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COYOTES: HERE TO STAY

Takeaway: This deal was a lesson in perseverance & teamwork. Quitting at any point would have been easy, but we persevered & put the puck in the net.

By Daryl Jones

 

Four years ago, Keith, myself and Todd Jordan, our Managing Director of our Gaming, Lodging & Leisure team, embarked on a journey in which many people predicted we had little chance of succeeding at. With the support of our colleagues at Hedgeye, we entered the process to purchase the Phoenix Coyotes, a bankrupt NHL franchise.  Our proposal to purchase the team was seemingly received well (as you might imagine Keith played the lead role in that meeting!) and enabled us to become the key contender to own the team.

 

COYOTES: HERE TO STAY - coyotes

 

Our analysis of the situation in Phoenix was vintage Hedgeye. We started with a macro perspective that it was likely the ideal time to buy a distressed asset in the Phoenix region as housing was literally in free fall.  Our view was that housing would ultimately revert to the mean, and thus home prices would see a strong recovery, which would then drive discretionary spending on things like sporting tickets.  In the Chart of the Day, we show the improvement in home prices in Phoenix since that period.

 

We then took a hard look at the financials of the team (hat tip to our colleague Anna Massion for some good work here), we found a business that was bloated on the cost side with some easy pro-forma cost reductions.  On the revenue side, we developed a plan for steady revenue growth with the unique idea of playing five games in another market (think the Buffalo Bills playing in Toronto).  Even though we came to agreement with the NHL on the parameters of a purchase via a letter of intent, the deal ultimately fell through as we were unable to agree to terms on an arena lease.

 

At that point, we chalked it up as a loss, but a win on the learning side, and watched over the last couple of years as various other groups attempted, yet failed, to purchase the franchise.  With the advent of the new collective bargaining agreement in 2013, which from our view created a very compelling economic situation for smaller market NHL teams, we decided to revisit the opportunity, almost three and half years after first looking at the team.

 

COYOTES: HERE TO STAY - coy7

 

Over the course of the last few months, we and our partner Anthony LeBlanc were able to put together a very intriguing financing package with a major hedge fund as the lender. With Anthony’s guidance, an arena lease was negotiated that exemplifies a true public / private partnership.  And finally we found a lead equity investor in my friend George Gosbee from Calgary, who is now the Governor of the franchise, and closed the transaction earlier this week.

 

For Hedgeye and our partners, the deal was a true lesson in perseverance and teamwork.  Quitting at any point would have been easy, but ultimately we persevered and put the puck in the net.  While we are quite excited about the prospects for NHL hockey in Phoenix, I will ease the minds of any NHL hockey fans out there . . .  despite owning a small piece of the team, you can be rest assured Keith and I won’t be getting on the ice any time soon!

 

- Daryl "Big Alberta" Jones is Director of Research at Hedgeye Risk Management. In a prior life, he was a defenseman on Yale University's Men's Ice Hockey team. 


CASUAL DINING – IN A HOLE

On Wednesday, Malcolm Knapp gave us a glimpse of how ugly sales trends were in July when he released his estimates for the month.  Although the numbers released by Black Box yesterday are not as dire, it remains clear that the industry is beginning 3Q13 in a hole and must play catch up in order to make the numbers.

 

As a refresher, Knapp reported that July 2013 same-restaurant sales declined -3.8%, while traffic trends declined -5.1% -- both metrics slowed sequentially over a markedly weak June.  Black Box numbers were slightly less gloomy, as same-restaurant sales declined -0.9%, while comparable traffic trends declined -2.2%.

 

 

CASUAL DINING – IN A HOLE - BB SALES

 

CASUAL DINING – IN A HOLE - BBOX TRAFFIC

 

 

Currently, our Casual Dining Index (a compilation of 29 casual dining chains) is estimated to post same-store sales growth of +1.4% in 3Q13, before accelerating to +2.8% growth in 4Q13.  This would indicate, that for the balance of 3Q13, same-store sales need to accelerate by 200-300 bps to make the current estimates.  Knapp noted that while all four weeks in July were negative, each successive week in the month was sequentially better than the prior.

 

We believe a massive acceleration in trends will be difficult to achieve.  According to our Casual Dining Index, average same-store sales growth in 2Q13 was +2.1%, indicating that same-store sales for the period were up +1.7% on a LTM basis, down significantly from its +3.7% peak in 1Q12.

 

 

CASUAL DINING – IN A HOLE - yaaa

 

 

With the casual dining group trading at 23.5x P/E and 8.8x EBITDA (adjusted for CHUY and NDLS), it appears as though the market is expecting a noticeably sizeable acceleration in same-store sales.  While the job market continues to show signs of improvement, at least in the headline numbers, it seems as though the weakness we have seen in July can be partially attributed to a surge in gas prices.

 

 

CASUAL DINING – IN A HOLE - GASOLINE PRICES

 

 

Our top short in the casual dining space remains RRGB.  The company is due to release 2Q13 earnings on August 15h before the open.  We will post on anything incremental after the call.

 

 

 

Howard Penney

Managing Director

 


[VIDEO] Seideman: OpenTable (OPEN) Is a Buy

 

Hedgeye Summer Intern, Yale Senior and Tennis Superstar Blair Seideman lays out the bullish, long-term case for OpenTable (OPEN). She highlights the company’s dominant market share, brand loyalty, and the imminent launch of its proprietary, cloud-based Electronic Reservation Book (ERB). Seideman believes this new, innovative upgrade will drive OPEN’s seated diner numbers faster than consensus expectations.

 

Bottom line: If Blair’s skills and success on the court are any indication of her future as an analyst, our advice is to pay close attention to her investment advice on OPEN.


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CCL: SURVEY SAYS?

Weaker close-in bookings troubling

 

 

Since CCL gave guidance in late June, we haven't seen much improvement overall in 2014 pricing.  More troubling, however, is that pricing is dropping considerably for close-in bookings for Q4 2013.  Most of Q4 is already on the books so we're not so much worried about Q4 yields and earnings.  What troubles us is that weak last minute pricing could be indicative of soft demand carrying into the 2014 Wave season.  The Street is expecting Carnival to post 3.0% net yield growth (constant-currency) in 2014.  While pricing that laps Triumph will have easier comps, consensus estimates could prove aggressive. 

 

Here are some observations from our proprietary pricing survey of >12,000 itineraries.  We analyze YoY trends, as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator i.e. CCL: 6/25

 

Caribbean

  • Close-in pricing for end of 2013 continue to worsen, relative to July's.  FQ1 2014 pricing also has deteriorated further. However, FQ2 2014 pricing has reversed course to being flat - with pricing trend unchanged.

Europe

  • Europe continues to be in status quo mode – slow and steady
    • Costa’s close-in FQ4 pricing, while slightly lower sequentially, continues to be robust YoY; early 2014 Costa pricing trend is slightly higher.
    • Cunard and Princess FQ4 pricing slipped a little relative to July but is still nicely higher YoY
    • AIDA’s FQ4 saw some discounting everywhere except Western Med in August. FY2014 pricing is relatively unchanged.

Mexico/South America/Asia  

  • Pricing is little changed relative to July
    • Mexico’s FQ4 2013 pricing for Carnival remains weak but FQ1 2014 pricing is somewhat higher YoY, led by Carnival Inspiration
    • Costa's Asia pricing continues to maintain high double digit growth

 CCL: SURVEY SAYS? - ccl2


THE FEROCIOUS AUGUST BEAR RAID

The bear raid in U.S. equities took its toll with a cumulative decline of 71 basis points over the last four days (#SarcasmAlert). We’ve been harping on this all year, but as the U.S. economy continues to transition from stabilizing to accelerating with labor and confidence hitting levels not seen since 2007, U.S. equities will continue to find a bid on any sell-off.

 

The longer term supporting bid in U.S. equities is, of course, the theme that our financials team has been focused with their recent launch on asset managers, which is the current (and we expect continued) outflows from fixed income assets as interest rates grind higher. 

 

This will only accelerate if U.S. economic data continues to come in strong.

 

THE FEROCIOUS AUGUST BEAR RAID - Bear Raid With closeup


Insight: JPM 2Q EARNINGS

Takeaway: This note argues why the current criticisms of JPMorgan's 2Q earnings quality seem misplaced. We also take a refreshed look at fair value.

This note was originally published July 12, 2013 at 12:11 in Financials

Insight: JPM 2Q EARNINGS - jpm 

(Editor's note: Hedgeye's Institutional Clients range from the country's largest mutual funds to the world's top hedge funds. For more information on Hedgeye's Institutional Research product offerings, please click here.)

 

Lateral Plays

 

JPM read throughs. We see Capital One (COF) as a clear winner when they report 2Q next week. The card results from JPM confirm our perception of accelerating underlying improvement in credit quality in the unsecured market. Also, the enormous Q/Q improvements in residential RE credit quality trends bode well for BofA (BAC) when they report next week.

 

 

Results Are Stronger Than They Appear

JPMorgan reported a strong second quarter (all things considered), a blueprint for how we expect the rest of earnings season to progress. That said, there are many size-able adjustments that bulls and bears alike can find plenty to like or take issue with in this report. Here's our take.

 

The printed number was $1.60 vs. the Street at $1.44. There’s lots of adjustments here, so let’s dig in.

 

  • First, the company posted a whopper of a reserve release at $1.356bn, or 23 cents per share. Consensus was looking for $1.26bn, or 21 cents per share . As such, that delta only accounts for 2 cents vs. Street numbers.
  • Second, the company posted a DVA benefit of 6 cents or $355mn from spreads widening. This is a tough one to make apples to apples adjustments to because, while we know there's a DVA benefit in the consensus estimate, we don't know how large it is. 
  • Third, they posted a 9 cent ($600mn pretax) charge for boosting litigation reserves.

Net, net we get to $1.60 less 2 cents (reserve release delta vs consensus) less 6 cents (DVA) = $1.52. Finally, if we give them the 9 cents in litigation reserve they pop back up to $1.61, and, if not, they stay at $1.52. Either way, they seem well ahead of the $1.44 estimate. Also, recall that the $1.44 already included some degree of DVA tailwind, so the true apples to apples number is likely stronger still.

 

Moving past the adjustments, here is a quick summary of some of the other notable items we spotted this quarter: 

  • NIM down 17 bps QoQ to 2.20% from 2.37%. Much of the decline was attributable to the company boosting cash levels by over $100 billion to meet LCR requirements. The interesting takeaway is that while NIM was down 7.2% Q/Q, Net Interest Income was down a much more benign 1.8% Q/Q. Also, taking a step back, if we look at the 7-quarter trend, we find that NII has been falling at trend-line rate of $202mn per quarter (Q/Q). This quarter's sequential decline of $208mn was essentially right in line with that trend. We're not cheering this as good news, but it is an important context factor relative to what appears to be horrible sequential performance in the NIM. Also, it's worth noting that the forward outlook is for stabilizing NIM in the back half and for NII to be sequentially higher in 3Q vs 2Q. For reference, in the last 7 quarters, NII has only advanced Q/Q once (4Q12).
  • Loan growth was negative 50 bps Q/Q. The outlook is for loan growth to begin to accelerate in the back half of the year as the company is reporting seeing early signs of a modest resurgence in loan demand.
  • Non-interest income was again strong this quarter, even after adjusting for DVA benefits. Clearly the Investment Banking business delivered stronger than expected results and Mortgage Banking held steadier than expected under the circumstances. Looking forward, the company clearly tempered expectations on the mortgage side, indicating that the current rate environment would lead to a 30-40% reduction in mortgage volume over the back half of the year. 
  • Efficiency was up Q/Q, rising to 61.1% from 59.7%, but is continuing its trend-line improvement since the start of last year. Looking back over the last 7 quarters, the company has driven efficiency lower by 1% per quarter (Q/Q). 
  • Credit quality was impressively strong this quarter. Supporting the massive reserve release, the company’s NPAs and NPLs were down, 4 and 9 bps, respectively. Meanwhile, coverage remained at 199% of NPLs in spite of the drawdown (flat with last 4 quarters).
  • Tangible book value per share advanced this quarter to $40.04 from $39.54 last quarter, and, importantly, has grown 12.1% in the last 12 months. This is in spite the London Whale fiasco. This quarter, the company posted a 13% return on equity and a 17% return on tangible equity.
  • Leverage Ratio - Yesterday's fanfare over the new supplementary leverage ratio requirements looks like it won't be a terribly big event for JPMorgan. To put things in context, the company is currently at a 4.7% leverage ratio under the new framework with a BHC requirement to get to 5% by 1Q18. They are generating a 16-17% return on tangible capital right now. If we gross up their capital base by 6% (5.0% / 4.7% = 106%), we find that that potential return on tangible equity compresses by roughly 100 bps, i.e. from 17% to 16%. On a fair value model for banks, a 100 bps compression in potential ROTE equates to roughly an 8% reduction in multiple to tangible book value. 8% of JPMorgan's $40 TBVPS = $3. However, based on the company's 16-17% ROTE, we estimate fair value is actually closer to 2x tangible book value (on a straight P/TBVPS : ROTE model (y = 9.4098x + 0.492) and on an EVA model (+3.2%) we estimate fair value is 1.73x TBVPS (y = 8.2686x + 1.4679), or $70-80 per share. So a $3 reduction in potential fair value seems de minimis relative to $15-25 upside.
  • Capital Return - The dividend was increased to 38 cents (2.7% yield) from 30 cents (2.2%) and the outlook for buyback remains unchanged.

The charts below look at the trends in net interest income, tangible book value growth vs. price and returns, the current relationship of return on tangible capital to price/tangible book value (good), the current relationship between EVA and price to tangible book value (better), the current upside/downside to fair value by bank based on our EVA model, and, finally, the 2Q earnings snapshot.

 

Insight: JPM 2Q EARNINGS - jpm 2

 

Insight: JPM 2Q EARNINGS - josh1

 

Insight: JPM 2Q EARNINGS - simple scatter

 

Insight: JPM 2Q EARNINGS - eva scatter

 

Insight: JPM 2Q EARNINGS - cheap cheap

 

Insight: JPM 2Q EARNINGS - jpm earnings

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com

 


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