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CASUAL DINING TRENDS UNINSPIRING

Takeaway: Initial indications are that April may have been another sluggish month for casual dining.

This note was originally published May 10, 2013 at 07:47 in Restaurants

Initial indications are that April may have been another sluggish month for casual dining. For some people this might come as disappointing news. What happened to the Easter “shift” from March to April? Knowing some chains weakness at the end of March, this had shifted to strength in early April. This suggests that balance of April was weak.  

 

 Sluggish sales trends are not being borne out in the casual dining stock, which have outperformed the S&P 500 by 340bps over the past month and 1080 basis points year-to-date.  Over the same time period, the average earnings estimate has increased 1.1% and 3.3%, respectively, implying a significant multiple expansion for the group.

 

Black Box Intelligence released its casual dining numbers for April this week. Same-restaurant sales gained 0.4% in April, versus 0.5% in March, which implied a sequential acceleration in two-year average trends of 70 bps. Sale-restaurant traffic declined -1.7% in April, versus -2% in March, which implied a sequential acceleration in two-year average trends of 80 bps. The “Willingness to Spend” Index, reported by Black Box, also registered a sequential acceleration in April.

 

Our favorite names in the group remain CAKE, EAT, and DRI.

 

CASUAL DINING TRENDS UNINSPIRING - BLACKBOX

 

CASUAL DINING TRENDS UNINSPIRING - cd perf

 

 


Strong Dollar, Weak Yen

Client Talking Points

Strong Dollar

Thanks to back-to-back weeks of declining initial jobless claims, the US Dollar and the 10-Year US Treasury yield both are ripping. Those are both very strong pro-growth signals domestically. Being long Treasurys (or utilities for that matter) are two of the worst places you could have put your money since May 1.

Burning Yen

The yen fell to a four-year low against the US dollar this morning. According to our proprietary multi-factor model, the yen has burned a whole all the to TRADE oversold with its rapid decline against the dollar. The Nikkei’s moving the other direction – up 2.9% overnight, up 41.6% so far this year. Welcome to the world of Central Planning and systematic devaluation of your country’s currency.

Asset Allocation

CASH 28% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.  

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.

Three for the Road

TWEET OF THE DAY

“The spire of 1 World Trade Center has been put into place making it the tallest building in the western hemisphere.” --@ITVnews

QUOTE OF THE DAY

 “Kites rise highest against the wind – not with it.” – Winston Churchill

STAT OF THE DAY

101.20, the level hit this morning by the Yen versus the US Dollar, its lowest level in four years


#Losing

This note was originally published at 8am on April 26, 2013 for Hedgeye subscribers.

“Losing on the other hand, really does say something about who you are. Among other things it measures: do you blame others, or do you own the loss? Do you analyze your failure, or just complain about bad luck?”

-Lance Armstrong

 

Yesterday, I started off the Early Look with the title #Winning and today I chose its antonym as the title.  It is rarely enjoyable to lose, or think about losing, especially in investing and business, but the reality is that we probably learn more from our mistakes than we do from our victories.

 

 Lance Armstrong is now considered by many to be one of the biggest losers of our generation after being one of the biggest winners with his unprecedented string of Tour de France victories.  In the most recent news, the Justice Department has filed a suit for $100MM against Armstrong and Tailwind Sports under the False Claims Act on behalf of the U.S. Postal Service (yes, it does beg the questions as to why the USPS was sponsoring cycling!). Time will tell what, if anything, Armstrong has learned from his failures and mistakes.

 

To be fair, it is natural to over react to mistakes (although I don’t think Armstrong is guilty of this) and I’ve certainly noticed this with myself and my colleagues at times.  The immediate reaction to a loss is often a willingness to quit a strategy. In reality, the reaction to a loss should be to analyze it, learn from it, and focus on improving the results.

 

The more interesting point on not learning and moving on from mistakes is that we basically inhibit ourselves from creating new ideas and opportunities.  As Po Bronson and Ashley Merriman write in “Top Dog: The Science of Winning and Losing”:

 

“By definition, new ideas can’t come from a playing-not-to-lose mindset, where the inhibition system is hyperactive. Creativity requires disinhibition: it requires turning off the internal censors in order to allow brainstorming and idea generation. Neuroscience has shown that in the very moment when a new idea sparks to life in the brain, the prevention system is turned off.”

 

So, in effect, if you can’t actually forget about your past mistakes and become uninhibited, you will chemically impair your ability to generate new and innovative ideas.

 

Forgetting about mistakes is certainly not easy, especially when the reminders are very present.  In the Chart of the Day, we’ve highlighted the three worst performing major global asset classes in the year-to-date: Peruvian equities, the Japanese Yen, and gold.  The irony of the last two is that when central bankers are aggressively printing money, like the Japanese central bank is, gold is not supposed to go down.  Of course, if unilateral money printing leads to U.S. dollar strength, the case for gold obviously becomes less compelling.  It should be no surprise that in U.S dollar terms the Yen is down almost the same percentage as gold this year.

 

The larger risk to gold is that we actually get to a place in which the U.S. Federal Reserve begins to tighten policy.  Certainly some slackness remains in the U.S. economy and inflation appears largely in check, but as my colleague and our U.S. economist Christian Drake pointed out yesterday in a note, we are starting to see potential that economic growth in the U.S. may accelerate based on:

 

1)      Housing – The housing recovery continues on the parabolic recovery that we outlined at the start of the year. Specifically, mortgage purchase applications recently registered a YTD high, median home prices of existing homes for existing home sales rose 11.8% (the highest level since November 2005), and inventory of existing home remains basically at its trough (down 17% in the last 12 months); and

 

2)      Employment -This week’s Initial Jobless Claims data was again positive with both the SA and NSA series showing sharp sequential improvement.   We consider the 4-week rolling average in NSA claims to be the more accurate representation of the underlying labor market trend and on that metric, the trend improved 250bps week-over-week as the year-over-year change in 4-wk rolling claims went to -6.3% Y/Y from -3.8% Y/Y the week prior.  So, despite initial sequester related impacts beginning in April and the seasonal distortion in the seasonally adjusted data shifting to a headwind, labor market trends continue to show steady improvement.

 

Despite what some of the talking heads might have you believe, in an economy that is 70% consumption, a strong U.S. dollar (the currency with which we consume), an improving housing market (the consumer’s balance sheet), and stabilizing employment, are all very supportive factors of improving economic growth.

 

I’m going to end this morning in the winner category.  If you haven’t been watching European sovereign yields, you should be focused on them as a measure of global tail risk.  Since the freak-out highs in yields perpetuated by the Cyprus dysfunction, yields in the 10-year sovereign bonds of Italy, Spain, and Portugal have recovered to some of the lowest levels we’ve seen since the beginning of the European sovereign debt crisis began.  In fact, it won’t be long before Italian 10-year yields starts with a three handle . . . I mean, who would’ve thunk!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1321-1478, $97.31-103.34, $82.55-83.44, 97.45-101.36, 1.70-1.76%, 11.33-14.89, and 1564-1595, respectively.

 

Keep your head up and stick on the ice,               

                                                                                               

Daryl G. Jones

Director of Research

 

#Losing - Chart of the Day

 

#Losing - Virtual Portfolio


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Big Game Hunting

“They might more than ever in the future engage in hunting beavers.”

-Samuel de Champlain

 

Samuel de Champlain was most definitely a big game hunter.  On a basic level, he lived from the period of 1574 – 1635, so he had to hunt big game to eat.  On a broader level, he founded the Canadian province of Quebec and was the first person to map the east coast of Canada.  Founding and mapping a large part of Canada is most certainly big game hunting.

 

In the investment world, this was the week of big game hunting.  Earlier in the week we had the Ira Sohn Conference, which Keith went through yesterday in the Early Look, and now we have the Salt Conference.  And if you aren’t in the hedge fund industry, you probably don’t know what I’m talking about right now!

 

The Ira Sohn Conference is a charitable conference at which some of the top money managers come and pitch ideas.  Meanwhile the Salt Conference is a for profit conference organized by Anthony “Gucci” Scaramucci at which money managers also talk ideas, for the monetary benefit of the organizers (and the casinos in Vegas!).   Incidentally, Gucci was the nickname bestowed upon him by President George W. Bush.  (When I met President Bush, he called me the much less creative, “Big D”.)

 

So, what exactly do I mean by big game hunting? Well, in this industry it is when a money manager with some sizeable funds behind him (aka ammo) comes out and pitches a unique investment idea.  More often than not the best and most controversial ideas are those on the short side.   Over time, markets go up so if you are going to pitch a short idea, you are best off doing your homework.

 

So this morning I’m going to take a break from the global macro grind to talk about a certain big game short idea that we are hunting.  This animal goes by the name of LINN Energy and the ticker is $LINE.  Our energy analyst Kevin Kaiser has been all over this for the past couple of months and last weekend he gained even more notoriety as his work was highlighted in Barron’s.

 

The indomitable Jim Cramer then attempted to provide the counter argument to Kaiser by bringing the CEO of Linn on to his nightly show, Mad Money.  And it was somewhat apropos from our perspective, as the CEO’s performance in defending himself against our short thesis was a little mad.   You can find that video here: http://video.cnbc.com/gallery/?play=1&video=3000166362.

 

So what was our take on the interview? Overall, we thought Ellis' defenses were weak, which is not a surprise to us (there aren't any good ones).  No change in our view here - LNCO/LINE is still one of the best sells/shorts in the energy sector today. In the chart of the day we’ve outlined their cash funding needs and  Kaiser’s play-by-play of the Cramer interview is outlined below:

 

“Jim Cramer: “Are [the bankers advising LINN Energy and Berry Petroleum on the pending merger] saying that [LINE] is worth $18 like Barron’s says?”

 

Mark Ellis, CEO of LINN Energy: “Absolutely not, Jim.  They’ve done a complete independent analysis; we’ve had three different independent analyses done.  They are all coming in with valuations in the high 30’s to mid 40’s for the Company.  We’ve done our own valuation, it’s in the mid 40’s to as high as $60 per unit depending on how far you go into the 3P reserves.”

 

Hedgeye:  You are citing the fairness opinions of the bankers that are getting paid to work on the merger?  Really?  We are independent, don’t get paid banking fees from LINN or Berry, and believe that LINE is worth $5 – $18/unit.

 

Ellis: “Our accounting is in strict adherence to GAAP measures.”

 

Hedgeye:  We agree.

 

Ellis: “We’ve been very clear and transparent as it relates to our non-GAAP measures that we use to measure the performance of our business.  And in our most recent 8-K’s we’ve given total transparency in terms of how those measures are calculated.”

 

Hedgeye:  We disagree.  How LINN excludes the cash cost of put options from “distributable cash flow” by amortizing them through the unrealized loss on commodity derivatives line has neither been adequately explained nor justified (it's complex and most LINE investors don't understand it).  Further, “maintenance capex” is still very much a mystery; we are not able to calculate or estimate this number on our own.  In fact, LINN’s IR team has told us that it’s not possible with publicly available information.  This is hardly transparent.

 

Cramer: “[Kevin Kaiser] says that ‘LINN can’t keep production flat despite $260MM of capital expenditures, yet the amount of capital spending that is deducted from their definition of distributable cash flow was only $110MM.’  He’s saying that your free cash flow was actually negative $40MM…”

 

Ellis: “Jim, what you have to understand in our business is that one quarter does not make a company.  One quarter is not the appropriate measure for determining whether or not your maintaining your asset or not [sic].  You have to look at the body of the work over the course of a full year; so I think he’s taking a pretty short view of our business.”

 

Hedgeye:  This is a weak argument that is not supported by the data.  First off, LINN is a pretty standard E&P company – spud-to-sales times are ~30 - 60 days.  There are no significant upfront costs to be followed by a large increase in production months or years later.  Second, let’s do what Mr. Ellis suggests and look at the Company's performance over a longer duration.  LINN says that maintenance capex should be considered on an annual basis, but let’s look at the last two quarters plus the guidance for 2Q13; this is an instructive exercise because the Company did not close any material acquisitions over these three quarters, so we have three straight quarters of organic numbers.  Production averaged  800 MMcfe/d in 4Q12, 796 MMcfe/d in 1Q13, and management has guided 2Q13 production to 780 – 820 MMcfe/d.  After adjusting the 2Q13 guidance for the Panther divestiture (expected to close on 5/31/13), the midpoint of the 2Q13 guidance is 806 MMcfe/d (by our estimates).  So for three consecutive quarters LINN will have essentially no production growth, and total capex will exceed maintenance capex by $491MM.  "Distributable cash flow” over these three quarters equals $497MM.  In our view, if maintenance capex was anywhere near what it is really costing LINN to maintain production, there would be no distributable cash flow (see table below).

 

Ellis: "I think many of the facts were misleading.

 

Hedgeye: Freudian slip?”

 

If you want to talk to Kaiser in more detail on this name and/or subscribe to his work to get some insight on the next big animal he is going to take down, email .

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.07-106.05, $82.17-83.12, 98.65-101.78, 1.77-1.88%, 12.12-14.41, and 1, respectively.

 

Enjoy the weekend.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Big Game Hunter

 

Big Game Hunting - Chart of the Day

 

Big Game Hunting - Virtual Portfolio


CASUAL DINING TRENDS UNINSPIRING

Initial indications are that April may have been another sluggish month for casual dining. For some people this might come as disappointing news. What happened to the Easter “shift” from March to April? Knowing some chains weakness at the end of March, this had shifted to strength in early April. This suggests that balance of April was weak.  

 

Sluggish sales trends are not being borne out in the casual dining stock, which have outperformed the S&P 500 by 340bps over the past month and 1080bps year-to-date.  Over the same time period, the average earnings estimate has increased 1.1% and 3.3%, respectively, implying a significant multiple expansion for the group.

 

Black Box Intelligence released its casual dining numbers for April this week. Same-restaurant sales gained 0.4% in April, versus 0.5% in March, which implied a sequential acceleration in two-year average trends of 70 bps. Sale-restaurant traffic declined -1.7% in April, versus -2% in March, which implied a sequential acceleration in two-year average trends of 80 bps. The “Willingness to Spend” Index, reported by Black Box, also registered a sequential acceleration in April.

 

Our favorite names in the group remain CAKE, EAT, and DRI.

 

CASUAL DINING TRENDS UNINSPIRING - BLACKBOX

 

CASUAL DINING TRENDS UNINSPIRING - cd perf

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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