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THE M3: TABLES/SLOTS; HK-ZHUHAI-MACAU BRIDGE; MGM MARYLAND

THE MACAU METRO MONITOR, JULY 17, 2013

 

 

MACAU GAMING TABLES/SLOTS DICJ

At the end of Q2, Macau had 5,746 gaming tables and 15,310 slots, down 3 tables and 1,096 slots QoQ, respectively.

 

TWO MORE ROUTES TO CONNECT WITH HK-ZHUHAI-MACAU BRIDGE Macau Daily News

Zhuhai plans to add two more routes to connect Zhuhai with the Zhuhai-Macau Port Artificial Island aiming to boost Zhuhai’s economy by leveraging on the economic advantage of the Hong Kong-Zhuhai-Macau Bridge.  According to the new plan, a commercial city will be established in the north of the Zhuhai-Macau Artificial Island, and Gongbei Bay will be transformed into an inland lake, so that the Hong Kong-Zhuhai-Macau bridge can act to drive economic benefits to Zhuhai.

 

US REGULATORS PROBE MACAU TIES BETWEEN PANSY HO, MGM Macau Business

Regulators and law enforcement officers from Maryland in the United States spent last week in Macau, probing the suitability of MGM Resorts International to operate a casino there.  Investigators visited the MGM Macau.  They also spoke to junket operators as part of a mandatory inquiry into the financial capabilities and integrity of potential casino owners.

 

MGM is one of three candidates in the running to build and operate a US$800-million (MOP6.4 billion) casino-resort in National Harbour.  MGM said last year it expected inquiries into the relationship with Pansy Ho Chiu King, a part owner of MGM China and a daughter of gaming magnate Stanley Ho Hung Sun.


[VIDEO] MCCULLOUGH WARNS INVESTORS

Hedgeye Risk Management CEO Keith McCullough talks US stocks and economy, explains why investors need to stay far away from Gold and Treasuries, and why Bernanke remains an enormous risk.


KO Takes It on the Chin, But Room For Optimism

KO is trading down today as volume results for Q2 2013 came in below expectations (globally +1% vs +4% last quarter) with the company citing a challenged macro environment (U.S., Europe, Asia, and Latin America), social unrest, and poor weather conditions (wet and cold across multiple regions) that impacted consumer spending and demand. North America, which is ~ 44% of sales, saw volume down a disappointing -1% in the quarter.  

 

Performance was hit by tough Q2 comps given the especially good weather in 1H last year: Pacific volumes were +2% vs +10% last year; Brazil’s volume was even cycling +6% a year ago; and India’s volume grew +1% versus a +20% comp.

 

The company cited optimism around a turnaround in 2H for its key international markets (China, Brazil, Russia, Mexico, and India) on improvement in the macro environment, continued marketing support of its brands, weather improvements (India performs historically stronger in the back half), and its systems execution.

 

While we expect many of the forces dragging on confidence and demand to remain in the back half of the year,  including  high unemployment (especially in southern Europe), social unrest, and inflation, we like that the back half quarters of 2013 are lapping much easier comparisons year-over-year.  On the top line, the Q3 2012 comp is +0.8% versus this quarter’s +2.8%. Gross margin was pretty consistent throughout last year, however the operating margin gets easier in the final two quarters of last year (+23.6% and +21.7%, respectively) versus +26.1% this quarter.

 

The stock is currently trading above its intraday lows at around $40.45. Our quantitative levels suggest that KO has an intermediate term price TREND line of support at $40.14.

 

KO Takes It on the Chin, But Room For Optimism - v. KO

 

What we liked:

  • EPS inline with consensus at $0.63
  • Outperformance of still beverages, volume +6%  vs sparkling 0%
  • Packaged water volume up +6% and energy drinks +5%
  • Russia volume +11% with a strong marketing calendar tied to the 2014 Sochi Winter Olympics
  • COGS decreased -5%
  • Eurasia and Africa volume up 9% (benefitting from Aujan partnership)
  • New guidance on the effective tax rate of 23.0% for 2013 vs last quarter’s estimate of 23.5%

What we didn’t like:

  • Net Revenues were down -2.6%  in the quarter and missed estimates ($12.75B vs $12.96B)
  • Operating income fell -1.5% in the quarter
  • Europe volume -4% (vs -4% in Q1 2013) on colder weather and flooding in Germany and central Europe

 

Matthew Hedrick

Senior Analyst


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#GotVolume?

Takeaway: Where's the volume?

Either everyone is at the beach… Everyone is waiting for our Central-Planner-In-Chief's latest messaging ("To Taper, Or Not To Taper") signal tomorrow… or everyone’s waiting for the guy next to them to make the first move.

 

But any way you slice it, it looks like no one has any real conviction on either side at these levels.

 

#GotVolume? - Volume YTD

 

Of course, depressed volume is not a new phenomenon as the trend in aggregate market volume has been one of decline as the 2nd chart below illustrates.  Soft volume month-to-date (around the July 4th Holiday) is not particularly surprising.

 

#GotVolume? - Volume LT

 

That said, this ain’t the stuff convicted new market highs are made of.  Keep your head up out there.


Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

Elon Musk to Release ‘Hyperloop’ Tranport Plans Next Month (via Bloomberg)

Thousands of Greeks join strike against public sector layoffs (via Reuters)

Mexican Marines Captured one of World's Most Notorious Drug-Gang Leaders (via BBC)

 

Morning Reads on Our Radar Screen - earth1

 

Josh Steiner – Financials

Homebuilder confidence surges:  Strongest print since Jan 2006. (via NAHB)

Goldman Beats Estimates on Investment Banking, Debt Gains (via Bloomberg)

 

Tom Tobin – Healthcare

Johnson & Johnson results beat forecasts  (via Reuters)

HCA Jumps After Preliminary Earnings Top Estimates (via Bloomberg)

 

Jonathan Casteleyn - Financials

Tesla CEO Musk Morphs From Tony Stark to Henry Ford (via Bloomberg)

Charles Schwab profit misses estimates as expenses increase (via Reuters)

 

Matt Hedrick – Macro

Iceland Bucks EU Entry-Decision Plea Amid Mackerel Spat (via Bloomberg)

 

Kevin Kaiser – Energy

Celebrity house for sale: Wayne Gretzky (via Bankrate)

Huge disparity between US (6-year high) and European (2-decade low) car sales (via Bloomberg H/T to Bespoke)


CMG – EARNINGS PREVIEW

Prior to Monday’s retail sales data point, the broad restaurant macro indicators have been gradually improving and restaurant stocks have surged.  As we mentioned in a post last week, casual dining sales trends look more like the recent retail sales print – very disappointing.  CMG will report on Thursday and give the street a more relevant look into the how the industry is faring. 

 

Overall, consensus estimates indicate the expectation of a challenging quarter for Chipotle.  Consensus is looking for a 16% increase in revenues and only a 10.5% increase in EPS, numbers similar to 4Q12 when the company had little leverage in its business model.  Over the past three months, the consensus estimates for 2Q13 have remained relatively stable, while the stock has returned 14.6% versus the S&P 500’s 8.2% gain.

 

The street remains on the bearish side of CMG, but this trend has been improving.  Short interest is currently at 9.09% of the float, the lowest it has been in a year, as valuation appears rich but not excessive.  We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry.

 

 

SALES TRENDS

 

Coming into 2Q13 earnings, management has guided to flat to low-single digits same-store sales before the impact of any future menu prices increases.  In the second quarter, the company lost 70bps of price, but was able to pick up an incremental trading day due to Easter’s impact on 1Q13 results.

 

The street is looking for a sequential improvement in same-store sales of 3.8% in 2Q13 versus 1.0% in 1Q13.  The 2Q13 number is slightly better than the implied 3% run rate the company had previously alluded to as the trend line at the conclusion of 1Q13.  Overall, this implies a 100bps slowdown in the two-year trend to 5.9%. 

 

The potential for an upside surprise to the 2Q13 same-store sales estimates could be driven by a significant increase in marketing spending over the course of the quarter.  In 2Q13, CMG likely spent 2% of sales on marketing, up from 0.7% in 2Q12. 

 

HEDGEYEWe believe the street’s estimate for 3.8% same-store sales growth in 2Q13 is conservative.

 

CMG – EARNINGS PREVIEW - CMG SSS3

 

 

MARGINS

 

Restaurant level margins decreased 110bps in 1Q13, primarily driven by higher food and occupancy costs.  During the first quarter, CMG was able to leverage G&A by 160bps in order to drive operating margins higher by 60bps to 16.5%.  Management noted that 1Q12 included a one-time cost of $5.6 million for long-term incentive performance shares that were issued in 2010.  We believe Chipotle is likely to see a more significant decline in operating margins in 2Q13.  We expect to see a 2bps and 140bps decline in restaurant and operating margins, respectively. 

 

HEDGEYE – We expect that CMG’s margin trends in 2Q13 will look slightly worse than in 1Q13.  We believe that an increase in food costs and other operating expenses will drive restaurant level margins down 160bps versus 103bps in 1Q13.  With little G&A leverage, we could see operating margins decline by 142bps.

 

CMG – EARNINGS PREVIEW - CMG RL3

CMG – EARNINGS PREVIEW - CMG OPM2

CMG – EARNINGS PREVIEW - CMG GA2

 

 

FOOD COST TRENDS


Food costs were 32.9% in 1Q13, up 72bps year-over-year, due to inflation in salsas, produce, chicken and dairy.  However, food costs were down 53bps sequentially from 4Q12, primarily driven by lower avocado and dairy costs. 

 

Looking at 2Q13, we expect food costs to be relatively stable and remain around 33%.  The company is at risk for an increase in beef prices and seasonally higher avocado costs.  Currently, CMG is seeing inflation around 3-5%; if that accelerates from here, we would expect to see the company raise prices.

 

HEDGEYE – Chipotle is lapping against an 85bps decline in 2Q12 food costs.  At 33%, food costs seem quite reasonable, however, we believe there is an upward bias to this number.  Food cost trends remain a wild card for CMG.

 

CMG – EARNINGS PREVIEW - CMG COGS2

 

 

LABOR COST TRENDS

 

Labor costs declined 10bps to 23.6% in 1Q13, driven by higher sales volumes (higher menu prices) and efficiencies.  The company typically believes it can leverage its labor costs when generating 3% same-store sales.  The street is modeling labor costs of 23.1% for 2Q13, down 0.05% year-over-year.    

 

HEDGEYE – With the street modeling 3.8% same-store sales growth, there is little confidence that management will be able to leverage labor costs.  We believe there is room for an upside surprise to labor costs this quarter.

 

CMG – EARNINGS PREVIEW - CMG LABOR2

 

 

OTHER OPERATING TRENDS


Other operating expenses were 17.1% in 1Q13, up 45bps year over year.  In 2Q13, other restaurant expenses are expected to be 16.4%, or down 71bps sequentially.  Management has indicated that CMG ramped up their marketing expenses significantly in 2Q13, up to 2% in 2Q13 versus 0.7% in 1Q13.

 

HEDGEYE – We believe the increase in marketing expenses should help drive incremental traffic during 2Q13.

 

CMG – EARNINGS PREVIEW - CMG OTHER OP2


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