MCD: All The Hype For This?

We pulled MCD from the Hedgeye Best Ideas list as a short on 2/14/2014 at $94.17/share, largely due to an underleveraged balance sheet and the potential for shareholder friendly financial engineering. 


Today, McDonald’s management revealed several new initiatives the company will undertake to enhance shareholder value:

  1. Optimize the capital structure
  2. Optimize the ownership structure
  3. Scrutinize G&A


The company expects to return $18 to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases, representing a 10% to 20% increase over the amount of cash returned between 2011 and 2013.


McDonald’s CFO Pete Bensen stated, “Our 3-year cash return target is based on several activities including the significant free cash flow generated from our operations, as well as the use of cash proceeds from our debt additions and refranchising activity.”


Hedgeye McDonald’s stated back in March that it was looking at ways to “optimize [its] capital structure” to create value.  We find today’s news disappointing, as we believe the company could leverage its balance sheet significantly more.  We have always felt that any financial engineering event would only be a temporary boost to the stock given the decelerating sales environment.


On June 9th, MCD will release its May sales data.  Our current read is that sales trends will be uninspiring, even with the rollout of the high density tables.  With the financial engineering news in the rear view mirror, we’d be tempted to revisit our short thesis in the coming months.  The company plans to report 2Q14 results on July 22nd.



MCD: All The Hype For This? - 1


MCD: All The Hype For This? - 2


Howard Penney

Managing Director


Fred Masotta


Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch

Takeaway: DSW and BWS have essentially traded places.

Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch - 1

DSW and BWS Earnings

Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch - chart4 5 28 large


Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch - chart5 5 28 large


One company missed by 13%, the other beat by 13%.  One comped down 3.7%, and the other comped up 1.3%. One guided up. The other guided down. One blamed weather. The other did not. One SIGMA improved, the other eroded. All else equal, we'd bet that 9 out of 10 people would say that that the company that surprised on the upside is DSW, and the loser is Brown Shoe. But today, they'd be wrong.


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Editor's Note: This is a research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow Brian on Twitter @HedgeyeRetail

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Takeaway: Either it's “different this time” and the bond market is wrong on growth, or it's not.

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VIDEO | Keith's Macro Notebook 5/28: UST10YR SENTIMENT SWISSY

LEISURE LETTER (05/28/2014)



  • Monday, June 2 - Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 


G13 Genting Singapore – up eight wholly owned subsidiaries in Japan. the Japanese companies – each with a nominal registered capital of JPY2.00 (2 US cents) – include Resorts World Japan Co Ltd, Resorts World Tokyo Co Ltd and Resorts World Osaka Co Ltd, and “will be principally engaged in investment holding, leisure and related businesses”.

Takeaway: Setting the stage to be ready for the casino legislation.


9766.JP Konami – once Japanese casino legislation is approved, the company will establish a subsidiary through which it would take a minority stake in casinos in partnership with operators. 

Takeaway: Foreign operators with local partners seems to be the direction this is going.


LVS/1928:HK – Waddell & Reed Advisors announced a simultaneous sale of Sands China Limited (1928.HK) and purchase of Las Vegas Sands (LVS) of 16,963,601 shares via Merrill Lynch. 

Takeaway: It would appear Waddell & Reed is seeking exposure to the emerging and growth opportunities of Japan and Korea which would be best expressed via LVS rather than 1928.


BEE - commenced a 34M share secondary offering and to use the net proceeds from the Offering to fund the acquisition of the 63.6% ownership interest in the Hotel del Coronado that it does not own from its joint venture partner, to redeem all of the issued and outstanding shares of its 8.25% Series C Cumulative Redeemable Preferred Stock, and for general corporate purposes. Management estimates the to-be-acquired 63.6% interest in the hotel is projected to generate an incremental $19M to $21M of EBITDA for the remainder of 2014. In Q1 of 2014, RevPAR grew 11% at the property resulting in 21% EBITDA growth. 

Takeaway: In February 2011, BEE sold the 63.6% interest to Blackstone as a way to unwind the $630 million loan on the property.  At that time, the del Coronado was valued at $590 million below BEE's acquisition price of $745 million in 2005.


RCL - last week, the bailiff in the fjord-side city of Ålesund boarded and seized Independence of the Seas, citing the owner, Royal Caribbean's, failure to pay pilot fees from the previous year. According to The Norwegian Coastal Administration (NCA), which ordered the boat to be seized, Royal Caribbean owed the NCA about 600,000 Norwegian kroner which should have been paid in mid-October last year. Following the seizure, the ship's captain contacted Royal Caribbean immediately and the money was paid to NCA within an hour.

Takeaway: Never mess with the taxing authorities.


RCL - entered into an agreement with The Port Authority of New York and New Jersey for RCL to develop the next phase of Cape Liberty Cruise Port in Bayonne, N.J. The $55-million project will include the construction of a new, guest terminal, with 125,000 square feet of check-in, customs and immigration and luggage processing space, as well as a 900-car parking structure and pier improvements. The new facilities will be built adjacent to the terminal currently used to welcome guests and will accommodate the cruise company’s ships, including the Quantum of the Seas and Anthem of the Seas, each to start service at Cape Liberty in November 2014 and 2015, respectively. The new terminal is scheduled to be completed in November 2014.


Australia Gaming Expansion – subject to final environmental and planning approvals, Tony Fung's A$8.15 billion (US$7.53 billion) Aquis project near Cairns and ASF Consortium's A$7.5 billion Broadwater Marine Project on the Gold Coast will receive gaming licenses to build multi-billion-dollar mega-casinos in Queensland. Plans for the Aquis project, which will be 13 kilometers (eight miles) north of the Great Barrier Reef gateway city of Cairns in Yorkeys Knob, include the construction of a casino, nine luxury hotels with 3,750 rooms, and one of the world's largest aquariums.  ASF Group, a Chinese-Australian investment firm listed on the Australian Securities Exchange which was joined in its bid by two state-owned Chinese companies, said its Gold Coast proposal included a waterfront eco-park and a cruise ship terminal.

Takeaway: More competition for the SE Asian gambler, good for new slot sales and we await the highly anticipated Brisbane integrated resorts licenses award as well. 


McCarran Airport Traffic - increased 1.7% in April on year-over-year basis as compared to +2.8% in March.

Takeaway: Bulls will blame the slowdown on the Easter calendar shift.  Traffic declined 0.2% YoY in April 2013.


McCarran Airport New Service - Frontier Airlines, which currently averages six round trips a day between Denver International and McCarran International airports, will add flights from Washington’s Dulles International Airport and Cleveland. Nonstop service between Washington, D.C., and Las Vegas begins Sept. 8 with four flights a week. Frontier will run those flights Mondays, Thursdays, Fridays and Sundays. Frontier’s Cleveland service will begin Sept. 11 with two flights a week, Thursdays and Sundays. Frontier will fly the routes with 168-passenger Airbus A320 twin-engine jets. Frontier’s current schedule of 39 flights a week to Las Vegas ranks it the 12th busiest carrier at McCarran. The airline flew 137,100 passengers in the first quarter of 2014.

Takeaway: We like to see expansion of long-haul service as such gamblers typically spend more time in Las Vegas as compared to short-haul service from the West Coast.

Iowa Gaming Expansion – The Iowa Racing and Gaming Commission will meet Thursday in Jefferson to visit the site of a proposed new casino, hear a formal presentation and take public comments. A decision won't be made until the commission's June 12 meeting. The proposed project would be a $40 million casino resort with restaurants, a conference center and a hotel on the north edge of Jefferson.

Takeaway: A low probability event, awarding a new license, as Iowa already has 18 commercial casinos and the IRGC recently voted down a proposed casino in Cedar Rapids due to canabalization concerns. 


Greektown Casino, Detroit – more than a year after Cleveland Cavaliers owner and Quicken Loans founder Dan Gilbert took control of the casino, the new owner plans to scale back a $150 million renovation plan to work totaling $25 million to $50 million. Greektown is the smallest of the three Detroit casinos by revenue, at 24 percent of the market.

Takeaway: A mature market with little hope for new growth, so minimizing capex makes sense. 


Lodging Transcation – Accor announces that its HotelInvest business has agreed to purchase two real-estate portfolios representing 86 and 11 hotels respectively (12,838 rooms) for a total consideration of about €900 million or approx. US$1.228 billion. The first portfolio, representing 86 hotels and 11,286 rooms across Germany (67 hotels) and the Netherlands (19 hotels) has been operated by Accor since 2007 and includes ibis (29 hotels), ibis budget (31 hotels), Mercure (17 hotels) and Novotel (9 hotels) for €722 million. The second portfolio, 11 hotels and 1,592 rooms in Switzerland, Accor has entered into exclusive negotiations with Axa Real Estate. This portfolio has been operated by Accor since 2008 and includes ibis (5 hotels), ibis budget (2 hotels), Novotel (3 hotels) and MGallery (1 hotel) for €188 million.

Takeaway:  One of the first lodging companies to adopt the asset light strategy getting more real estate intensive.   


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


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