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MONDAY MASHUP: MCD, YUM 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: MCD, YUM AND MORE - 1

 

YUM: We removed long YUM from our Investment Ideas list in part due to the recent food scandal in China and its implications on the company's ability to hit its current full-year targets, which we now fear may be too aggressive.  We ran through our thoughts in a recent note below.

 

MCD: We added short MCD to our Investment Ideas list following the company's lackluster 2Q14 results.  We believe the management's current "reset plan" will prove inadequate and the company will be forced to undertake a major restructuring in 2015.  We ran through our thoughts in a recent note below.

Recent Notes

07/21/14 MONDAY MASHUP: EARNINGS KICKOFF

07/21/14 CMG CONSUMER SURVEY: DOES CMG HAVE PRICING FLEXIBILITY?

07/21/14 DFRG: THOUGHTS INTO THE PRINT

07/21/14 CMG: SIMPLY INCREDIBLE

07/22/14 INFLATED MULTIPLE DEFLATING

07/22/14 MCD: IN NEED OF A MAJOR RESTRUCTURING

07/23/14 YUM: LOSING FAITH

07/24/14 BLMN: 2Q ESTIMATES ARE TOO HIGH

Events This Week

Monday, July 28th

  • DENN earnings call 4:30pm EST

Tuesday, July 29th

  • DIN earnings call 11:00am EST
  • RT earnings call 4:15pm EST
  • BWLD earnings call 5:00pm EST

Wednesday, July 30th

  • PNRA earnings call 8:30am EST
  • DAVE earnings call 4:30pm EST

Thursday, July 31st

  • BAGL earnings call 4:30pm EST
  • BBRG earnings call 5:00pm EST

Friday, August 1st

  • BKW earnings call 8:30am EST
  • RUTH earnings call 8:30am EST

Chart of the Day

MONDAY MASHUP: MCD, YUM AND MORE - chart2

Recent News Flow

Monday, July 21st

  • No news

Tuesday, July 22nd

  • SBUX Nikkei reported that Starbucks has plans to more aggressively open stores (an additional ~260 over the next three years) in Japan, shifting its focus to the suburbs.

Wednesday, July 23rd

  • MCD was upgraded to buy at LBBW with a $104 PT.
  • MCD was downgraded to equal-weight at Stephens with a $100 PT.
  • MCD was downgraded to underperform at CLSA with a $101 PT.
  • MCD was downgraded to neutral at RW Baird with a $98 PT.
  • MCD was downgraded to neutral at Sterne Agee.
  • EAT was downgraded to sector perform at RBC Capital with a $49 PT.
  • BOBE detailed the qualifications of its Board nominees in a letter to shareholders.

Thursday, July 24th

  • WEN named Brandon Solano Senior VP of Marketing. Prior to joining Wendy's, Solano held various roles at Domino's, The Hershey Company, Procter & Gamble, the Kellogg Company and Newell Rubbermaid.
  • DRI Starboard Value filed a complaint against Darden, seeking an order to force the company to hand over certain books and records related to the company's sale of Red Lobster to Golden Gate Capital.

Friday, July 25th

  • LOCO El Pollo Loco IPO (originally priced at $15.00) opened at $19.00 on the Nasdaq. It ended the day trading at $24.03.
  • CMG detailed plans for its Cultivate Dallas-Ft. Worth Festival, which will include cooking demonstrations, Kids' Zone games, other activities and live music headlined by Amos Lee and O.A.R.

Sector Performance

The XLY (-1.0%) underperformed the SPX (+0.0%).  In aggregate, both casual dining stocks (-0.6%) and quick service stocks (+0.7%) outperformed the XLY Index. 

 

MONDAY MASHUP: MCD, YUM AND MORE - chart3

MONDAY MASHUP: MCD, YUM AND MORE - chart4

Consumption

The Hedgeye U.S. Consumption Model continues to signal bullish, with 7 out of 12 metrics flashing green.

 

MONDAY MASHUP: MCD, YUM AND MORE - chart5

XLY Quantitative Setup

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

 

MONDAY MASHUP: MCD, YUM AND MORE - chart6

Casual Dining Restaurants

MONDAY MASHUP: MCD, YUM AND MORE - chart7

MONDAY MASHUP: MCD, YUM AND MORE - chart8

Quick Service Restaurants

MONDAY MASHUP: MCD, YUM AND MORE - chart9

MONDAY MASHUP: MCD, YUM AND MORE - 10

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


SINGAPORE: CHINESE VISITATION FREEFALL

Visitation from mainland China contributing to drop in overall visitation to Singapore.


 

Anyone predicting a 40% to 50% drop in total Mainland visitation?  How about eight straight months of YoY declines in Mainland visitors?  Uneasiness over the tragic Malaysian airline 370 disappearance filled with Chinese nationals on March 8 no doubt contributed to the steep decline.  The number of Mainland Chinese on Malaysia/Singapore tour destination groups is way down since the incident.  However, weakness in Mainland visitation had actually started before the incident.  Mainland Chinese had been the 2nd largest visitors to Singapore - Malaysians overtook them in May 2014.  Overall visitation has fallen for three straight months, despite growth from Indonesia which continues to account for the most visitors to Singapore.

 

Genting will report its earnings in the next few weeks and we will likely see weak VIP volumes consistent with LVS and Marina Bay Sands.  Market VIP volumes declined in both Q4 and Q1.  Genting mentioned on its 1Q 2014 conference call that they had not seen much impact from the Malaysia/Korea incidents. 

 

Not surprisingly, our regressions show that visitation is a statistically significantly variable in driving gaming revenue.

 

SINGAPORE: CHINESE VISITATION FREEFALL - gda


PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING

Takeaway: June pending home sales fell 1.1% m/m, and are down -7.2% year-over-year. The trend in housing data continues to soften.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

The table below has a lot of red on it. The only holdouts remain builder confidence - increasingly at odds with construction activity - and Existing Home Sales - a lagging indicator.

 

PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING - Compendium 072814

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table above represents the monthly average as opposed to the most recent weekly data point.

 

 

Today's Focus: June Pending Home Sales Index

The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of June.

 

Big picture, PHS drops 1.1% (not huge), but as we’ve noted, with cash sales still elevated and the regulation-catalyzed shift in the origination channel ongoing, the truth is probably somewhere in between PHS and Purchase apps. But with Purchase demand sliding further in July, New Home Sales flagging and HPI in full retreat, the broader trend in housing remains one of ongoing softness.

 

Pending Home Sales fell by 1.1% month-over-month to an index level of 102.7 (vs 103.8 in May). For reference, an index value of 100 corresponds to the average level of contract activity in the year 2001. While the sequential decline wasn't especially large at -1.1%, it marks a continuation of the negative year-over-year trends, falling -7.2%. Moreover, it reverses three positive monthly prints in a row. Consider that at this time last year, Pending Home Sales were growing at a rate of +12% y/y and today they're shrinking at -7%. 

 

Geographically, Northeast/South were worse sequentially, West/Midwest better MoM, but all regions remain negative on a YoY basis. 

 

 

PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING - PHS vs Purchase Apps

 

PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING - PHS Index   YoY TTM

 

PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING - PHS LT

 

PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING - PHS Regional June

 

PENDING HOME SALES DROP, ADDING TO THE SEA OF RED THAT IS HOUSING - PHS vs Case Shiller 18mo lag 

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake


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European Banking Monitor: Risk Premiums Tick Higher in Russia

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 - Russian bank, Sberbank, continued to see its swaps widen (+18 bps to 283 bps). Outside of Russia, however, there was slight tightening across Europe. The average EU bank tightened 2 bps on the week.

 

European Banking Monitor: Risk Premiums Tick Higher in Russia - chart 1 European Financials CDS

 

Sovereign CDS – Sovereign swaps tightened an average of 3 bps over the week. Portuguese swaps tightened the most, -11 bps, with Spain next at -3 bps. Swaps in the US were unchanged at 16 bps.

 

European Banking Monitor: Risk Premiums Tick Higher in Russia - chart 2 sovereign CDS

 

European Banking Monitor: Risk Premiums Tick Higher in Russia - chart 3 sovereign CDS

 

European Banking Monitor: Risk Premiums Tick Higher in Russia - chart 4 sovereign CDS

 

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 widened by 1 bps to 14 bps.

 

European Banking Monitor: Risk Premiums Tick Higher in Russia - chart 5 euribor OIS spread

 

Matthew Hedrick 

Associate

 

Ben Ryan

Analyst

 

 



MACAU ON TRACK FOR ANOTHER NEGATIVE GROWTH MONTH

A down low to mid single digit month is in the cards for July

 

 

Table revenue averaged HK$885 million per day in the 4th week of the month, down 11% from the comparable week of 2013.  We are hearing that some properties (Galaxy, MGM, MPEL) may have experienced lower than normal hold over the past 7-14 days.  Peninsula properties was hit particularly hard by low hold.  Mass remains strong although we think June's deceleration was not an anomaly.  

 

With 4 days left in the month, we expect July GGR to fall low to mid-single digits YoY.

 

In terms of market share, Wynn, LVS, and Galaxy are leading the way when compared to recent trend.  Indeed, Galaxy is the only Macau stock we like on the long side currently.  MPEL and MGM are both tracking below recent trend.

 

As for the upcoming Cotai projects, we continue to believe Galaxy's Phase 2 expansion may be the only new property to open in 2015.  Parisian (LVS) construction remains stalled while Macau Studio City's (MPEL) construction timetable may also suggest an early 2016 opening.  Parisian remains stalled while Sand China Limited awaits a full construction permit.  Historically, we understand operators began construction after filing for permits but prior to actual award of such permits.

 

MACAU ON TRACK FOR ANOTHER NEGATIVE GROWTH MONTH - 1

 

MACAU ON TRACK FOR ANOTHER NEGATIVE GROWTH MONTH - 2


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20 Proprietary Risk Ranges

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