Takeaway: If all that mattered to US Consumers was gas prices (it's only 6.4% of median consumer budget) all of those rosy “surveys” would be right.
Takeaway: OIL remains in a BEARISH Set-Up without a near-term catalyst to put in a hard support level.
In three recent notes, we highlighted why oil had more downside pressure:
- October 16th: OIL HAS FURTHER DOWNSIDE BEFORE THE BOTTOM
TAKEAWAY: “The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves”
- October 23rd : OPEC's NEXT MOVE
TAKEAWAY: “A production cut from OPEC near-term is unlikely, especially with new competition threatening to take global market share.”
- “Most analysis has underestimated technological advancement in production and recovery efficiency
- Model-driven analysis in this space anchors on old information, holding rapidly changing variables static, rather than leaning on real-time, data-driven facts
The biggest mistake in consensus analysis is that it does not accurately weigh each production area within a formation. It uses a gross average for each area within a formation with each area equally weighted.
The lowest cost areas are by far the largest producers. For example McKenzie County, ND in Bakken makes up almost 1/3rd of the formation's production and is by far the lowest cost area with a break-even price in the $20-$30 per barrel range.”
WTI Crude Oil is BEARISH on both a TREND and TAIL duration:
Oil would have to retrace and move above its intermediate and longer-term resistance levels for our model-driven process to shake its bearish bias over those durations.
TRADE (3 Weeks or Less) Risk Range: $76.43-$80.51
TREND (3 Months or Less) Resistance: $91.67
TAIL (3 Years or Less): $96.05
With the domestic economy slowing and deflation taking hold (#QUAD4 set-up), monetary policy out of the ECB and BOJ continue to provide support for lower oil prices.
Both WTI and BRENT moved out of red territory this morning after marginally bullish U.S. inventory data from the Department of Energy and news of a pipeline explosion in Saudi Arabia. While the weekly inventory data is always a catalyst for intraday volatility on the number, we disregard the weekly comps until we see an extended sequential trend in the time series.
Very simply, we continue to believe supply cuts near-term will disappoint to support current price levels.
- The November 27th OPEC meeting is unlikely to bring news of a collective supply cut (the aforementioned note from October 23rd explains this argument in more detail)
- Because of the 1) Upfront Capital Commitment for many projects, 2) long-term contractual commitments, and 3) the lag for daily mark-to-market losses to become real, booked reported losses production will continue until at these levels or lower over the intermediate-term
Please reach out with any comments or questions as we continue to comment on this topic.
Takeaway: Hedgeye restaurants sector head Howard Penney added Chuy's (CHUY) to our Best Ideas list as a short on 10/28. CHUY is down over -30% today.
Editor's note: This report was originally published October 28, 2014 at 06:09 in Restaurants. CHUY is down over -30% since Penney made this short call.
We’ve covered the majority of our shorts in the casual dining space, but remain bearish on a select few stocks. Today, we’re adding one of these names, CHUY, to the Hedgeye Best Ideas list as a short.
Three Key Points:
- In addition to being phonetically challenging, the Chuy’s brand is having difficult generating awareness is new markets. The street is assuming that other states will be able to produce the same levels of revenues and returns generated in its core market (Texas) as it pursues its nationwide expansion plans.
- The issues associated with a disappointing 2013 class of restaurants are not a one quarter issue. In fact, AUVs have declined every single quarter since 4Q12, a trend we believe will persist for the balance of 2015. The concept has already proven it doesn’t travel well, suggesting growth expectations are being overvalued in the marketplace today. Considering an onslaught of new, underperforming restaurants, the cost structure of the company is deleveraging. This, coupled with increasing food and labor costs, likely means that more margin deterioration is on the way – precisely what the street is missing.
- Trading at 33x consensus NTM EPS, CHUY is currently one of the most expensive publicly traded casual dining stocks. The company has maintained a premium valuation despite declining AUVs, returns and consensus EPS estimates. Furthermore, we believe 2014 and 2015 earnings estimates are too high, which would imply this 33x multiple is closer to 39x by our estimates. We see 30-40% downside in this name and believe 3Q14 earnings will be the catalyst the shorts are looking for.
CHUY has been on our Long Bench for the majority of 2014, until recently when we spotted several disconnects between the street’s expectations and reality. For this reason, we believe the current issues the company faces will take longer to correct than most are giving them credit for. At 39x NTM EPS, we believe there are too many risks in the current business, and the future of the business, to support such a multiple. Importantly, we believe 3Q14 earnings will be the downside catalyst shorts are hoping for.
Our short thesis focuses on the following:
- Disappointing new unit productivity
- Cash burn necessitates the current new unit growth rate
- Rampant support from the biased bulls (read: high expectations, aggressive estimates)
- Significant insider selling
- Strong sell-side sentiment and unjustified premium multiple
- Significant food inflation (dairy, beef, avocados, produce)
- Overly optimistic consensus food and labor cost assumptions in 2H14
- A lack of leverage in the business model considering higher year-over-year G&A, D&A and pre-opening spend
- Aggressive 2H14 and 2015 EPS estimates
- Approximately 30-40% downside to the name
We’re in the early stages of this earnings season and, so far, we’ve seen bigger casual dining chains posting slightly stronger sales trends than a year ago. While this trend is important to consider, some of this sales growth is coming at a significant cost to margins. To that extent, Wyman Roberts, CEO of Brinker, recently said on the company’s earnings call: “If you look at NPD numbers 12 months rolling August, the category hit the highest deal rate that it’s ever hit, and some players in there are reaching some pretty aggressive numbers.”
So while gas prices may be helping the macro picture, it’s undoubtedly difficult to gauge the impact that increased discounting is having on several players in the industry. What we do know, however, is that discounting is never good for margins.
Chuy’s looks to be one of the promising companies that can beat on the top-line, however, we suspect it will miss on margins and earnings. The bulls on CHUY will likely point to stronger industry trends and the unexpected price increase management enacted sometime in September (we believe) to help mitigate the margin pressure the company is facing. While both of these may likely occurred in the quarter, it will not be enough to save it.
The underperformance of new units, in addition to lower margins, puts the company in a difficult spot, increasing the need for the company to tap the capital market in order to deliver on aggressive unit growth plans. Over the past 12 months, capital spending has grown by 29%, while the cash burn has more than doubled to $12 million.
From a sentiment standpoint, one issue of concern on the short side is the 18% of short interest. The average casual dining chain is running closer to 9.8%, so Chuy’s issues are fairly widely known. Given the massive declines we’ve seen in restaurant stocks this year (with higher short interest) and the fact that insiders have been selling shares faster than gazelles, we believe the short side is a much better place to be.
We look forward to sharing more with you on the call.
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Takeaway: Mass and VIP volume well below expectations. Premium Mass table conversions to Direct VIP only partly to blame for the Mass disappointment.
October numbers look much worse than previously thought.
Please see our note: http://docs.hedgeye.com/HE_Macau_OctDetail_11.5.14.pdf
There are more than five reasons, but we will start with these.
S.E.C. Subpoena: In a Halloween 10-Q filing, CAT disclosed an S.E.C. subpoena from September 10, 2014 saying “…SEC issued to Caterpillar a subpoena seeking information concerning the Company’s accounting for the goodwill relating to its acquisition of Bucyrus International Inc. in 2011 and related matters. The Company is cooperating with the SEC regarding this subpoena and its ongoing investigation. We currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operation, financial position or liquidity.” We reviewed this accounting issue in the summer of 2013 CAT Short Review: Short Thesis, Long Tail: Replay: CLICK HERE, Materials: CLICK HERE. Investors love S.E.C. subpoenas and potential restatements.
Oil Price Decline: Oil & Gas is a large, high margin end-market for CAT. After the collapse in mining equipment demand, CAT management directed attention away from Resource Industries and toward Energy & Transportation. We continue to think that will prove an error. On their earnings call, CAT commented that “the feedback we've been getting that say, mid-$80s - say $80 to $90, somewhere in there on a sustained basis, certainly will take the really agitated top off of it. …. I think if you'd see low $70s on a sustained basis there would be a chill across the market. Markets are closer to the “chill” level now and time will tell if it is on a “sustained basis”. Still, it sets up what are likely to be tough comps for E&T in 2015, which already had tough comps elsewhere. Our recent call on tight oil suggests the chill may not thaw soon.
Mining Can Get Worse: Mining capital spending may be at or near a bottom, but results from Resource Industries can get worse. We expect pricing pressure, which was mentioned in the 3Q 2014 earnings press release, to persist. Orders in revenue likely reflect better pricing than those backlogged in today’s weaker market. With mined commodity prices continuing to see pressure (e.g seaborne iron ore under $80/t) and MATS rules set to impact coal in 2015, idled equipment may well be parted out or resold/repurposed. CAT Financial may be impacted if used equipment prices decline, potentially exposing the receivables portfolio to losses. As we understand it, not all of CAT’s mining exposure is categorized under the “Mining” section of CAT Financials disclosures, as much of it is presented by geographic region.
Tier IV Pre-Buy: While the locomotive pre-buy ahead of new emissions regulations was largely telegraphed and quantified at “less than 2% impact on Energy and Transportation” next year, the rest of the Tier IV impact was not. We expect to see an impact on larger gensets and other very large engines in 2015.
Inflated 2015 Estimates: CAT hasn’t guided revenues conservatively in recent years, with the 2014 top line mid-point staying constant since last October. Given the evaporation of Resource Industries, likely pressure on Energy & Transportation (Tier IV, Lower Oil), and tough comps in Construction Industries (dealer inventory build, record margins), flat revenue growth seems reasonable, and perhaps aggressive, in 1H 2015. The street lowered 2015 sales estimates a bit following the guidance, but remains above guidance (consensus at ~$56.9 bil vs. guide of ~$55 bil). EPS are expected to grow to an adjusted $7.00 from an estimated $6.50 in 2014. By our initial estimates, CAT would have to buy in a huge amount of stock to get there.
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