long side for a TRADE, it’s important that investors do not overstay their respective welcomes here.

SUMMARY BULLETS:

 

  • Leading up to and through the recent 1-2 punch of monetary and fiscal stimulus, South Korea’s benchmark KOSPI Index has recaptured its immediate-term TRADE and intermediate-term TREND lines on our proprietary three-factor quantitative overlay. Now bullish TRADE & TREND and demonstrably underperforming global equities in the YTD (-0.9% vs. +12.3% for the MSCI World Index), the KOSPI looks like a tasty market to chase (it’s up +4.2% from its 4/18 YTD closing low).
  • At a bare minimum here, South Korea is no longer a short/underweight candidate across the Asian and/or EM equities space. What would reverse this conclusion, however, is the resumption of yen declines – arguably the single most important factor that has weighed on the KOSPI in the YTD. Over the past month or so, the trend of appreciation across both the dollar-yen rate and the US Dollar Index has been suspended. To the extent this immediate-term phenomenon reserves – as we think it should on strong US consumption growth that is underpinned by improvement in the domestic employment and housing picture, as well as a perpetually-widening divergence between Fed and BOJ monetary policy – the earnings outlook for KOSPI stocks will once again come under pressure as Japanese exporters take market share, at the margins.
  • All told, while the KOSPI (and emerging markets broadly; South Korea is the largest component of the EEM etf at 14.2%) has looked good on the long side for a TRADE, it’s important that investors do not overstay their respective welcomes here. While our TREND & TAIL duration calls on the USD (i.e. bullish) and JPY (i.e. bearish) have certainly cooled off quite a bit in recent weeks, we don’t anticipate yen strength and dollar weakness morphing into any kind of sustainable trend. In fact, both the DXY and USD/JPY cross remain bullish from an intermediate-term TREND perspective on our proprietary three-factor quantitative overlay.

 

SOUTH KOREA – BACK FROM THE DEAD

Overnight, the BOK cut its Benchmark 7-Day Repo Rate to 2.5% from 2.75% prior. The move was predicted by six of 20 economists surveyed by Bloomberg News, which was a reasonable position for consensus to take, given that BOK Governor Kim Choong Soo actually opposed a cut last month.

 

That being said, however, this fairly meaningful acceleration in the BOK’s easing bias is not completely out of the blue: CPI tied a for a 13-year low in APR at +1.2% YoY and Export growth continued at a paltry +0.4% YoY pace in the same month. Additionally, the swaps market started to price in some magnitude of rate cuts going back to mid-FEB.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 1

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 2

 

Make no mistake, this decision was particularly political: the KRW’s +30.2% increase vs. the JPY since the 9/27 initiation of our bearish bias on the yen is weighing on the new orders of South Korean exporters – particularly in the autos, electronics and capital goods sectors – aiding their Japanese rivals in the process; reference our 3/25 note titled, “IS THE KOSPI IS LOSING ITS LEADING INDICATOR STATUS?” for more details. In the accompanying statement, Kim indeed stated that “Japan’s aggressive monetary easing has big impact on South Korea” and added that “a big fall in yen is a concern and threatens market stability”.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 3

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 4

 

Finance Ministry Director General Choi Sang Mok aggressively welcomed the cut; recall that the Park Geun-hye administration had been applying pressure upon the BOK to ease monetary policy to support their fiscal stimulus efforts. Regarding those efforts, the government said yesterday it will add KRW11.1 trillion ($10.2 billion) of financial support this year for companies – particularly to export-oriented SMEs – to help them cope with the demonstrably weak yen. This is on top of the recently ratified KRW17.3 trillion ($15.9 billion) supplementary budget announced back on APR 16 (~1.4% of GDP).

 

Leading up to and through this 1-2 punch of monetary and fiscal stimulus, South Korea’s benchmark KOSPI Index has recaptured its immediate-term TRADE and intermediate-term TREND lines on our proprietary three-factor quantitative overlay. Now bullish TRADE & TREND and demonstrably underperforming global equities in the YTD (-0.9% vs. +12.3% for the MSCI World Index), the KOSPI looks like a tasty market to chase (it’s up +4.2% from its 4/18 YTD closing low).

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - Korea KOSPI

 

SHOULD YOU CHASE?

Starting with our proprietary Growth/Inflation/Policy modeling process, the South Korean economy looks set to enter Quad #2 and remain there for the foreseeable future (i.e. 2-3 quarters at best). This move to a steady state of Growth Accelerating as Inflation Accelerates is supported by the aforementioned stimulus measures, as well as an outlook for directional weakness in the YoY strength of the KRW – particularly relative external inflation pressures, which mostly emanate from the commodities market as well as from inflows of “hot money”. Regarding directional pressures on CPI, it’s not enough to simply have commodity inflation/deflation; the currency’s relative strength or weakness to the key markets within commodity complex is what matters most.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - SOUTH KOREA

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 7

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 8

 

While Quad #2 is neither overtly positive or negative for equities, we think that because CPI remains demonstrably below the BOK’s +2-4% target range, the market’s focus will likely be on the likely acceleration in Real GDP growth – a phenomenon that hasn’t occurred in South Korea since 3Q11!

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 9

 

GLOBALLY-INTERCONNECTED RISKS REMAIN

At a bare minimum here, South Korea is no longer a short/underweight candidate across the Asian and/or EM equities space. What would reverse this conclusion, however, is the resumption of yen declines – arguably the single most important factor that has weighed on the KOSPI in the YTD. Over the past month or so, the trend of appreciation across both the dollar-yen rate and the US Dollar Index has been suspended. To the extent this immediate-term phenomenon reserves – as we think it should on strong US consumption growth that is underpinned by improvement in the domestic employment and housing picture, as well as a perpetually-widening divergence between Fed and BOJ monetary policy – the earnings outlook for KOSPI stocks will once again come under pressure as Japanese exporters take market share, at the margins.

 

All told, while the KOSPI (and emerging markets broadly; South Korea is the largest component of the EEM etf at 14.2%) has looked good on the long side for a TRADE, it’s important that investors do not overstay their respective welcomes here. While our TREND & TAIL duration calls on the USD (i.e. bullish) and JPY (i.e. bearish) have certainly cooled off quite a bit in recent weeks, we don’t anticipate yen strength and dollar weakness morphing into any kind of sustainable trend. In fact, both the DXY and USD/JPY cross remain bullish from an intermediate-term TREND perspective on our proprietary three-factor quantitative overlay.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 10

 

Alas, managing Duration Mismatch remains omnipotent to Global Macro investing.

 

Darius Dale

Senior Analyst


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Carnival: Pricing shows weakness

Takeaway: As the tide slowly turns around, Carnival Cruise Lines might be left behind.

This note was originally published May 08, 2013 at 06:45 in Gaming

 

Carnival Cruise Lines (CCL) investors will have to continue to wait for a definitive inflection point in Europe.  Royal (RCL) and Norwegian (NCL) has kept yield guidance unchanged. Moreover, our monthly pricing survey suggests that CCL pricing remains under pressure. Aggressive promotions by Carnival indicates that to fill capacity, it needs to offer dirt cheap prices to potential cruisers. Carnival needs to repair its image worldwide—a tall task at a hefty price.  

 

As the summer season revs up, a barrage of promotional deals should be hitting your inbox if you've shown a tiny bit of interest on going on a cruise. While we’ve seen some usual promotions post Wave Season, one recent promotion was particularly striking. Princess, one of Carnival’s premium cruise lines, announced a special sale running from May 1-8, offering up to 50% off on more than 200 cruise itineraries throughout Europe and Alaska in addition to an onboard credit ranging from $25-$100. This Princess sale is not only early for Alaska (they did something similar for June last year) but it shows Carnival’s aggressive price discounting strategy to desperately fill up cabins in the critical fiscal third quarter (FQ3) period.  

 

While the Carnival brands continue to cut prices in its effort to regain loyalty, we've seen the competition capitalize on CCL’s misfortunes.  Royal & Norwegian pricing and bookings are doing particularly well in the Caribbean and MSC Cruises recently saw its April UK bookings almost double due to a successful promotional strategy of its newest ship, the MSC Preziosa. 

 

Here is what we’re seeing from our proprietary pricing survey for May in Europe and North America.  We analyze year-on-year (YoY) trends as well as relative trends, determined by pricing relative to those seen near the last earnings date for a cruise operator. 

 

Europe

RCL recently mentioned on its conference call even though Europe still was struggling, the market was performing better than its expectations in February. Based on our survey, we saw that the RC brand pricing is improving YoY in Europe.  For FQ3, we estimate average pricing YoY for the Royal Cruise brand has been trending higher in the mid-single digits in May, up from low single-digits in April. NCL’s European pricing fell moderately for FQ2 on a relative basis but its FQ3 pricing gradually improved.  This is consistent with management's commentary on a very slow recovery in European pricing.

 

Carnival is lagging way behind. With the exception of Costa and a handful of Cunard itineraries, Europe pricing for other Carnival brands (e.g. AIDA, Princess, Holland America) are lower for the rest of the year and the trend is worsening.  In addition, Costa’s +30% YoY price gains in March for FQ3 have shrunk to +15% in May; on the brighter side, FQ4 prices remain up 30% YoY .

 

As for Princess, YoY pricing has slipped into negative territory in May, falling in the mid to high single digits—a substantial decline in trend from April due to the aggressive promotion mentioned above. 

 

North America

We continue to believe Carnival’s biggest concern should be the Caribbean due to the multiple operational failures.  The Caribbean accounts for roughly 34%, 23% and 29% of Carnival’s total itineraries for F2Q, F3Q, and F4Q.  The Carnival brand pricing suffered a sharp decline sequentially (~10%) in May for F2Q, F3Q, and F4Q. We also saw early F1Q 2014 pricing exhibiting weakness.

 

There was not much change in RCL’s pricing for the region.  It continues to be robust particularly in F2Q and F3Q.  Norwegian pricing picked up slightly in May. This divergence suggests that Carnival continues to lose share to Royal and Norwegian in the Caribbean market.

 

Alaska may not be as strong as people expect in 2013.  Summer prices were discounted substantially in May across most brands. It seems the discounting in Alaska is earlier than usual this time of year.  However, the expected record bookings should alleviate that. Carnival is also struggling in Mexico for F2Q and F3Q due to hard comps as the pricing trend remains lower. 


Monster Beverage: A Monster of a Stock?

Takeaway: Monster Beverage reported first quarter earnings Wednesday that didn't exactly energize investors.

This note was originally published May 09, 2013 at 09:32 in Consumer Staples

Monster Beverage (MNST) reported first quarter 2013 earnings yesterday evening, and if earnings season was a punch bowl, MNST would be an unwelcome addition to that receptacle.



The company missed on sales and earnings-per-share (EPS), against some admittedly very difficult comparisons, but comparisons don’t get any easier until the second half of the year so we are staring down one more quarter of potentially similar quality before the optics improve on the earnings results.



We expect that the stock will trade below $50 per share this morning (versus a close near $57).  We see potentially one more quarter of EPS weakness relative to consensus (depending on where that shakes out over the next couple of days).  We start to get interested in MNST closer to $45 for investors with longer durations.

 

What we liked:

  • International sales grew 29.9%, taking up some of the slack for domestic top line weakness (profitability of sales outside the U.S. is an open issue)
  • Within a softer category, MNST continues to take share (category +2.8%, 13 week, all channel, MNST +7.1%, Red Bull +9.5%)
  • Even with potential negative incremental news flow, we continue to believe that virtually all of the lawsuits, etc. are just noise

What we didn’t like:

  • Missed EPS ($0.37 reported versus consensus of $0.46)
  • Sales growth of 6.5% (against a very difficult comparison, but Q2 is more difficult on a one-year basis, substantially easier on a two-year)
  • 13 week category numbers for all outlets increased just 2.8% for the energy drink category, including energy shots,  and Red Bull’s sales growth outpaces MNST
  • Gross margin declines of 100 bps
  • No leverage on sales growth – EBIT declined 15.0% on the modest sales growth number – impact by some one-time costs, but even adjusted no operating leverage
  • Despite significant growth in international markets, management commentary suggests that the energy drink category has slowed in some markets outside the U.S.
  • Negative news flow surrounding company’s products likely to continue

Bottom line, we are going to stay on the sidelines unless price becomes compelling (closer to $45) or consensus moves closer to our estimates for the next quarter.


 


INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET?

Takeaway: Underlying labor market trends continue to accelerate. Obamacare may be a growing factor.

Below is the detailed breakdown of this morning's 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 

 

 

Last week we pointed out that claims had been diverging from historical trends for four weeks. This week's print brings that divergence to five weeks. NSA claims last week were 12.5% lower than the same week last year. 4-week rolling NSA claims last week were lower by 9.3% vs last year, an improvement vs. 8.4% the prior week. The seasonally-adjusted data is obviously very strong as well.

 

To reiterate, the strength in the underlying labor market over the last few weeks is strong enough to more than offset the seasonality distortions we regularly highlight. This continues to turn the duck & cover in May dynamic on its head. It doesn't hurt that the housing metrics are also strengthening, though this shouldn't be surprising as the two (labor & housing) are closely co-integrated.

 

Is ACA Driving Hiring?

An interesting question worth asking is Why? Why is the labor market showing accelerating improvement? One hypothesis we've been considering is the ACA impact on low-wage, high employment industries like restaurants, hotels, etc. Under ACA (i.e. Obamacare), employers with 50+ employees must provide healthcare to employees who work 30 hours or more per week. Part-time (those under 30 hours) and temp workers are exempted from the requirement. Industries like restaurants and hotels, that employ huge numbers of relatively low-wage earners, would see their costs rise materially under ACA. Not surprisingly, many employers are quietly seeking to sidestep ACA by cutting workers to sub-30 hours and offsetting the lost hours by hiring additional part-time and temp workers.

 

Anecdotally, we've been reading a lot of articles about temp agencies seeing significantly higher demand of late. We ran across one that quoted an analyst at another firm saying that when Massachusetts implemented its universal healthcare plan, growth in hiring of temp workers in the state ran at six times the national average.

 

One thing to consider is that companies are treading very cautiously here from a PR standpoint. No employer wants to be seen as intentionally seeking to sidestep ACA requirements. So much of this is going on under the radar. As counterintuitive as it may seem, we think ACA is actually creating jobs in significant numbers, while simultaneously reducing many workers from full-time (40 hrs+) to part-time (sub 30). [Hedgeye Macro:  We would expect to see this dynamic manifest in a decline in weekly hours worked (also impacted by gov’t furloughs) and ave weekly earnings.  We observed some pressure across both measures in April with hours worked and weekly earnings declining  0.6%, and 0.4% month-over-month, respectively]

 

The Numbers

Prior to revision, initial jobless claims fell 1k to 323k from 324k WoW, as the prior week's number was revised up by 3k to 327k.

 

The headline (unrevised) number shows claims were lower by 4k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.25k WoW to 336.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.4%.

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 1

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 2

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 3

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 4

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 5

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 8

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 7

 

INITIAL CLAIMS: IS OBAMACARE ENERGIZING THE LABOR MARKET? - JS 6

 

Joshua Steiner, CFA

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next