Takeaway: The Russell 2000 small cap bubble is down -8% from its all-time #bubble top on 7/7.
CALL TO ACTION
Today RHP begins the process of redeeming the convertible notes that mature this Wednesday, October 1, 2014 as well as satisfying the derivative complex set-up to offset the dilution. As result, the lower outstanding share count vs the Street should become more transparent.
We reiterate our RHP – Best Ideas Long thesis as found in our Sept 18, 2014 note "RHP: RIDING THE GROUP HORSE TO HIGHER EARNINGS". The majority of RHP’s revenues are from the group travel segment of the lodging industry. We expect that segment to outperform sentiment over the next few years leading to higher EBITDA and FFO which should boost this undervalued stock.
- The Convertible Notes were convertible through the close of business today (September 29, 2014) pursuant to the indenture.
- Concurrent with the offering of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to its common stock with counterparties affiliated with the initial purchasers of the Convertible Notes, for purposes of reducing the potential dilutive effect upon conversion of the Convertible Notes.
- Today, (prior to the end of the current quarter), the Company will draw down $229 million (assuming no change since June 30, 2014) on its corporate credit facility (revolver) and hold the proceeds as “cash” as an asset on the balance sheet.
- On Wednesday, October 1, 2014 (Q4 2014), the Company will retire/payoff the Convertible Senior Notes with the "cash" (drawn off the revolver).
- The equity share count should not increase materially despite the conversion due to the prior hedge transaction.
RHP is undervalued versus peers in our opinion. Today, RHP trades at 11x 2015 EV/EBITDA versus the peer group average of 14x 2015. RHP trades at a forecasted 2015 dividend yield of 5.5% versus 4.1% for peers. Fair value for RHP is $66-68/share based on RHP reaching 13x EV/EBITDA valuation levels next year plus the current 4.7% current dividend yield (forecasted to increase significantly over the next six months). Total return potential could exceed 40% over the next 12-18 months.
RHP is the REIT with the greatest exposure to the group segment which is where we see the most upside vis a vis Street expectation. Thus, current earnings are likely to be exceeded and dividends raised. RHP is undervalued versus its comp space and we see the potential for a total return of >40% over the next 12-18 months
Daily Trading Ranges
20 Proprietary Risk Ranges
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Takeaway: In this Black Book, we dive into everything from Dept Store current trends (survey) to what the group will look like in the next eco cycle.
Please join us Thursday, October 9th at 11:00 am ET for our Deep Dive on Department Store Fundamentals and Stocks. Relevant tickers: JCP, M, KSS, DDS, JWN, SHLD, TGT, WMT, TJX, and GPS.
Key Topics Will Include:
- What will the Department Store Landscape look like (physically and financially) when we transition into the next economic cycle?
- Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic. Who has the most risk/upside based on where we are in the economic cycle?
- Margin Sustainability: Who has the most defendable margins and levers to pull in the event of a sales downturn?
- The importance of Financial Engineering to earnings algorithms.
- Current Business Trends: Results from our detailed 1,000 consumer survey. This is the 4th iteration of the survey that we started back in 3Q of 2013
- Visitation statistics
- Dot.com and Mobile trends
- Buy Online/Pick Up in Store – does anyone really use this? Which retailers have the competitive advantage?
- Detailed category analysis – what retailers are top of mind in each category
- Who wins on price, sales, selection, and quality.
- What does the competitive matrix look like across the space
- Winners & losers from a demographic and spending vantage point
- Are department stores over or under-indexed to their target customer?
- The JCP and SHLD affect – what do more store closures mean for other names in this space
Call details to follow
Takeaway: Walmart's move is a sign of the times.
- "Walmart’s Saturday morning meetings have been a long-term fixture for the company. Once a month at 7:30 on a Saturday morning, the US retail giant’s top executives gather in an auditorium at its Bentonville headquarters. The required meetings have been described (paywall) as 'part evangelical revival, part Oscars, part Broadway show.' People bring their kids, and there’s a company cheer and awards for associates, as well as a more serious rundown of sales figures."
- "But according to a recent speech by Walmart’s SVP of change management, Celia Swanson, one of new CEO Doug McMillon’s first actions as CEO was to make those Saturday meetings optional—for the first time in the company’s history."
10-Second Hedgeye Retail Takeaway
It's been some time since Sam Walton famously wrote:
"If you don't want to work weekends you shouldn't be in retail."
Over the years, Walmart's mandatory Saturday morning meeting has morphed from a deep dive on numbers into a "dog and pony" show complete with celebrity acts. In 2008, the meetings moved from weekly to monthly. Now? Optional for all...
It may just be a sign of the times - heck even baseball, hot dogs, apple pie, and Chevrolet have become passé. But, according to the report, McMillon has taking the onus upon himself to reinvigorate an institution that has more or less become irrelevant.
The table below lists our Investment Ideas as well as our Idea Bench -- 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.
We added BLMN to the Investment Ideas list as a long in a note last Thursday. CLICK HERE to access the note.
09/22/14 Monday Mashup: PBPB, TAST and More
09/24/14 SBUX: A Well-Timed Transaction
09/25/14 BLMN: Same As It Ever Was
Events This Week
Tuesday, September 30th
DPZ TAG Fall Consumer Conference
DENN, BJRI Wells Fargo Securities Retail and Restaurants Summit
Chart of the Day
Recent News Flow
Monday, September 22nd
- JMBA announced the launch of a new line of cold-pressed juices that will initially focus on the Southern California markets with the product becoming available in Northern California by mid-October, and eventually rolling out across the Jamba system in 2015.
- THI announced it will celebrate National Coffee Week (beginning September 29th) with $1 any size coffee across select cities.
- DFRG celebrated its expansion within the D.C. market with the newest opening of its Double Eagle Steak House at CityCenterDC. This opening marks the 11th Double Eagle restaurant and the 43rd restaurant overall for DFRG.
- BOBE was upgraded to neutral from underperform at CL King.
Tuesday, September 23rd
- DRI issued an open letter to shareholders highlighting "Starboard's troubling, inconsistent, contradictory and misleading statements."
- PLKI introduced its new southern inspired Beer Can Chicken which will be available through October 25th for just $3.99.
- SBUX announced it will purchase the remaining 60.5% share of Starbucks Japan in a two-step offer process.
- LOCO opened its first restaurant in Visalia, CA.
Wednesday, September 24th
- PZZA mentioned positively at Longbow Research, reaffirming its $63 PT.
- BWLD upgraded to buy from hold at Miller Tabak with a $170 PT.
- BOBE Activist Sandell Asset Management filed an amended 13D in which it noted it has been contacted by firms interested in the food products division and real estate.
- EAT Maggiano's introduced its new "Lighter Take" menu which includes new preparations of classic, Italian dishes with at least one-third fewer calories than the original recipes.
- DRI Activist Starboard Value issued a letter to Darden shareholders in which it "condemns the current board's series of desperate tactics aimed at trying to confuse shareholders by repeating obviously false statements about Starboard's nominees and their turnaround plan for Darden."
Thursday, September 25th
- BOBE The WSJ reported six firms are interested in buying Bob Evans real estate, including Spirit Reality, American Realty Capital, Store Capital and National Retail Properties.
- JACK debuted its new late night instant win game, Jack's Muchie PeelTM.
- BLMN JP Morgan reaffirmed its overweight rating and increased its PT to $22.
- WEN introduced three new BBQ Pulled Pork offerings: the BBQ Pulled Pork Sandwich ($4.49), the BBQ Pulled Pork Cheeseburger ($4.99) and the BBQ Pulled Pork Cheese Fries ($2.99).
Friday, September 26th
- DRI ISS recommends for all twelve of Starboard's nominees for Darden, concluding that "significant board change is warranted."
The XLY (-1.6%) underperformed the SPX (-1.4%) as both casual dining and quick service stocks outperformed the XLY Index.
XLY Quantitative Setup
From a quantitative setup, the sector turned bearish on an intermediate-term TREND duration.
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