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MCD: McLibel 2.0?

We are bumping up short MCD to the Investment Ideas list.

 

MCD: McLibel 2.0? - 1

 

MCD is under siege on three continents (America, Europe, Asia) and senior management's response to these crises will determine the future and the future profitability of this company.  Hopefully we don't see a pattern of missteps similar to those that created one of the biggest public relations nightmares in the history of McDonald's.

 

Students of McDonald's history know that the "McLibel" case was a very dark period for McDonald's Corporation.  This case was an English lawsuit for libel filed by McDonald's Corporation against environmental activists Helen Steel and David Morris over a pamphlet highly critical of the company.  The litigation, drawn out over a ten-year period, embarrassed McDonald's and caused the U.K. business to underperform for more than a decade.

 

McDonald's is currently under attack from different groups over varying issues in three key countries across three separate continents.  How management handles these issues will be critical to the future of the company.

 

  1. In the U.S., McDonald's (and other QSR chains) are under attack for poor wages and inferior food quality compared to other, more "fashion forward," restaurants.
  2. In Russia, the country's Consumer Protection Agency has filed a claim accusing the restaurant chain of violating government nutritional and safety codes in a number of its burger and ice cream products.
  3. In China, the meat supplier issue is creating serious issues in the form of availability and product quality concerns.

 

How management responds to these issues is critical to the future performance of the company, as they are not insignificant markets.  If the company's initial response to the meat supplier issue is any indication, we could be in for an extended period of underperformance.

 

China - Last Thursday, McDonald's said it is sticking with a Chinese meat provider, even after saying earlier in the week that it may have been misled regarding sales of allegedly expired meat.  The supplier is Shanghai Husi, which is owned by U.S. based OSI Group, a longtime supplier of McDonald's.  Clearly, the company's ties to its Chinese supplier run deep.  Today, however, news came out that McDonald's cannot sell its core menu items in China.  China is the last bastion of growth for McDonald's and, prior to today's news, the company was not able to meet its unit growth targets.

 

Russia - We haven't seen any official response to the Russian lawsuit from McDonald's, but how they respond will be critical.  Is McDonald's a pawn in the ever-increasing tension between the U.S. and Russia or did McDonald's bring on this pressure by shutting down its three restaurants in Crimea after Russia's annexation of the peninsula in March?  Either way, McDonald's is in a very difficult spot.  They need to settle this issue immediately and not let another legal case be played out in the press.

 

U.S. - Wages are headed higher for McDonald's in the U.S. and the company needs to get ahead of the curve.  Unfortunately, being a franchised system, the issue is in the control of the franchisees.  They won't want to pay higher wages with same-store sales and margins declining.

 

Turning back to the McLibel case, some of the leading allegations were that McDonald's:

 

  1. Wastes vast quantities of grain and water
  2. Sells unhealthy, addictive fast food
  3. Alters its food with artificial chemistry
  4. Exploits children with its advertising
  5. Is responsible for torture and murder of animals
  6. Poisons customers with contaminated meat
  7. Exploits its workers and bans unions
  8. Hides it malfeasance

 

McDonald's is a strong global brand that must protect itself against erroneous allegations.  It appears that any one of these could be made again today.  With that being said, how management proceeds with all the issues the company is currently facing will determine the financial performance of the company for the balance of the decade.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


GLPI Q2 2014 - EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

 

Q2 2014 CONSENSUS ESTIMATES

  • Total revenues:  $162 million
  • Adjusted EBITDA:  $106 million
  • FFO:  $0.62/share
  • AFFO:  $0.65/share

 

MANAGEMENT GUIDANCE

Q2 2014:

  • Total Rental Income:  $476 million with ~$418 million from PENN, ~$13 million from Casino Queen, ~$48 million to account for property taxes paid by PENN, and reduced by ~$3 million to account for non-assigned land lease payments made by PENN
  • Net Revenue:  $162.1 million
  • Adjusted EBITDA:  $106.6 million
  • Net Income:  $44.1 million
  • Real Estate Depreciation:  ~$24 million
  • Non-real estate deprecation: ~$3 million
  • Funds From Operation:  $69.4 million
  • Adjusted Funds From Operation:  $76.8 million
  • Net Income, per diluted common share: $0.39
  • AFFO, per diluted common share:  $0.65

FY 2014:

  • Net Revenue:  $630.1 million
  • Adjusted EBITDA:  $416.1 million
  • Net Income:  $177.5 million
  • Real Estate Depreciation:  ~$93 million
  • Non-real estate deprecation: ~$12 million
  • Funds From Operation:  $271.1 million
  • Adjusted Funds From Operation:  $299.7 million
  • Net Income, per diluted common share:  $1.50
  • AFFO, per diluted common share:  $2.54

 

QUESTIONS FOR MANAGEMENT

  • What is the REIT investment community missing about the GLPI story?  Why as of June 30, 2015 did only five REIT/Real Estate funds own GLPI?  Why is the REIT investment community ignoring GLPI?  What steps is GLPI taking to expand ownership by the dedicated REIT/Real Estate funds?
  • Given Steven Snyder's comments at the Goodwin Proctor tax seminar in May regarding the IRGC ruling that the not-for-profit counterpart holds the gaming license and GLPI would not pursue additional acquisitions in Iowa, why is GLPI holding talk with ISLE -- when ISLE owns three casinos and more than 20% of ISLE EBITDA is from Iowa?
  • Update on the The Meadows Race Track & Casino acquisition - targeted closing date?  Interest and potential value by selling the operator license? How much equity needed to complete this transaction?
  • Argosy Casino Sioux Falls
    • Given Iowa Supreme Court and the closure on Wednesday, July 30th, what is the timing and amounts of changes analyst should be modeling pertaining to the closure/shutdown?  Do these changes include any assumptions or residual value -- machines/tables/boat?
    • What are the costs related to the removals of the boat?
    • Will historical numbers be restated to exclude Argosy Sioux Falls?
  • Any indications Casino Queen is attempting to refinance its $43 million term loan? 
  • Discuss the current valuation gap between potential sellers and buyers of gaming assets?
  • Thoughts on diversifying tenants.  Would you consider sale/leasebacks with BYD, PNK, or even an MGM?

 

RECENT MANAGEMENT COMMENTARY

Development Pipeline

  • Mahoning Valley Race Track - Planned budget $100 million, $25.9 million expended as of 12/31/2013, and $35.5 million spent as of 03/31/2014.
  • Dayton Raceway - Planned budget $89.5 million, $26.2 million expended as of 12/31/2012, and $39.1 million spent as of 03/31/2014.

Acquisition

  • On May 14, 2014, announced an agreement to acquire The Meadows Racetrack and Casino located in Washington, Pennsylvania, a suburb of Pittsburgh, Pennsylvania, from Cannery Casino Resorts, LLC for $465 million. The purchase price, which the Company intends to fund with a combination of equity and debt, represents approximately 9 times the property's 2013 EBITDA

Rent Escalator

  • Need to wait to get out and past the end of the second quarter, if PENN performs in line with their guidance, then the 2% rent escalator would be at risk.

New York

  • GLPI may look to backstop or support an (upstate gaming) applicant from a financing perspective, but there is 60 days (application deadline) until those issues will clarify.

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NCLH Q2 2014 EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

 

Q2 2014 CONSENSUS ESTIMATES

  • Total revenues:  $798 million
  • EPS $0.57

MANAGEMENT GUIDANCE

 

NCLH Q2 2014 EARNINGS PREP - n

 

QUESTIONS FOR MANAGEMENT

  1. Visitation into Hawaii has declined in 2014. Any worries about Pride of America?

  2. Has the Caribbean pricing environment gotten worse since your Q1 earnings call?  We've been hearing a pickup in NCL promotional deals being delivered via email.

  3. Is the Caribbean weakness mainly attributed to lack of demand from North American source markets? Are international source markets for Caribbean itineraries doing better?

  4. How confident are you that Breakway will be able to maintain double digit premiums in the NY/NJ market as Quantum makes its arrival in November?

  5. As your biggest competitors look to new destination markets in 2015 and beyond, at what point would you be comfortable in deploying ships outside of North America and Europe?  

  6. Is onboard and other revenue yield reaching a peak?  It declined for the 1st time in 8 quarters in Q1.

  7. ECA impact in 2015

  8. Update on pending Genting share sell 

  9. Industry capacity growth in Europe in 2015

 

FORWARD LOOKING COMMENTARY

 

Bookings

  • Caribbean still has opportunities to improve on booking, but that is the major focus for the NY and Miami markets
  • Across the Baltic, the Canaries and the Med, all of which are significantly booked better than last year.
  • On par pretty much with Hawaii
  • Are heavily booked in the Canada and New England,
  • Had significant positive bookings every week for the last 10 weeks, which has put NCLH into a very good book position 

Onboard spend

  • Pretty solid with onboard as NCLH moves through the rest of the year.

Europe

  • Pricing across Europe is very healthy double-digits.
  • Seeing the benefits of our strategy of consistent deployment and commitment for the European markets in the form of improved pricing and occupancy as we go into the third consecutive year of our four ship seasonal deployment from Europe.

Alaska

  • Alaska is in the zone of being low single-digit positive.
  • Norwegian Sun has found its footing and is showing stronger pricing and booked position versus last year demonstrating that our strategy of keeping consistent offerings while it may include some time for awareness to grow during their introduction, results in these products being successfully absorbed by the marketplace and contributing to overall yield growth.

Hawaii

  • Hawaii is doing well

Caribbean

  • Pricing still a little behind 
  • Minimal incremental capacity in 2015

Capital Allocation

  • 3-yr $500m share repurchase program

Genting ownership sale

  • Genting is seeing that the stock prices are not where they would like it to be and are NCLH suspects, will take wait-and-see attitude on selling their shares.

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


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