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Monday Mashup: DNKN, NDLS and More

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: DNKN, NDLS and More - chart1

Recent Notes

06/23/14  Monday Mashup: DRI, SBUX and More

06/24/14  DRI: Management’s Perpetual, Misguided Vision

06/25/14  Restaurant Value Spread In Unfamiliar Territory

Events This Week

No events scheduled for this week.

Chart of the Day

Feeling the squeeze? Gasoline prices are up +5.3% YoY and +10.6% YTD.

 

Monday Mashup: DNKN, NDLS and More - chart2

Recent News Flow

Monday, June 23rd

  • DFRG dismissed Ernst & Young LLP as its independent auditor.
  • RRGB is two weeks away from opening its first restaurant in Orlando, Florida.
  • BOBE named former SVP and CFO of the Brown Shoe Company, Mark Hood as CFO, effective immediately.

 

Tuesday, June 24th

  • CMG announced plans to serve more than 20 million pounds of locally grown produce in 2014, up from 15 million pounds in 2013.

 

Wednesday, June 25th                                

  • DNKN named Jeff Miller as Executive Chef and VP of Product Innovation.  Mr. Miller, who has been with Dunkin’ Brands for 11 years, will head the company’s 22-person culinary team.

 

Thursday, June 26th

  • RRGB appointed Cammie Dunaway to its Board of Directors.  Dunaway currently serves as the U.S. President and Global Chief Marketing Officer for KidZania.  Prior to KidZania, Dunaway served as Executive Vice President for Nintendo, Chief Marketing Officer for Yahoo as well as in various other roles.
  • RT CFO Michael Moore announced his retirement.  The company appointed Jill Golder as CFO, effective immediately.  Ms. Golder has served as Ruby Tuesday’s Senior Vice President of Finance since April 15, 2013.  Moore will remain with Ruby Tuesday as an advisor and help assist in Ms. Golder’s transition until his retirement in August.
  • DNKN promoted Roxanne Bensason to Vice President of International Field Marketing.  Ms. Bensason, who has been with the company for the past 12 years, will report directly to John Costello.
  • NDLS appointed Johanna Murphy to its Board of Directors and a member of its Audit Committee.  Ms. Murphy currently serves as CMO and Director of Digital for Ivanka Trump International.

 

Friday, June 27th

  • GMCR was upgraded to buy at Argus Research with a $140 PT.

Sector Performance

The XLY (+1.0%) outperformed the SPX (-0.1%) last week.  Both casual dining and quick service stocks underperformed the narrower XLY index.

 

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U.S. Macro Consumption

The Hedgeye U.S. Consumption Model continues to signal bearish, flashing red on 7 out of 12 metrics.

 

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XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

 

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Casual Dining Restaurants

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Quick Service Restaurants

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Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US

Takeaway: Portugal is in turmoil over Espirito Santo allegations. Meanwhile, the domestic yield spread continues its tailspin, shedding another 8 bps.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 19

 

Key Callouts:

 

* European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).

 

* 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 15

 

1. U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. The Global US Banks were wider by an average of 5 bps on the week while the bond guarantors, MBIA and Assured, widened by 97 and 59 bps, respectively, on the week. Mortgage insurers, MGIC and Radian, also widened on the week by 5 and 17 bps, respectively.

 

Tightened the most WoW: TRV, SLM, MMC

Widened the most WoW: MBI, AGO, MET

Tightened the most WoW: ALL, TRV, GS

Widened the most MoM: WFC, MBI, HIG

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 1

 

2. European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 2

 

3. Asian Financial CDS - Bank swaps across Asia were flat to wider last week rising an average 3 bps. Chinese banks saw the largest w/w increase, while Japanese swaps were little changed.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 17

 

4. Sovereign CDS – Sovereign swaps were generally little-changed on the  week, though Portugal was +9 bps to 154 bps in response to concerns over the probe into its largest bank, Espirito Santo, by Luxembourg's justice department. 

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 18

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 3

 

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5. High Yield (YTM) Monitor – High Yield rates rose 2.0 bps last week, ending the week at 5.32% versus 5.30% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1881.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 6

 

7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 21.2 bps this week versus last week’s print of 21.8 bps.

 

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8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 311 versus 309 the prior week. As compared with the prior month, commodity prices have increased 1.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

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9. Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 15 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 22 basis points last week, ending the week at 2.97% versus last week’s print of 2.76%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

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11. Chinese Steel – Steel prices in China fell 0.4% last week, or 13 yuan/ton, to 3124 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 1.1% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


Just Charts – Summer Swings

INVESTMENT IDEAS

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

Just Charts – Summer Swings - 1

EVENTS THIS WEEK

7/2/14 STZ Earnings Call 10:30am EST

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples fell -1.2% week-over-week versus the broader market (S&P500) down -0.1 %.  XLP is up 3.9% year-to-date versus the SPX at 6.1%.

 

Positive Divergence:  THS 4.5%; BNNY 3.0%; CAG 2.8%; TSN 2.7%; KO 1.2%

Negative Divergence:  SODA -7.9%; PM -6.9%; LO -5.6%; MNST -4.7%; NUS -3.8%

RECENT NOTES 

 

XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts – Summer Swings - 2

 

The Hedgeye U.S. Consumption Model shows 5 of the 12 U.S. Economic Indicators flashing green.

Just Charts – Summer Swings - 3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.9x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and remained unchanged at 37.1 versus the prior week

Just Charts – Summer Swings - 4

Just Charts – Summer Swings - 5

Just Charts – Summer Swings - 6

QUANTITATIVE SETUP

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD – bullish TRADE and TREND w/ TREND support = 108.55

Just Charts – Summer Swings - 7

 

DEO – bearish TRADE and TREND w/ TREND resistance = 126.86

Just Charts – Summer Swings - 8

 

KO – bullish TRADE and TREND w/ TREND support = 40.22

Just Charts – Summer Swings - 9

 

PEP – bullish TRADE and TREND w/ TREND support = 85.61

Just Charts – Summer Swings - 10

 

GIS – bearish TRADE and TREND w/ TREND resistance = 53.61

Just Charts – Summer Swings - 11

 

MDLZ – bullish TRADE and TREND w/ TREND support = 36.25

Just Charts – Summer Swings - 12

 

KMB – bullish TRADE and TREND w/ TREND support = 109.41

Just Charts – Summer Swings - 13

 

PG – bearish TRADE and TREND w/ TREND resistance = 80.40

Just Charts – Summer Swings - 14

 

MO – bullish TRADE and TREND w/ TREND support = 39.67

Just Charts – Summer Swings - 15

 

PM – bearish TRADE (88.39 resistance); bullish TREND (84.72 support)

Just Charts – Summer Swings - 166

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

LEISURE LETTER (06/30/2014)

Tickers: BYI, IGT, IKGH, LVS, PENN, PNK, CCL

COMPANY NEWS

PENN (WFMZ) withdrew its proposal for a $480M Hollywood Casino Philadelphia at 700 Packer Avenue in the City's Sports and Entertainment District, which has been pending with the Pennsylvania Gaming Control board (PGCB) since November 2012.  CEO Wilmott said, "A contributing factor in our decision to withdraw our proposal was the city of Philadelphia's vocal support for a center city casino location, despite the fact that 2/3 of the profits from our proposed casino were dedicated to the city's education and pension fund liabilities."

Takeaway:  PA is reaching saturation so the opportunity would have been small.   A positive for shareholder ROIC. 

 

BYI – unveiled its newest slot machine offering "The Magic of David Copperfield"

 

BYI – announced it cut 270 jobs as part of a reorganization effort, half of the jobs eliminated were located outside the United States. 

Takeaway:  There will be a one-time reorganization charge in the quarter.

 

BLOOM:PM – Bloomberry Resorts and Solaire Resorts and Casino unveiled its latest marketing strategy the "Billboard in the Sky" - a brightly painted, logo-adorned Air Asia Airbus A320 which will traverse the skies over Malaysia, China and South Korea

Takeaway: A creative way to advertise gaming, without really advertising gaming - similar to Southwest Airlines fleet of "Shamu" aircraft.

 

IGT – signed an agreement with DLV to install IGT systems in 50 slot halls connecting approximately 1,000 machines in locations throughout Latvia over the next two years

Takeaway:  Good systems win for IGT

 

IHG.LN – the Board of Directors approved the payment of a special dividend of $2.93 (174.9p) per share or per ADS (as applicable) to shareholders on the Register as at 18:00 BST today (30-Jun) in pounds sterling and to ADR holders on the ADR register as at 16:00 ET today, in US dollars. The dividend is payable on July 14. 

Takeaway: Curious and interesting timing of the special dividend, especially in light of the recent takeover commentary.

  

IKGH (Macau Business) says it has applied to list its shares on the main board of the Hong Kong Stock Exchange. The company announced the exchange will review the application for three days, and if the HKSE accepts IKGH's application, the HKSE will pose post additional information on the exchange’s website.

Iao Kun has VIP gaming rooms in the StarWorld, Galaxy Macau, Sands Cotai Central, City of Dreams Macau and Le Royal Arc casinos.

Takeaway: The next step in the listing by introduction. 

 

PNK – L'Auberge Casino Resort unveiled 60 refurbished suites last week with the completion of phase two of its $20-million renovation project. The renovated rooms include spruced up Luxury Rooms and the newly added Royale Suites and Marquis Suites, which offer views of the resort's golf course.  In September, L'Auberge completed renovations of 754 of its almost 1,000 rooms. 

Takeaway:  L'Auberge is preparing for increased competition as this winter will mark the opening of the new Golden Nugget Casino and Hotel immediately adjacent to L'Auberge.

 

CCL Westerdam sailing resumed (Seatrade Insider)

Holland America Line's Westerdam sailed at 10 a.m. Sunday after returning to Seattle Saturday night following a boiler room fire that was quickly put out.  No injuries were reported.  The fire broke out in one boiler room at approximately 5:15 p.m. Saturday, after Westerdam had departed at 4 p.m.  As a result, Westerdam will miss its planned call in Sitka.  Passengers will receive an on-board credit of $250 per stateroom as well as a future cruise credit equal to 25% of the cruise fare.

Takeaway:  An unfortunate event over the weekend 

INDUSTRY NEWS

Package Tours and Hotel Occupancy Rate for May 2014 (DSEC)

Visitor arrivals in package tour increased by 21% YoY to 925,000 in May 2014.  Attributable to the Labour Day holidays, visitors from Mainland China (734,000) recorded an increase of 25%, with 240,000 coming from Guangdong Province.  Visitors from Taiwan (62,000) surged by 50% and those from Hong Kong (33,000) increased by 3%; meanwhile, visitors from the Republic of Korea (27,000) decreased by 2%. 

 

There were 99 hotels and guesthouses operating at the end of May 2014, providing 28,000 guest rooms, down by 1% YoY; 5-star hotels accounted for 66% of the total supply, with 18,000 rooms.  The average length of stay of guests was 1.4 nights, up by 0.1 night YoY.  The average occupancy rate of hotels and guesthouses increased by 7% points YoY to 86%, with 4-star hotels leading at 88%. 

Takeaway:  Hotel visitation, occupancy steady

 

Okada in talks with possible partners for $2b casino (Reuters)

Okada is in talks with several listed companies as a possible local partner for its $2 billion casino project in the Philippines.  

 

New Jersey Sports Betting – the State legislature passed bills allowing sports betting at casinos and racetracks. Gov. Chris Christie now has 45 days to sign or veto the bills. They would take effect immediately upon his signature.

Takeaway:  Long shot

MACRO

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.



RELATIVE WEAKNESS IN EUROPE

Client Talking Points

USD

U.S. Dollar down for 2 straight weeks (and not bouncing this morning) following the Fed getting easier in terms of both its growth forecast and timing on rates; this is not a position for the faint of heart as #InflationAccelerating is already slowing U.S. consumption growth.  

UST 10YR

UST 10YR yield down another 7 basis points last week (-49bps year-to-date) to 2.53% and not bouncing this morning; Yield Spread (10yr – 2yr) compressed 8 basis points to +207 basis points wide; inflation slowing U.S. growth into Q3 remains our out-of-consensus call; bond market agrees.

EUROPE

EuroStoxx600 -1.8% last week and not seeing much of a bid into month-end today either; both the DAX and Italian MIB Index have broken our immediate-term TRADE lines of support; this relative weakness is new and noteworthy if it were to continue.

Asset Allocation

CASH 18% US EQUITIES 6%
INTL EQUITIES 15% COMMODITIES 22%
FIXED INCOME 24% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

DUBAI: back into crash mode, -4.5% this morning (-23% since the beginning of June)

@KeithMcCullough

QUOTE OF THE DAY

“Nobody's a natural. You work hard to get good and then work to get better. It's hard to stay on top.”

-Paul Coffey

STAT OF THE DAY

$42.6 million, the amount of money Miami Heat guard Dwyane Wage would have earned over the next two years had he not opted out of his current contract.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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