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PNRA: STAGE 1 DENIAL

Takeaway: PNRA remains on the Hedgeye Best Ideas list as a SHORT.

First, we'd like to say that we do not believe management has adequately recognized the seriousness of the situation they find themselves in.  Therefore, it goes without saying that, in our opinion, earnings estimates are too high for the remainder of 2013 and 2014.

 

We’ve recently spoken to an unnamed industry insider in order to clarify our understanding of the cycle that many companies in the restaurant industry tend to go through.  Typically, when a concept gets in trouble, the management team’s decision-making process tends to follow a certain pattern:

  1. Overconfidence – The concept loses its value proposition when management raises prices too aggressively or lowers the quality of food.
  2. Stage 1 Denial – Consumers catch on and begin to frequent the concept less often.  Traffic begins to decline and management usually begins to blame the weather or another external event.
  3. Stage 2 Denial – In an effort to avoid the inevitable and appease the street, management begins to accelerate growth through the form of new unit acceleration or the acquisition of new brands.  Normally, the core business continues to deteriorate alongside a decline in ROIIC (return on incremental invested capital).
  4. Stage 1 Panic – Analysts begin to catch on and management responds by slowing new unit growth, although often not by enough.  The core business continues to decline, as senior management begins to replace the operating team.  Simultaneously, the search for a new advertising agency begins.
  5. Stage 2 Panic – Now it really begins to get ugly, as management sacrifices margins to increase customer counts by implementing a deep discounting strategy.  It then becomes clear that major changes need to be made across the enterprise.
  6. The Healing Process – Management decides to stop growth and attack the middle of the P&L.

Starbucks, Brinker, and McDonald’s are all companies that have successfully worked their way through this cycle, as management from their respective companies aggressively cut CapEx and began to grow it very conservatively for the next few years.  By slowing growth and attacking the middle of the P&L, EBITDA began to consistently increase in each situation.  In our view, SBUX and EAT are currently two of the best managed companies in the restaurant space.  DRI, on the other hand, is a company which, similar to PNRA, is currently going through this cycle (Stage 2 Panic).  But, unlike DRI, PNRA is in the early stages.

 

While 2Q was a disaster for PNRA and a number of analysts have downgraded the stock recently, we are sticking with our short thesis.  We believe the stock will continue to underperform until the healing process begins.  Last quarter, management warned investors that 2013 would be more volatile than expected and that this trend should continue for the next 3-4 quarters.  Looking past 3Q13, we believe the challenges the company faces will extend into 2014.  How far into 2014 these challenges will persist depends on how management reacts to them.

 

PNRA: STAGE 1 DENIAL - pnra sss

 

 

On the 2Q13 earnings call, management lowered the 2013 outlook to properly reflect the operational improvements they are making.  Management’s guidance for 3Q13 EPS was between $1.32-1.36, and the street is coming in at $1.35.  Given the likelihood of a top-line miss, we believe the street is giving the company the benefit of the doubt, which could lead to further disappointment when the company reports on Tuesday. 

 

PNRA: STAGE 1 DENIAL - pnra operating margin

 

PNRA: STAGE 1 DENIAL - pnra rlmn

 

 

With the company trying to drive incremental throughput, we believe that an EPS miss could come from incremental labor costs.  Current consensus expectations are for labor costs to be up 11 bps y/y, which is, in our opinion, generous.  Given sluggish sales trends, limited pricing power, and the need for incremental investments, we believe labor costs will be higher than the street is expecting.

 

PNRA: STAGE 1 DENIAL - PNRA LABOR COSTS

 

PNRA: STAGE 1 DENIAL - pnra cogs

 

PNRA: STAGE 1 DENIAL - pnra other exp

 

 

Looking out to 4Q, it is difficult to tell whether PNRA will be able to hit the numbers, particularly given the company will have an additional week this year.  The street is coming in at $2.09, or 19% EPS growth, on 19% revenue growth, while management has guided to $2.05-2.11.  Given the early reads on October sales trends, we suspect it will be challenging for PNRA to accelerate SSS in 4Q.

 

Admittedly, the biggest risk to being short PNRA is that it appears to be a consensus short.  The sell-side has turned on the company.  Only 57% of analysts have PNRA rated a Buy and short interest in the stock is at 6.3% of the float, which is one of the highest in the QSR space.

 

 

 

Howard Penney

Managing Director

 


THE M3: MACAU CONNECTIONS; CPI

THE MACAU METRO MONITOR, OCTOBER 21, 2013

 

 

WYNN DEFENDS MACAU CASINO AT US LICENCE HEARINGS Macau Business

Two casino operators have faced questions from Massachusetts regulators about their operations in Macau at hearings for casino licences.  There were candid exchanges between Massachusetts Gaming Commission officials and executives of Wynn Resorts Ltd.  Commissioner Gayle Cameron told Wynn Resorts chairman Steve Wynn there was illegal activity in all casinos, including the company’s casino here.  “Macau is a legitimate place. They’re not gangsters or bums, they’re businessmen,” Wynn said.

 

MGM Resorts International says its chances of getting a licence will not be affected by ties to Pansy Ho Chiu King.

 

CONSUMER PRICE INDEX FOR SEPTEMBER 2013 DSEC

Macau CPI for September 2013 increased by 6.12% YoY or 0.77% MoM.


October 21, 2013

October 21, 2013 - dtr

 

BULLISH TRENDS

October 21, 2013 - 10yr

October 21, 2013 - spx

October 21, 2013 - dax

October 21, 2013 - SHCOMP

October 21, 2013 - euro

October 21, 2013 - pound

October 21, 2013 - oil

October 21, 2013 - natgas

 

BEARISH TRENDS

October 21, 2013 - VIX

October 21, 2013 - dxy
October 21, 2013 - yen

October 21, 2013 - gold

October 21, 2013 - copper


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The Scarcest Commodity

“Ideas are incapable of confinement or exclusive appropriation.”

-Thomas Jefferson

 

One of the biggest push-backs I’ve been getting from both US stock market bulls and bears throughout the 2nd half of 2013 is one and the same – “I can’t buy that up here – I missed the move.” And my response continues to be that Mr. Market doesn’t care about what you did or did not miss. The market’s price is both dynamic and non-linear. As Jesse Pinkman would say, ‘it’s evolution, yo.’

 

Pinkman is not Jefferson. The aforementioned quote comes from a great book on the evolution of entropy economics that I’m still reviewing: George Gilder’s Knowledge And Power. If you are a growth investor (and/or you just want to be long growth as a Style Factor right now), read Chapter 10: “Romer’s Recipes and Their Limits” (Paul, not that raging Keynesian, Christina Romer).

 

“Still, change keeps coming, fueled by technology, as Romer’s 1990 paper reminded the economics fraternity. As productivity grows, technology keeps freeing people. And this … really is, in some sense, the scarcest commodity: the power of the human intellect.” (Knowledge and Power, page 96)

 

Back to the Global Macro Grind

 

BREAKING: the Global Macro call of 2013 is basically baked into the cake. You were either long growth, or you were not. With the Russell 2000 closing at another all-time high on Friday (1114 = +31.2% YTD), long virtually anything growth has absolutely pulverized the #EOW (end of the world) “new normal” thing (Gold, Bonds, Utilities, etc.).  

 

In terms of 2013 US Equity Market Style Factors, here’s how awesome growth, as a style, looks at the all-time highs:

  1. LOW YIELD (i.e. growthier stocks) = +35.2% YTD (vs High Yield Div stocks +14.9%)
  2. TOP 25% EPS GROWTH (Top Quartile of SP500) = +34.1% YTD (vs Bottom 25% = +20.8%)
  3. TOP 25% SALES GROWTH (Top Quartile) = +31.4% YTD
  4. HIGH BETA = +30.5% YTD
  5. HIGH SHORT INTEREST = +28.1% YTD

#awesome

 

To be clear, growth (as an investing style) can be very frustrating to A) embrace and B) capitalize upon. I think the reasons for that are bountiful (it’s called a cycle), but here are three big ones:

  1. STYLE: Growth Investing hasn’t worked like this since the 1990s – and few were positioned for an early 1990s style US recovery
  2. CYA: many equity investors are still fighting the last war of getting smoked in 2008 – consensus is long yielding income, not growth
  3. MULTIPLE EXPANSION: expensive gets more expensive on the way up

That last one is really tough for people to swallow, primarily because there are just so many people managing money these days. How many people do you know short stocks because they’re “expensive”?

 

I’d argue that part of Carl Icahn’s resurgence as an activist has a lot to do with being mucho long Style Factors 4 and 5 (HIGH BETA + HIGH SHORT INTEREST). With what was working locked into his sights, all he needed was Bill Ackman pumping those factors live @CNBC.

 

How many investors break the market down by Style Factors?

 

I’d say a lot fewer than you might think. And, to a degree, this makes Institutional Investing a lot like Moneyball was before Billy Beane did Moneyball. In the end, a chubby 1st baseman with a high on base % beats a pretty boy “highly concentrated” activist long ball hitter.

 

So what if my writing this note top-ticks growth vs. slow growth for 2013?

  1. That could very well happen – the performance divergences between growth and slow growth styles is at its YTD high
  2. That could very well not happen – if you started short selling growth in 1995 or 1996, let me know how that went by 1999

This is why the 1994 Global Macro Market metaphor (bond market blew up) really matters to me. As you can see in the Chart of The Day:

  1. Utilities (XLU) = -17.4% in 1994, 0.2% in 1996, -12.8% in 1999
  2. Tech (XLK) = +19.1% in 1994, +43.3% in 1996, +78.4% in 1999

How many investors are positioned for 2013 being 1993? How about 1995?

 

I don’t know if this is the top of growth investing. If it is, it ends with the Twitter IPO. But I do know that The Scarcest Commodity out there right now is being a raging growth bull. And that’s all I have to say about that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.58-2.69%

DAX 8

SPX 1

VIX 11.55-15.19
USD 79.21-80.28

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Scarcest Commodity - Chart of the Day

 

The Scarcest Commodity - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 21, 2013


As we look at today's setup for the S&P 500, the range is 59 points or 2.49% downside to 1701 and 0.89% upside to 1760.                        

                                                                                                       

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.28 from 2.27
  • VIX closed at 13.04 1 day percent change of -3.26%

MACRO DATA POINTS (Bloomberg Estimates):

 

ECONOMY:

  • 10am: Existing home sales, Sept., est. 5.30m (prior 5.48m)
  • 11am: Fed to purchase $3b-$4b notes in 2019-2020 sector
  • 11:30am: U.S. to sell $35b 3M, $30b 6M bills
  • 4pm: USDA crop-condition reports

GOVERNMENT:

    • Deadline for comments to Fed, FDIC, Office of the Comptroller of the Currency on rule to amend leverage-ratio standards for U.S. bank-holding companies
    • 9:20am: CFPB Director Richard Cordray will discuss agency’s latest regulatory initiatives at ABA convention in New Orleans
    • 11am: NABE holds conference call briefing to discuss survey on business conditions

WHAT TO WATCH:

  • JPMorgan said to reach $13b U.S. mortgage-bond settlement
  • AT&T to sell, lease 9,700 towers to Crown Castle for $4.85b
  • FHFA said to seek at least $6b from BoFA for MBS sales
  • Office Depot, OfficeMax to get FTC merger approval: WSJ
  • Sinclair skirting FCC rules on station ownership, WSJ says
  • Apple to debut new iPad tmw as tablet mkt becomes crowded
  • NYSE cancels mistaken options trades on DJIA, S&P 500 on Fri.
  • Eli Lilly to maintain R&D spending as competitors cut: WSJ
  • Netflix poised to report passing HBO in paid U.S. subscribers
  • Caesars drops Gansevoort name from Vegas project post-probe
  • Almost 500k apply for Obamacare; team to help fix website
  • “Gravity” leads N.A. box office for 3rd time with $31m
  • China urges economic policy implementation to spur rebound

AM EARNS:

    • AO Smith (AOS) 7am, $0.43
    • Gannett (GCI) 8:24am, $0.41
    • Halliburton (HAL) 7:03am, $0.82 - Preview
    • Hasbro (HAS) 6:30am, $1.28 - Preview
    • Lennox Intl (LII) 8am, $1.27
    • Manpowergroup (MAN) 7:30am, $1.08
    • McDonald’s (MCD) 7:58am, $1.51 - Preview
    • Sonic Automotive (SAH) 7:30am, $0.50
    • VF Corp (VFC) 7am, $3.78 – Preview

   PM EARNS:

    • American Campus Communities (ACC) 4:01pm, $0.42
    • BancorpSouth (BXS) 4:01pm, $0.27
    • Brookfield Canada Office Properties (BOX-U CN) 5pm, $0.42
    • Discover Financial Services (DFS) 4:05pm, $1.21
    • Helix Energy Solutions Group (HLX) 6pm, $0.29
    • Hexcel (HXL) 4:05pm, $0.46
    • Idex (IEX) 4:45pm, $0.74
    • Illumina (ILMN) 4:05pm, $0.40 - Preview
    • Netflix (NFLX) 4:04pm, $0.47 - Preview
    • Sonic (SONC) 4:01pm, $0.30
    • Texas Instruments (TXN) 4:30pm, $0.53 - Preview
    • VMWare (VMW) 4:01pm, $0.82 - Preview
    • WR Berkley (WRB) 4:01pm, $0.74
    • Zions Bancorporation (ZION) 4:10pm, $0.42

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Falls to $100 for First Time Since July on Supplies
  • Nickel Glut Extends to Fourth Year on China Supply: Commodities
  • Wheat Climbs to Highest in Four Months on Argentina Crop Damage
  • Gold Holds Near Highest in a Week as Investors Weigh Stimulus
  • Copper Swings Between Gains and Drops as Chinese Imports Jump
  • Alcoa Says LME Warehouse Plan To Cut Waits Should Be Suspended
  • Raw Sugar Erases Decline for Year, Extending Gains After Rally
  • Cotton Output in India Seen at Record as Rains Boost Crop Yields
  • Money Managers Were Net Long on Cocoa in London 65,234 Contracts
  • Zimbabwe Needs $5.3 Billion Investment for Platinum Expansion
  • Shale Overload to Spur U.S.-China Fuel Trade: Energy Markets
  • Rebar Ends Near Three-Month Low on Slower China Investment
  • Rosneft, Exxon Face Unrivaled Challenges in Russian Arctic Basin
  • Rubber Snaps Three-Day Losing Streak as Weaker Yen Boosts Appeal

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


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