MPEL’s Mass push has been an overwhelming success


  • Mass revenue per table still climbing at a fast rate for all operators with the exception of capacity constrained SJM
  • MPEL’s Mass business has come a long way in 2 years and the operator is firmly entrenched as the market leader in terms of productivity and growth (along with Galaxy on the growth front)
  • Remind us again why MPEL deserves such a valuation discount?  It can’t be due to operational prowess.  EBITDA is not shown here but MPEL is also the market leader in same-store EBITDA growth over the same period.


PF - No New Holes to Poke in a Solid Quarter

The issues with PF are well known – crappy categories and sluggish top line sitting atop a highly-levered balance sheet.   As we mentioned previously, the company does have some margin levers to pull in ’13, which may be helped over time by lower commodity costs.  All of these factors came together in what was a pretty solid first quarter out of the IPO gate.

What we liked:

  • EPS of $0.34, ahead of somewhat unreliable consensus estimate
  • A substantial improvement in gross margins (+290 bps) against an easy comparison – this is where we see the most opportunity for progress for the company in 2013, as per our prior piece on the name
  • Excellent FCF quarter ($49.5 million or $0.42 per share versus $20.3 million in the year ago)
  • Next quarter’s comparisons remain unchallenging, so we could likely see a repeat of the margin performance posted in Q1
  • New dividend (as of last night) - $0.72 annually

What we didn’t like:

  • Lackluster sales growth in Birds Eye Frozen (+0.7%) and Duncan Hines (2.3%) even with volumes flattered by the timing of Easter
  • Inventories increased 2.6%, outpacing sales growth

Bottom line, with the newly instituted dividend, downside in the name is probably limited to $22/$23 per share (where the yield with the annual $0.72 dividend creeps above 3%).  Further, with another quarter of easy margins comparisons, there is likely some further upside in the shares despite what we see as full valuation.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Takeaway: Here's why we're confident in our bear case on McDonald's.

This note was originally published May 14, 2013 at 11:15 in Restaurants

A revival of trends in the U.S. is a key pillar of the bull case on MCD. In light of the “menu innovation” year-to-date, we feel confident standing by our bear case.


A few months ago we wrote that McDonald’s was going to abandon its Angus burger and now we read that a new line of quarter pounders is replacing the product in an effort to deliver the top-line growth needed to meet expectations.



Bull Case Crumbling


One bullish analyst on the Street has suggested that the company needs a “hero-like lifting” from U.S. consumers as the global macro picture looks mixed.  The expectations that comps will reflate seems stretched, given our view on MCD’s pricing flexibility, and we expect U.S. comps to fall short of the level needed to carry the stock higher. We believe the most likely outcome is that the fundamentals of McDonald’s business continue to suggest a lowering of EPS expectations for 2013.







The recent news that McDonald's is adding to its Quarter Pounder line up has spurred a lot of dialogue among the investment community. These additions are not quite as striking as past innovations but are unusual in that they fall on a generally stable part of the McDonald's menu. Greg Watson, McDonald’s USA SVP-Menu Innovation Team said, “we haven’t touched the Quarter Pounder since its inception 40 years ago. We think this is a great way to bring new news to the brand.”


Six months ago, the question on investors’ minds was, “what menu innovation will MCD push through to grow the top line?” Now, we know: premium wraps and a new line of quarter pounders. In light of this, we remain confident in our bearish thesis.


From late May or early June, there will be three new Quarter Pounder varieties offered at McDonald’s with national advertising starting in mid-June.

  1. MCD is going to take most popular condiments from the Angus line and put them on the Quarter Pounder brand
  2. The company is creating a third new flavor—Habanero Ranch with white Cheddar, bacon, lettuce, tomato, and habanero ranch sauce tested
  3. The new quarter pounders will be served on bakery-style buns


What Does the Failure of The Angus Burger Tell Us?


It is difficult to know why the offering failed. It could have been too expensive for the McDonald’s customer or the construct of the burger may have been unpopular. If either of these speculations is true, it could suggest that the new quarter pounder offerings – drawing from the Angus ingredients – are unlikely to resonate or, if pricing was the issue, that McDonald’s has limited pricing flexibility. Neither scenario would be positive for shareholders.


The early August release of July sales will be the day when we gain the most significant insight into the effectiveness of this year’s menu changes.  We continue to believe that the Street’s numbers are too high.



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Overbought (finally): SP500 Levels, Refreshed

Takeaway: The market is overbought and it’s a safer place to cut gross long exposure and/or start tightening your net exposure than it was last week.



Finally, anywhere north of 1657, the SP500 is immediate-term TRADE overbought. I have been waiting to send you this overbought email all week – but my machine didn’t give me the explicit signal until today. I listen to my wife, and my machine.


This doesn’t mean I am trying to call a top. This simply means what it says – the market is overbought and it’s a safer place to cut gross long exposure and/or start tightening your net exposure than it was last week.


The fundament bull case of #StrongDollar hasn’t been better obviously (USD is at its YTD high here intraday), but it too is immediate-term TRADE overbought. SPX vs USD has a positive correlation on our TREND duration of +0.81.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1657
  2. Immediate-term TRADE support = 1629
  3. Intermediate-term TREND support = 1545


In other words, we are up on a rope. Sell some high – buyem back on red, and keep doing more of what’s been working.




Keith R. McCullough
Chief Executive Officer


Overbought (finally): SP500 Levels, Refreshed - SPX

DF – Quick Update on When Issued Trading

WWAV shares began trading “when issued” this morning, and since you don’t need a borrow on when issued shares, investors are buying shares of DF and simply selling shares of WWAV/A and WWAV/B (when issued) – both those securities are now trading at a substantial discount to WWAV regular way (WWAV/B is trading nearly a $1 below WWAV).

There is also significant volume in the DF when issued (trading at $9.15), but keep in mind that value includes the remaining 19.9% interest in WWAV that DF will seek to monetize over the next 18 months.


Using the most aggressive value of the DF stub obtained by looking at all these moving parts – DF regular way less the value of WWAV/B, the stub is trading at approximately $6 per share, which still only equates to 5.1x EV/EBITDA for the fluid milk business, so there is still plenty of meat on the bone.


For investors that are able to trade when issued securities (not everyone), purchasing DF when issued makes a great deal of sense to us at this point.  Interestingly, while acknowledging that WWAV is a difficult borrow, investors so inclined and able to do so could by WWAV/B when issued and short WWAV regular way – the two values are nearly a $1 apart and that spread will move to zero over the next week.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Signs of European Strength?

Takeaway: Here's our take on the GDP numbers from Europe and what it means for the Euro and for stock markets in the region.

This note was originally published May 15, 2013 at 11:23 in Macro

European first quarter 2013 Final GDP figures were released today and confirm our call for protracted sluggishness across the region. Eurozone GDP has now contracted for sixth straight quarters and actual results for the region and major countries were lower than estimates on a quarter-on-quarter basis:  Eurozone -0.2% (est -0.1%), Germany +0.1% (est +0.3%), France -0.2% (est -0.1%), Italy -0.5% (est -0.4%).


Call: we expect the EUR/USD to be range bound over the intermediate term, anchored on the ECB’s backstop for the region (with long-term TAIL support at $1.22) and a TREND/TAIL line of resistance at $1.32. We think that as the market increasingly looks for another interest rate cut (which we’re not calling for over the next months as Draghi assesses the last cut), the EUR/USD may weaken as equities rise.  (This is also in line with our #StrongDollar call).


Signs of European Strength? - rr. eurusd



Negative France/ Positive Germany and the Periphery

We continue to wrestle with the miss-match on weak fundamental results and strong capital market performance across much of the region.


On the fundamental side, we highlight France as one nation that has not proven it has a credible plan of structural reforms to improve its competitiveness. We continue to think that Hollande’s budget policy of increased taxes without sufficient spending cuts and its outsized debt to GDP (now over 90%) will hamper the economy (and the region) more than it helps. That said, the European Commission is squarely on board to allow France two more years to reach its deficit reduction target level and has largely signaled a dovishness vis-à-vis further austerity. This could prove to be a tailwind.  


On the flip side, we like Germany on a relative basis. We see GDP gains coming in 2H and the EUR/USD price benefiting the export-heavy country. Chancellor Merkel should continue to talk-up her handling of the economy throughout the “crisis” in Europe as she prepares for re-elections in September. We see Germany playing ball in the European project (writing bailout checks if needed) versus the very adverse option of a return to a strong D-Mark.


Despite ongoing fundamental weakness across the periphery, we continue to believe that market participants will buy the periphery (equities and bonds) as the yield chase extends itself alongside the expectation that the ECB will backstop the Union at all costs. 


Sovereign bond issuance year-to-date continues to show paper being priced at lower levels, a positive sign, and in the coming months we may see steps towards setting up loan pools to small-and-medium-sized enterprises (SMEs), which would be another tailwind to a channel that is currently clogged.


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