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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall (KM note: ridiculous and reckless headline of the morning  … via Bloomberg)

CNBC Has Lowest-Rated Quarter in 20 Years (via Mediaite)

Fukushima worker accidentally switches off cooling pumps (via Reuters)

US credits Syria's Assad over chemical weapons destruction (via BBC)

 

Morning Reads on Our Radar Screen - cong5

 

Tom Tobin – Healthcare

ACA Grace Period for Late Payments Could Pose Problems for Doctors (via SouthBrunswick)

Experts Suggest Software Problems, Not Just Demand, May Be Behind Marketplace Glitches  (via KHN)

 

Jay Van Sciver – Industrials

Why You Should Fill Your Company With 'Athletes'  (via Forbes)

 

Kevin Kaiser – Energy

Petronas Plans LNG Project in Canada (via WSJ)

 

Daryl Jones – Macro

Twitter defying gravity with fastest growth in ad revenue (via Sunshine Coast Daily)

 

Josh Steiner – Financials

Eight banks join chat network from Markit and Thomson Reuters (via Yahoo!)

Ex-CBOT chief accused of fleeing U.S. to avoid $18 million bill: report (via Chicago Tribune)

Richmond’s rules: Why one California town is keeping Wall Street up at night (via WonkBlog)

 

Brian McGough – Retail

Fifth & Pacific sells Juicy Couture brand for $195 million (via Reuters)

 

Todd Jordan – Gaming

Man accused of stealing $25K in casino poker chips (via AP)

 

Jonathan Casteleyn – Financials

Gensler Assesses U.S. Swap Rules’ Debut by Phone Amid Shutdown (via Bloomberg)


BLACK BOOK CONFERENCE CALL: SLOTHY GROWTH IN SLOT MACHINES

Please join us for an in-depth look at the slot machine industry.  The Black Book conference call will be held on Thursday, October 10th at 11:00am EDT.

 

BLACK BOOK CONFERENCE CALL: SLOTHY GROWTH IN SLOT MACHINES - gll2

 

TOPICS WILL INCLUDE:

  • Stocks of the big U.S. gaming supply companies are up 30% to 95% on the year yet big fundamental hurdles have emerged.
  • How will these same stocks fare over the coming months and years in the face of stagnating replacement demand, a dearth of new markets, pricing pressure, and bad demographics?
  • We'll analyze the issues - there are many - and explain who is at risk and for how long.

 

RELEVANT TICKERS

BYI, IGT, SGMS, WMS, MGAM, ALL.AX, KNM

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 187413#
  • Materials: CLICK HERE



EXCELLENT GOLDEN WEEK

As expected, October exploded out of the gate in Macau with average daily table revenues (ADTR) up 38% YoY to HK$1,679MM.  We fully anticipate softer weekly run rates.  Golden Week will not be matched the rest of the month and this coming week is apt to be slower than normal as is typical following the holiday.  Our full month GGR estimate (including slots) remains at YoY growth of 20-25%.  Indeed, October should continue the strong momentum of the past few months.

 

Too early to gain much from the market share numbers this early in the month.  SJM flew out of the blocks with big gains, Wynn and MPEL likely held lower than the market, and LVS/Galaxy look normal.  LVS remains our favorite name among the Macau stocks as the properties should continue to gain market share at least through next year.

 

EXCELLENT GOLDEN WEEK - chart1

 

EXCELLENT GOLDEN WEEK - chart2


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CAKE: BULL CASE NOT FULLY BAKED IN

Takeaway: Sales are strong, margins continue to improve and international expansion plans remain underappreciated by the street.

CAKE remains on the Hedgeye Best Ideas list as a LONG.

 

Same-Restaurant Sales Are Strong

Sales trends remain strong at CAKE, as the company continues to outperform the industry.  In fact, CAKE has outpaced industry sales for at least the last 18 months.  That said, the casual dining industry is currently in secular decline and CAKE is not completely immune to any near-term weakness.  This, in addition to a difficult comp in 3Q, could incite some short-term pressure, but we believe the strong likelihood of a rebound in 4Q will allay these fears. 

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart1

 

 

International Expansion

We believe CAKE’s long-term international expansion growth strategy is underappreciated by the street.  This is an attractive opportunity for the company and, to date, performance abroad has been stronger than management originally anticipated, leaving the door open for a potential increase in their current expansion plans. Management expects to open one new restaurant in the Middle East this year, driving the total unit count in the region up to four.  They have also identified other international sites to add to their pipeline, including site in Mexico City and Latin America.  We’ll be looking for a little more color on 2014 international growth plans when the company reports 3Q13 earnings.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart2

 


Margins Continue to Improve

Restaurant level and operating margins continue to be points of strength for CAKE.  Restaurant level margins, despite ticking down 5 bps in 2Q13, are expected to improve by 64 bps in 3Q13 and another 96 bps in 4Q13.  On top of that, operating margins, which ticked up 1 bps in 2Q13, are expected to fall by 2 bps in 3Q13, before improving by 101 bps in 4Q13. 

 

Overall, the company expects operating margins to improve 50 bps over the prior year.  Strong restaurant level and operating margins can be mostly attributed to the following:

  1. Lower expenses – every line item, aside from G&A, is expected to be better than last year
  2. International expansion – the three Middle East locations have exceeded management’s expectations and continue to deliver impressive volumes

CAKE: BULL CASE NOT FULLY BAKED IN - chart3

CAKE: BULL CASE NOT FULLY BAKED IN - Chart4

 

 

Favorable Food Costs

CAKE should continue to benefit from lower cost of sales due to moderate commodity cost inflation and favorable dairy costs over the prior year.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart5

CAKE: BULL CASE NOT FULLY BAKED IN - chart6

 

 

Financially Robust

CAKE is expected to generate more than $100 million in free cash flow this fiscal year and, despite ongoing international expansion efforts, management continues to reward shareholders.  Not only does the company boast a 1.28% dividend yield, but the Board of Directors recently authorized up to $125 million to repurchase shares in the latter half of the year.  In aggregate, CAKE is expected to return as much as $200 million to shareholders in fiscal 2013.

 

CAKE: BULL CASE NOT FULLY BAKED IN - share rep1o

 

 

ROIIC Treading Upward

While the majority of metrics analysts look at fall in and out of favor over time, one metric that has outlasted the test of time for every company is also, to no surprise, one of our favorites – Return On Incremental Invest Capital (ROIIC).  After an impressive stretch in 2010, CAKE’s ROIIC TTM fell rapidly over the course of 2011, before bottoming out in the middle of 2012.  From that point, we have been seeing, and believe we will continue to see, gradual and steady improvement in this trend.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart8

 

 

Sentiment

Sentiment on CAKE is very low – yet another reason we continue to like this call.  Illustrated in the chart below, 33.3% of analysts rate CAKE a Buy, 63.0% rate CAKE a Hold, and 3.7% rate CAKE a Sell.  Furthermore, short interest in the stock is currently 11.90% of the float.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart9

CAKE: BULL CASE NOT FULLY BAKED IN - chart10

 

 

Valuation

At 8.8x EV/EBITDA, CAKE is trading in line with its Casual Dining peer group.  We believe this valuation is fair and justified by the company’s international expansion plans, improving ROIIC, and robust financial profile. 

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart11

 

 

 

Howard Penney

Managing Director

 


Not Good: SP500 Levels, Refreshed

Takeaway: This correction is not like the ones we bought (we shorted this one).

This note was originally published October 03, 2013 at 10:49 in Macro

POSITION: 6 LONGS, 8 SHORTS @Hedgeye

 

I don’t always go net short, but when I do, I prefer Down Dollar and #GrowthSlowing.

 

This morning’s ISM Services report was the 1st of the major leading indicators (SEP #) in our model confirming what both the bond and currency markets continue to confirm – on the margin (from YTD growth accelerating highs in JUL-AUG), US growth is slowing.

 

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

 

  1. Immediate-term TRADE resistance = 1704
  2. Immediate-term TRADE support = 1671
  3. Intermediate-term TREND support = 1660

 

In other words, this correction is not like the ones we bought (we shorted this one). With Bernanke banning economic gravity on the long end of the curve and the USD getting crushed, you shouldn’t have expected me to execute any other way.

 

It’s just our process.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not Good: SP500 Levels, Refreshed - SPX


European Banking Monitor: Stable for Now

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

European Banking Monitor: Stable for Now - zz. banks

 

Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week.

 

European Banking Monitor: Stable for Now - zz.sov1

 

European Banking Monitor: Stable for Now - zz. sov2

 

European Banking Monitor: Stable for Now - zz.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bp to 14 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 


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