In preparation for HOT's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "As of the end of the quarter, we sold and closed about 86% of Bal Harbour residences. That means there's only about 40 units left, and we expect to complete the sellout this year."
  • "As we look at China, our business is generally picking up...we expect the Q2 REVPAR trend in China to be in the middle of our worldwide outlook range of 5% to 7%. New deal signing and new hotel opening pace remain robust."
  • "Helped by the holiday shift, we expect North American REVPAR growth to be sequentially higher at the high end of our Q2 outlook range of 5% to 7% for company-operated hotels. Rate increases should approach 5% as we hit peak occupancies."
  • "Group business continues to pace in the mid-single digits."
  • "Government travel is about 2% of our North American business, so the sequester itself is less of a drag today than you might think. We are keeping an eye, however, on whether the austerity measures are having a broader effect on demand."
  • "We also continue to sell owned hotels with long-term contracts. These two sources of growth, along with the continuation of the recovery, mean we have the potential to grow our fees at 9% to 12% per year. At the same time, we don't see the need to grow our SG&A faster than 3% to 5% a year. And most of our capital investments in making our system more attractive for owners is covered by our breakeven funds."
  • "As maybe expected, European companies are watching their costs, groups are smaller, staying closer to home and booking"
  • [Ex China] "the rest of Asia  should grow in the upper half of our Q2 REVPAR outlook range."
  • "With REVPAR up 7.1%, Africa and the Middle East was our fastest-growing region in Q1. Perhaps it has something to do with the fact that we were all there for the month of March. Jokes aside, the UAE is booming again with REVPAR growth of almost 14%. Saudi was up 8%. In North Africa, while the situation remains volatile, we are seeing some visitors return to the region. Egypt was up 30% in the quarter. We expect these trends to continue into Q2."
  • "In Latin America, REVPAR was flat, dragged down by Argentina, which dropped 15% at company-operated hotels. Local inflation has significantly slowed travel into the country. The GAAP between the official and unofficial exchange rates continues to widen. Our margins are squeezed by weakening demand and rising local costs. This situation is unlikely to improve anytime soon."
  • "In our vacation ownership business, trends remain stable. As a result, the reserves we need to set aside for loan losses continue to decline. Cash flow from this business remained strong."
  • [M&A] "Our sense is that volume in this kind of environment should continue to pick up. In the U.S., it's the public REITs. There's the sovereign-wealth funds and high net worth outside the U.S. We are not yet seeing a market that is looking for what you might call large deals, truly multi-hotel deals, billion-dollar plus deals. It is still a market for one and two hotels at a time."
  • "On buybacks, too, our goal is to be disciplined and be focused on buying back when we can, buy back at levels that are good relative to intrinsic value. You have seen us be very aggressive on buybacks in the past. So, again, this is something that we will review on a regular basis, and you should expect that our past behavior will tell you a lot about what we might do in the future."
  • "A little over 60% of our same-store managed properties are paying incentive fees. Outside of the U.S., if you look at it purely on the outside of the U.S., that number is about 75%. In the U.S., it's probably in the 30% range."
  • "We do have some modest ForEx headwinds. I mean, the move in the yen, as you know, has been quite substantial. And the Australian dollar and the Canadian dollar are also a little weaker than they were earlier in the year. So, the exchange rate impacts of another $3 million to $4 million."

Where In the World Is Keith?

Where in the world is Waldo Keith McCullough?


In case you haven’t been following the "Flow from Thunder Bay" on Twitter, Hedgeye’s CEO is mixing it up in Aspen on the front line of growth and innovation at Fortune's Brainstorm TECH conference. The annual event attracts some of the world’s top technology and media thinkers, operators, entrepreneurs, innovators, and influencers.


Keith has been tweeting away at the event (see below “McCullough’s Top-10 Tweets” from the Fortune conference.)


Where In the World Is Keith?  - innovation


According to Michael Blum, President of Hedgeye (who is with Keith at the conference), “One of the overarching themes this year is the value and monetization of great content. While a lot of the old media guard took issue with the interpretation of success for these new forms of media, many new business models are attracting the attention of content creators.


Blum added, “Hedgeye's freemium subscription model will continue to demonstrate strong growth as the audience explores new consumption channels.”



  1. "When you catch a winner, a lot of incredible things can happen" -Philipe Laffont #GrowthInvesting #FortuneTech
  2. "I want to back the CEO who doesn't sell stock and thinks he can go all the way" -Bill Gurley #fortunetech
  3. Hard core transparency and accountability drives your potential to learn from mistakes and evolve #FortuneTech               
  4. Does big media get what a new "digital brand" is? It’s their new competition #FortuneTech
  5. In financial markets/economics, most #OldWall media panders to government policy for access #FortuneTech
  6. You'll see more unaccountable market pundits leave Twitter, #FortuneTech style #transparency gets them in the mind
  7. "Twitter engagement people have w/ their audience matters more than size of the audience" -Kosner @espn #FortuneTech
  8. "we don't care if you watch us on TV, as long as the red logo is in the corner" -Zucker on Digital #FortuneTech
  9. "I need to know what the buy-side thinks, b/c I need to sell them stuff" (Bill from Benchmark) true #FortuneTech
  10. "Marketing is now going to be all about the storytelling and the data" -Narayen, CEO $ADBE #FortuneTech @HedgeyeTV

(Speaking of "innovation" ... if you didn't catch Keith on HedgeyeTV's inaugural unveiling yesterday, click here to watch. Note to #OldWall & #OldMedia: Keep your head up, the Hedgeye Revolution has arrived.)

DPS Hoping For a Better 2H

DPS cited unseasonably cold and wet weather, a cautious consumer, and continued carbonated soft drink (CSD) category headwinds as the major factors influencing uninspiring Q2 results. DPS’s hope going into the back half of the year is improved weather, lesser commodity costs (especially with better visibility on lower apple costs in 2H), and the tailwind of lapping easier volume comps in Q3.


Our quantitative set-up for DPS shows -4.1% of downside from its current price to its intermediate term TREND line of support, with topside immediate term TRADE resistance at $47.66. We believe that the stock may benefit from weather and easier comps in 2H, but are not compelled by the lack of quality in its results. We’d opportunistically trade around DPS.


DPS Hoping For a Better 2H - vv. dp


Our concern is not a new one and remains grounded in the fact that DPS’s portfolio is ~ 80% CSD, a category that has seen less interest given health and wellness trends as consumers switch to both healthier carbonated and non-carbonated offerings versus traditional carbonated soda. DPS’s answer is DP 10, its newest offering that should have full distribution by the end of the summer. DPS says that the 10 calorie drink with a full taste profile (note: the lack of a full taste profile is often the complaint of diet drinkers) stands to address the health and wellness market. That said, the diet category across the industry is seeing declines, so it’s yet to be seen just how well DP 10 may be positioned and/or the cannibalization impact to its Diet DP product.   


Results: on the quarter, EPS met consensus at $0.84 (versus $0.85 last year) and revenue fell short of expectations at $1.61B vs the Street at $1.65B, or -0.6% year-over-year, and volume declined 4%. On the year, DPS reaffirmed its FY EPS guidance of $3.04-3.12, forecasts revenue up 2% (versus 3% previously), said it expects $375-400MM worth of common stock to be repurchased in 2013 (back-half loaded), and expects COGS (packaging and ingredients) to be up 1.5% (versus 2% previously).


Matthew Hedrick

Senior Analyst


We remain bullish on Starbucks at current levels.


Despite the stock trading at the high end of its historical consensus forward earnings and cash flow multiples, we believe there is more upside in store.  The bullish factors we are focused on include rapid unit growth in China, expansion into new segments of the global food and beverage industry and a commodity tailwind that appears to be getting stronger.


There is still significant leverage in the SBUX business model.  In 3Q13, SBUX is estimated to report 23.3% EPS growth ($0.53) on 12.9% revenue growth.  In 2Q13, the company reported 27.5% EPS growth ($0.48) on 11.3% revenue growth.


One of the biggest risks to SBUX is sentiment, as SBUX is currently the highest ranked stock in the Hedgeye Sentiment Monitor.  In 2Q13 SBUX raised its full-year EPS guidance to a range of $2.12 to $2.18.  With sentiment high and expectations likely baked into estimates, it is difficult to envision a significant upside surprise in 3Q13 earnings.


Short-term trades are difficult to call from a fundamental perspective, but the bullish long-term TAIL remains the best play in the restaurant space.  



Sales Trends

Same-store sales are estimated to be 6.1%, -0.5% and 9.2% in the Americas, EMEA and China, respectively.  All regions, barring EMEA, are expected to have slowed on a 2-year basis. 


We suspect that the EMEA region will report a same-store sales number down 2-3% and will be one of the biggest disappointments of the quarter.


China is comparing against a significantly easier comparison (12%) in 3Q13 versus 2Q13 (18%).  Having no edge on what the sales trends look like in China, we would suspect that there is risk to the downside due to the current macro fundamentals in China.


Consensus expectations for same-store sales in the Americas are at 6.1%, which would be a slight sequential improvement over the 6.0% reported in 2Q13.  However, this would suggest the 2-year trend is slowing sequentially, by 40bps, to 6.6%.  All told, Starbucks’ Americas business is one of the best positioned chains in the restaurant industry. 


HEDGEYE – There are a number of initiatives under way that could drive additional traffic and check (technology, food and juice) and allow for above average sales momentum for the immediate-term. 








Operating margins improved 180bps in 2Q13 and the expectations are for them to improve another 120bps in 3Q13.  We suspect that the Americas will be the biggest driver of margin improvement, with operating leverage provided by the scale and synergies among digital, card, loyalty, mobile and social platforms.


HEDGEYE – We believe that the coffee tailwind will benefit SBUX for the next two fiscal years.





Food Cost Trends

The coffee tailwind is only three quarters old and we have no reason to believe SBUX will face any significant margin pressure from other commodities.


HEDGEYE – We suspect SBUX will realize a multiple year benefit from a decline in food costs.





Store Operating Expenses

SBUX continues to leverage the store operating expense line.  Strong top line momentum, in addition to an intense focus on store operations (labor and waste utilities management), is giving the company significant leverage on this line.


HEDGEYE – While nothing lasts forever, we believe that the strong traffic trends in the U.S. indicate that the customer experience remains very positive.






Highlighted in the chart below, 77.4% of analysts rate SBUX a Buy, 19.4% rate SBUX a Hold, and 3.2% rate SBUX a Sell.  Sell-side sentiment regarding the stock remains very high.  Further, short interest in the stock is only 1.18% of the float.


HEDGEYE – Sentiment is high, but where else can you turn to for global growth in the restaurant space?






At 15.0x EV/EBITDA SBUX is trading significantly above its QSR peer group trading at 12.4x EV/EBITDA.  With YUM’s ongoing issues and MCD facing a secular downturn, it is not surprising that SBUX is trading at a premium multiple to both companies. 


HEDGEYE – We suspect there could be a correction in valuation.  However, the most important question remains: How much upside is there to EPS?







Howard Penney

Managing Director


Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

New home sales hit five-year high, prices soar (via Reuters)

Criminal Indictment Is Expected for SAC Capital Advisors (via DealB%K)

What does it take to be wealthy? $5 million (via CNNMoney)

Clashes in Mexico's Michoacan state leave 22 dead (via BBC)


Morning Reads on Our Radar Screen - bullbear


Jay Van Sciver – Industrials

CATastrophe: Why Caterpillar, Inc. is a Strong Sell (via thelongshorttrader)

Caterpillar cuts outlook on lower sales, plans more cost cuts (via Reuters)


Daryl Jones – Macro

Jim Cramer's TheStreet Facing Hostile Takeover by Spear Point (via Benzinga)


Tom Tobin – Healthcare

Fewer Hospitals May Lead to Higher Prices (via Time)


Josh Steiner – Financials

Nasdaq Profits Fall, Missing Estimates; Declares Dividend (NDAQ) (via


Howard Penney – Restaurants

Panera cuts 2013 view after restaurant sales miss target (via Reuters)


Brian McGough – Retail

Iconix 2Q profit up, lifts 2013 profit outlook (via AP)

PCAR: 2H Buying Opportunity Coming?



Given the risks inherent in the Hours-of-Service (HOS) regulations, the Euro 6 pre-buy and higher a share price relative to our fair value range, we do not expect PCAR to continue to outperform in 2H 2013.  PCAR is one of the best large U.S. industrial franchises and we would like to re-enter lower.  The HOS regulations and Euro 6 emissions standards may yet let us do so.


Key Items


Euro 6 Pre-buy:  To us, PCAR’s quarter looked fairly dependent on the Euro 6 pre-buy.  The effect of Euro 6 is hard to estimate - even though it was downplayed on the call.  Sales in Europe would probably not have been up (while those in the US and Canada were down) without it.  That pre-buy will probably reverse in 2014, with orders leading by year-end.


Industry Not Great Into HOS:  As we have written before, the industry backlog to build ratio (and other metrics) are not all that strong into the new HOS regulations.  These regulations will almost certainly exacerbate the driver shortage and negatively impact truck sales.


PCAR Strategy:  We would look to exit PCAR around here (it’s at the high end of our base case valuation range less special dividend, for example).  We suspect that Europe orders will look weak into 2014 with Euro 6 pending.   We also suspect that 2H 2013 US orders will look weak post hours-of-service.  We do not think that investors are compensated valuation-wise for taking those risks at current levels.  If PCAR gets clobbered on HOS, Euro 6 and other worries, we would very much like to re-enter.  There are a number of positive drivers for PCAR, as we outlined in our Truck OEM black book last August, including a very old North American fleet, parts sales on the MX engines and some returns on investments in Brazil.  But the shares have outperformed significantly since that presentation, leaving the risk/reward trade-off less attractive.  We are looking to buy a big dip, if we get it.  If not, there are other fish.



PCAR: 2H Buying Opportunity Coming? - nb


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