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CKR – CRAMER VS PENNEY

Yesterday, CKE rose 13% on the back of Jim Cramer recommending it as a turnaround play. His case was based on the premise that CKE is "the worst of breed" and therefore has the most upside potential. He noted that the company's operating margins of 5.7% lag behind its peers, like Burger King (BKC), with margins of 14.5% and Jack-In-The Box (JACK), with 8.5% margins.


I have some issues with his analysis. First, BKC is primarily a franchised company, while CKE is a company-owned operation; as a result comparing operating margins is a useless exercise. Although, it's relevant when looking at JACK, the analysis is still misguided.

 

When looking at any restaurant company, restaurant level margins are the best barometer of how a company is performing and on this metric CKR is the "best of breed."

 

Looking at restaurant level margins, CKE has better margins than both JACK and BKC. In the most recent quarter FY2Q09 JACK reported restaurant level margins of 16.5% versus my estimate of 19.9% for CKE restaurants (FY1Q10.) In FY3Q09 Burger King's restaurant level margins are 11.4% - ouch! So any turnaround in CKR margins is not going to come from better sales trends and/or lower food costs, but from management getting religion cutting fat from the company's bloated cost structure. Thus the difference in operating margins cited by Cramer


Having analyzed this company for years, management is not going to give up the Cessna Citation or the other perks that keep the company cost structure bloated. As a side note JACK's senior management flies commercial and the market value of JACK is $1.8 billion and CKR's is $750 million.


Today, CKR reported that its Carl's Jr. Restaurant reported a decline of 6.2% in the period ending May 18th. Assuming 2-3% pricing, this suggests that traffic trends at Carl's Jr. are down 8-9% -- that is a problem! CKR management cites the poor economic conditions in California as the main reason for the decline in traffic trends, but the competition is significantly outperforming in that market.


Recently, JACK reported that 2Q09 same-store sales for its Jack in the Box company-owned restaurants were up 0.4%. Importantly, they said on a regional basis, same-store sales remained positive in California, Texas, and Las Vegas.


CKR takes the high road as it relates to maintaining the company's profitability and brand image, therefore significant discounting is not an option. Maintaining the company's industry leading margins is a higher priority than generating short-term positive same-store sales!


If there is a turnaround in top line sales at Carl's Jr. concept, it will come from increased discounting, which carry lower margins. This is not the type of turnaround I would be looking for!

 

CKR – CRAMER VS PENNEY - carl s


RL: Still One To Ride in ‘09

As usual, there's a ton of noise in these RL numbers, but by my math the company came in at around $0.68 vs. my model at $0.52 and the Street at $0.42. This was a clean beat all around. Revenue, margins and capital intensity all looked better than I modeled - and I was well above consensus. Was this a 'great' quarter? No - it was not. Let's face it, these guys are perennial sandbaggers, and with sales down 1% and EBIT off by 27% there was nothing to write home about here.  But all things considered, this company continues to prove that its multi-pronged execution around an extremely focused strategy is second to none.

 

Ok, so back to the sandbagging comment. Management came out with guidance that genuinely represents uncertainty around the global economic environment. But as I hash through my model, I get to $4.25 for next year, and $5.50 the year after. Yes folks, that's a 15% CAGR, and is 16% and 27% above where I think the consensus will shake out in '10 (ending March) and '11, respectively.

 

Similarly, the first quarter guidance is a bit perplexing. Double digit decline in revs with growth in operating expenses? This comes at a time when FX hurts the top line, but helps opex. To get there, I need to assume a big sequential erosion in wholesale sales AND margins, as well as a slowdown in either .com or new store productivity (unlikely when new store growth is slowing meaningfully).  In fact, if I model the company's guidance to a 'T' I can get to a 1Q estimate as low as $0.10-$0.15 per share. Call me a perma-bull, but I'm getting to a number North of $0.50.

 

So what DOES concern me?  FX, for one. I could care less about the negative impact RL is feeling today from FX. But anyone who 'does macro' has got to be watching the dollar, which has been in a freefall for the past two weeks. While I highly doubt that RL as an organization is a fan of weak dollar policy, this trend may set up RL for a nice little top-line and margin pop by the September quarter. But the flips side is that this is also a time when it is investing capital in Europe and Asia to fill out the next leg of its global brand expansion. I like the fact that RL has not printed a disproportionate amount of its FX benefit in recent years (unlike WRC, GES and others), but I can't escape the fact that it is potentially investing capital at a time when a devalued currency could hit incremental ROIC.

 

Does threaten my EPS estimates for the next 18 months? No. But realize it or not, incremental ROIC has been THE key driver to this stock over the past two cycles, and I'll be hyper focused on how proactive the company is approaching this issue this time around. This is now one of my key issue on this name right now. Stay tuned for more analysis.

 

RL: Still One To Ride in ‘09 - 5 27 2009 1 14 33 PM

Brian McGough


Republican Popularity For A Trade?

 

My colleague Casey Flavin and I are up in Alberta (my home province), visiting a number of our Canadian clients.  Writing a note about the recent decline in President Obama's approval rating from Alberta seems somehow appropriate.  Many people refer to Alberta as the Texas of Canada.  As a native Albertan I tend to agree, except for one thing, Albertans are more conservative than Texans! 

 

In the last Canadian Federal election, it was considered a watershed moment when the leftist New Democratic Party won one seat in Alberta.  The Conservative Party won all 27 other seats.

 

But enough about these Alberta rednecks (since I'm both, I'm allowed to say that!) and on to Obama.  As we've outlined in the chart below and have been highlighting on the morning call to that clients that subscribe to the call,  Obama's approval has taken a sharp decline in the past couple of weeks.  Yesterday, according to the Rasmussen Tracking poll, Obama's approval ranking, the difference between Strongly Approve and Strongly Disapprove, was at +1, which is close to the lowest of his Presidency.

 

Some other data points that suggest that President Obama's influence may be waning and that Republicans may be gaining ground include:

 

  • Rasmussen poll from last week indicated that 49% of respondents disagreed with President Obama on closing Guantanamo and 38% agree with the decision. Given that this was a key focus for Obama during the campaign and a key recent decision he has made, this poll has relevance on the electorate's view of the President;

 

  • In a CNN Opinion poll from last week, former Vice President Dick Cheney approval rating was 37%, which was up 8% points from when he left office. Cheney is likely one of the most vilified politicians in the nation, so a dramatic increase in his approval rating, even if still low over all, likely indicates a marginal shift towards the Republican party

 

  • Rasmussen did an online poll Friday of last week that indicated that 70% of respondents, out of ~2,300, said they did not believe Tim Geithner would be Treasury Secretary by December 31, 2009. This is likely a decent proxy for how the electorate thinks about Obama's economic policy so far, although, admittedly, it is also a vote of disapproval on a particularly ineffective Treasury Secretary.

 

While broadly speaking, President Obama's approval is still high based on the Real Clear Markets poll summary, which shows that based on an average of polls his approval rating is at 60.5%, even that is near the lowest of his Presidency.  In aggregate, the confluence of events relating to foreign policy, domestic economic policy, broad based "socializing" and the burgeoning debt balance are starting to pierce the armor of President Obama.  It seems likely that over the coming months, he could see a more broad based correction in both his and his party's approval rating.

 

Perversely, this could actually be positive for the U.S. Dollar as both global currency and debt investors begin to realize that President Obama has less influence to promote legislation that could be perceived as socialistic.   

 

As Keith has said since the inauguration, "the REFLATION trade really works when Obama threatens to socialize the country to smithereens" (meaning Dollar Down = Stocks UP). If the Republicans keep picking up points, that could signal the last stand for a currency that is trending towards crisis.

 

Daryl G. Jones
Managing Director

 

Republican Popularity For A Trade? - obama


Early Look

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BETTER AIRPORT DATA BUT…

McCarran Airport posted its best month in almost a year with only a 5.9% drop from April of 2008.  Combined with automobile traffic, the "strong" air visitation should translate into total visitation falling only around 4%.  However, "lucky" play by the casinos last year causes a pretty difficult comparison.  We estimate total Strip gaming revenues could fall by a rate in the mid-teens, with 9% of the drop caused by the high hold percentage last year.  In April 2008, slot and table hold percentage was 30bps and 230bps above normal.  The following table shows our projections for April 2009.

 

BETTER AIRPORT DATA BUT… - estimated april strip metrics

 

So while the airport data is somewhat encouraging, the actual revenue data will likely look weak.  The good news is that the May hold comparisons are much easier.  The Strip won't face a difficult hold comparison until September.


Roubini The Revisionist

"A more sober analysis suggests we're closer to the bottom; there is light at the end of the tunnel, but it's going to take a while longer, and..."
-Nouriel Roubini
 
"And..."... After flying around in helicopters and feeding the manic media with his Doctor Depressionista interviews for the past 3 months, the man, the myth, the legend has revealed himself this morning - Tah-Dah, its Roubini The Revisionist!
 
Not unlike most "economists", Roubini is susceptible to gravity. The gravity of marked-to-market prices that is. Prices don't lie; people do. "And..." a +34.6% move in the US stock market since March 9th will apparently "sober" up one's views. Well done Nouriel! You can now go back to being just another economist who made a big call.
 
"Making the call" is what we all get paid to do in this business. Sometimes we're right, sometimes we're wrong. Being really right can make you eight to nine figures, and being wrong, well... depending on who you work for... sometimes has no downside at all!
 
One of my passions in life is calling people out. Call it aggressive, or call it plain dumb - I am a hockey player by training don't forget, and that's just what I do. Whether its holding Hank The Market Tank Paulson or Roubini The Revisionist accountable, it's all one and the same. Someone may as well do it.
 
Revisionist historians have populated Wall Street for over a hundred years. Once we get through month's end, you can expect to see plenty of their writings from the hallowed halls of the once vaunted sell side "strategist" who is now parroting the 6 month old REFLATION call, to the buy side. This is what makes this game so entertaining to observe.
 
Right on schedule, after the US stock market put in another lower-high yesterday, you're seeing 74% of America's finest revisionists presciently predict that the US recession could end by Q3 (as in 6 weeks from now). How wonderfully late this reactive prediction is from the National Association of Business Economics. I'll spare the revisionist participants the embarrassment of reminding you what their "forecast" was in February (hint: it was closer to Roubini's)...
 
"A more sober analysis" suggests that the prior analysis involved what? A few cocktails? God knows what Roubini does when no one is looking, but assuming he is as careful with his words as one should expect a soothsayer to be, I'll take his word for it.
 
The New Reality is simply that very few analysts, strategists, or economists called the top of the 2007 US market move as well as the bottom of the 2009 one. Is that a surprise? Hardly. But Washington and Wall Street should be learning a very important lesson from this - reactive analysis provides performance paralysis.
 
If our Almighty Ones are now admitting to sipping from the ole Sapporo without a proactive plan to address what Breaking The Buck could equate to, how in God's good name should we entrust our children's futures with their latest predictions? At what point in the last 18 months would you have been well positioned if aligned with the consensus of 74% of "economists"?
 
An understanding of the difference between a US currency breaking down versus one that's on a crash course for a crisis would seemingly require one to have understood the REFLATION call from its inception.
 
As CNBC rolls out the revisionists, I think we are going to roll right into lower-highs. If the US stock market finds a way to break out to higher-highs in the face of a pending currency crisis, I'll be the first to admit that I had the latest leg of my 2009 market call wrong. As prices change, I will.
 
Here are some immediate-term domestic price levels to focus on:
 
1.      SP500 levels of 934 (January 6th) and 929 (May 8th)

2.      Nasdaq 1764 (May 4th)

3.      Russell 2000 levels 507 (January 6th) and 511 (May 8th)

 
I know, we're very close to some of these lines. But I'm also sober... and I have a process that is my own - ah the weaponry!
 
To be clear, I am not making a call that China or Gold won't make higher YTD highs. As our British philosophy Captain of the Revisionist League likes to say, I am "long of" both those asset classes "whilst" having very high conviction in them.
 
While everyone is getting jazzed up with our REFLATION call or the MEGA Consumer Squeeze call this morning, just take a deep breath, and take a good hard long look in that rear view mirror. These bullish calls aren't new.
 
All the while, remember that Roubini The Revisionist is now sitting beside you in the passenger seat - and he's not alone. This morning's weekly sentiment survey has Bulls shooting up to 41% (from the mid 20's in March) and Bears dropping like flies down to 28% (from the high 40's in March). Sentiment in this market is finally bullish enough for me to get out of the way on the long side. As I start to wander on over to the ole Bear camp again, I wonder if anyone is still left standing? The booze is definitely gone!
 
My immediate term upside target for the SP500 is 918, and I have downside support at 896. Trade the range.
 
Best of luck out there today,
KM
 

LONG ETFS

XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund- A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. From a fundamental setup, we're bullish on Sweden. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.
 

SHORT ETFS
 
XLU - SPDR Utilities - We shorted Utilities on 5/22 as it is trading below the TREND line. As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

LQD  - iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

EWL - iShares Switzerland - We believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.


DUSTING OFF THE GAMING EXPANSION THESIS

With the political shift over the last few years it looks like we are going to give Keynesian economics yet another shot at success.  We've got a view on how that will end but in the meantime, state governments need more cash.  Legalized or expanded gaming is a surefire way to raise cash for the states.  There are almost always winners and losers among the operators when a state legalizes or expands gaming.  The slot suppliers always win.

 

Here are some of the opportunities:

 

  • Illinois - 45,000 machines? Probably not, but 30,000 looks doable. The video poker bill that passed the Illinois Congress and is likely be signed by the Governor is underrated in terms of its impact to IGT. These are video poker machine, not video lottery machines. The difference is important because IGT's video poker market share is probably 80%. The quick math says 80% of 30,000 is 24,000 machines at about $0.01 per 1,000 would yield $0.24 in EPS to IGT. Not bad
  • Ohio - It will happen eventually. MyOhio and PENN are supporting a measure that would allow for 4 casinos in the state with 20,000 machines in total. The votes appear to be there in Congress but Governor Strickland may be opposed.
  • New York - Aqueduct and its 4,525 machines looks like a go again and could open as early as 2011.
  • Maryland - Cordish Company has a bid for 4,750 slots at Arundel Mills Mall in Arundel County. Baltimore City Entertainment is looking to use up the full amount, 3,750, of slots available by state law in their proposed Baltimore City slot parlor. There is a bid in for 800 slots at Worchester County, with an option to expand to 1,500. Penn National bid for 500 machines at Cecil County, with an option to expand to 1,500. We don't expect these slots to come on line before 2012.
  • Massachusetts - The Massachusetts Senate recently rejected a proposal to add slot machines at racetracks but we remain convinced that an expansion of gaming, in one form or another, is on the way in Massachusetts. There is a dire need for revenue and the departure of anti-gaming former House Speaker Salvatore DiMasi of Boston is another major plus for gaming. Current Senate President Therese Murray has given strong indications that the Senate will likely debate gaming in the fall and has been cited, along with other prominent lawmakers in Massachusetts, as supporting expanded gaming. Mohegan Sun is proposing a resort casino in Palmer, MA and welcomes the rejection of slots at racetracks. They hope to win the gaming debate this fall.
  • Texas - Not this year but a huge potential market.

 

Bottom line is that slots could and should become a growth industry again.  Illinois could be the catalyst.  IGT should be the winner.  IGT typically gets a higher market share in the new/expansion slot market than replacements.  Illinois alone could add $0.24 to IGT's bottom line.  Even over 2 years, that number is meaningful to the current sub $1 run rate.  Throw in the other states over time and a normalizing replacement demand and the slots business starts to look growthy again.


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