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BKW: Flame-Broiled Crawlers

We are adding BKW to our Investment Ideas list as a short.

 

BKW: Flame-Broiled Crawlers - 8 26 2014 3 00 23 PM

 

The surge in BKW's stock following the deal to buy THI makes the stock safe to short for many reasons.  Additionally, we see significant risks to the combined company once the deal is completed.  To be fair, Warren Buffett's halo is on the deal, but we have reason to believe this halo will tarnish.

 

We have several concerns with the deal, including:

  1. Levering up to pay a premium for a slow growth CDA company
  2. The lack of synergies with the transaction; in fact, costs will accelerate to jumpstart unit growth
  3. We doubt the merger will accelerate the growth of THI globally
  4. The two companies have fundamentally different views on franchising
  5. The Burger King franchisee base is weak and getting weaker by the day
  6. BKW is likely to miss 3Q14 estimates, including USA and CDA comp expectations
  7. The social media backlash, on both ends of the spectrum, to this transaction cannot be underestimated
  8. The conference call announcing the deal was far from impressive; in fact, it was rather discouraging
  9. The transaction is dilutive to current shareholders
  10. Current valuation is unwarranted

 

Our thoughts about the conference call Q&A:

Q: How much overlap is there between these two companies?

  • Planning on managing the two brands independently of one another
  • No plans to mix products or do co-branding
  • The real driver is growth -- the potential to take THI global

Hedgeye -- On the surface this appears to be a positive, but we're not buying it.  It's a matter of time before they try to combine products, especially coffee.  Remember, Seattle's Best has failed to help BKW's breakfast business.  In addition, we fail to see how merging two companies that have distinctly different views on franchising will help accelerate growth.  The fact remains that Tim Hortons hardly has any brand awareness outside Canada and select parts of the U.S.

 

Q: Tax rate of the effective company?

  • Don't expect the tax rate to change materially

Hedgeye -- Then why do the deal? At best this statement from management is disingenuous.  In Canada, the corporate rate is about 15% compared with 35% in the U.S.  More importantly, Canadian citizenship will allow the new company more opportunities to use various accounting and business “schemes” to shift profits north of the border and out of the reach of the IRS.

 

Q: What are the synergies between the two companies?  Are they quantifiable?  Timing?

  • Transaction is not about synergies, it is about growth
  • The priority is how quickly they can enter new markets and win in the U.S.
  • They will be able to leverage BKW's infrastructure in the U.S.

Hedgeye -- Again, why do the deal?  What BKW infrastructure are they referring to?  The BKW franchisee base is suffering financially and doesn't quite mesh with THI's "mom and pop" franchise model.

 

Q: Any immediate feedback from franchisees on either side?

  • Franchisees understand the purpose of the deal

Hedgeye -- The franchisees don't have a say in the deal!

 

Call or email with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: Going Nowhere

Takeaway: Average Americans' cost of living is running right around the all-time highs.

Cartoon of the Day: Going Nowhere - Middle class 08.26.2014

"[D]espite falling interest rates, not as many Americans are either able or in the mood to lever themselves up on a new home these days," wrote CEO Keith McCullough in today's Morning Newsletter. "With cost of living running right around the all-time highs, many of your median income earning neighbors are broke too."


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen'

Takeaway: We don't like this Burger King/Tim Horton's deal.

Veteran Hedgeye restaurants analyst Howard Penney is not shy about his opinion on what's going on with Burger King (BKW). He was quoted in today’s Wall Street Journal and says ‘BKW is a disaster waiting to happen thus the need to buy Tim Horton’s (THI)’

 

Here are 6 tweets which capture Penney's less-than-bullish view. 

 

6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h2

 

6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h3

 

6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h4

 

6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h5

 

You can follow Howard Penney on Twitter at @HedgeyeHWP.


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.

CASE-SHILLER DECELERATION SATURATION COMPLETE

Takeaway: Deceleration saturation complete as second derivative HPI slowed across all 20-cities…..

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. 

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - Compendium 082614

 

Today's Focus: June S&P/Case-Shiller Home Price Report & FHFA HPI

 

Key Takeaways

With July data from Corelogic in hand for almost a month already, we knew the slope and likely magnitude of the deceleration for Case-Shiller in June, but it's nice to get the official confirmation. We should get the Corelogic home price report for August either Monday or Tuesday of next week, which will be the far more important report.

 

* Home Price growth slowed for a seventh consecutive month, decelerating -130 bps sequentially in June to +8.1% YoY.  This was the third biggest month of deceleration since August of 2010 (last month and the month before that were the other two largest months). 

 

* Notably, June marked the 2nd consecutive month of negative MoM price growth - the first such occurrence since January 2012 in the seasonally-adjusted series. 

 

* As the release aptly highlights, the 2nd derivative slowdown in HPI remains discrete and broad based:  

 

"For the first time since February 2008, all cities showed lower annual rates than the previous month"

 

So, all the primary price series continue to tell a cohesive story of deceleration – one which we expect to continue through the back half of the year. 

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - CS 20 City YoY NSA TTM

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - CS SA MoM

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - CS Index Weight vs YoY HPI Scatter May vs June

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - Pending vs HPI 18 mo lag

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - CS NSA index LT

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - CS NSA YoY LT

 

 

Bottom Line:

Housing-related equities follow the path of HPI. So long as HPI is decelerating, housing equities will move sideways to lower. We can forecast HPI's path by looking at demand trends on a 12-18 month lead/lag basis. Our expectation is that prices continue to decelerate throughout 2H14 and potentially into 1H15.

 

FHFA HPI

The FHFA HPI for June showed home prices decelerated a further -10bps sequentially to +5.2% YoY from 5.3% in May. It's worth noting that the May growth rate was downwardly revised from the previously reported +5.5%.  

 

CASE-SHILLER DECELERATION SATURATION COMPLETE - FHFA NSA YoY   TTM 

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake



Expert Call: Coffee Outlook in 2015 and Beyond

On Thursday, August 21st, the Hedgeye Macro Team hosted a call with Judith Ganes-Chase, founder and president of J. Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001. A replay link to the call is included below with a brief summary:

 

Call Replay

 

Judy acknowledged that Brazil has a cyclical pattern of coffee production (one year up, one year down). However the scale of Brazil’s shortfall in the coming years will be unprecedented: She emphasized that this is the first time we are looking at a two-year production deficit.

Judy proceeded to outline three unusual weather scenarios that occurred earlier this year:

  1. Late Winter Frost: Brazilian winter (November-December) mild frost lowered crop quality
  2. Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
  3. Heavy Rainfall: Late timing of heavy rainfall knocked flowers off trees, reducing the available volume for harvest
  • In her prediction prices could easily move much higher: Brazil will not produce enough volume in 2015-2016 to meet the global market demand for Arabica coffee.
  • Consensus expected 53-64 million bags of Arabica to be produced, but less than 46 million bags will come out of Brazil this year.  
  • Dire outlook into next year: Next year aggregate demand is expected to be around 34 million bags. However due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.
  • Nobody to pick-up the slack: Not enough capacity from other countries to cover the expected crop shortage of Arabica coffee in Brazil.
  • How High Can Prices Go?: $2.75 to above $4.00/lb. There will likely be a spike in prices for Arabica, and a higher basis for other grades of coffee. We can expect some read-through after the assessment of the third or fourth bloom in the coming weeks.

 

*h/t to The Macro Team's Ben Ryan for his work on this topic.

 

Feel free to reach out with additional questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


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 78.63%
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