Position: Long Sweden (EWD); Short Italy (EWI); Short Euro (FXE)
Conclusion: Despite the real risks for the Swedish economy to decelerate from 2010 levels (comp pressure, inflation risks, and headwinds for exporters from a stronger Kronor), we think we bought EWD at an attractive price for another quarter of favorable comps and due to the country’s relatively robust outlook versus most of its European peers. While talk from the Riksbank Governor to increase Tier 1 capital ratios of Swedish banks above their peers is alarming, we don’t think it is any more than talk.
We’ve been waiting for the right price to buy Sweden (via the etf EWD) for months, and today we got that price as Electrolux, Sandvik, Scania, and Nordea Bank dragged down the overall OMX 30 equity market (-1.4%) and the etf (-2.8%) on in-line to slightly negative earnings expectations and company concerns over a rising Kronor for exports.
Under the hood we’ve liked the fundamentals of Sweden and the Kronor for many months, especially given the volatility on continental Europe associated with its sovereign debt issues. However, and as part of our hesitation to buy Sweden, it’s important to look at the upside and downside risks governing the country’s macro landscape, especially following the estimated (and monster) annual GDP growth of +5.5% last year!
Hawkish Monetary Policy:
The Riksbank has proactively raised the benchmark repo four times since July 2010, most recently hiking 25bps in mid-December to 1.25%, in an effort to head off inflation (see chart). While CPI stands at 2.1% in DEC Y/Y, just above the Bank’s 2% target, there’s a real threat due to home price inflation.
- Swedish house prices rose for a 20th month in the quarter through December
- The average house price rose an annual 4% in the three months through December, following a 5% gain in the November quarter as reported last month according to Statistics Sweden
Given, this adds to the likelihood the Riksbank will raise again when it meets next month.
Consumer Spending Slips:
The follow-through of rate increases has equated to a squeeze on household credit and retail sales in recent months:
- Borrowing rose an annual +7.8% in December, after increasing +8.4% the previous month
- Retail sales fell -0.8% from November, when they dropped a revised -0.2%. From a year earlier, shop purchases increased +3.1%, versus a +4.6% median estimate in a Bloomberg survey of economists
The Kronor vs the Euro (SEK-EUR) has seen steady gains (up 13.6% since Feb. 2, 2010) alongside healthy growth over the last 4 quarters (see chart above) and as a flight to safety given the volatility in the EUR due to continental Europe’s sovereign debt issues. As the probability increases that the Riksbank will raise rates again, this an additional bullish catalyst for the currency.
That said, and as we saw in the commentary from Electrolux, Sandvik, and Scania today, a strong Kronor erodes export margins. With exports making up more than half of GDP this is a significant concern, and as the table below present, exporting companies contribute heavily to the holdings in the etf:
Banking Rebound vs Regulatory Drag:
Statements yesterday from Riksbank Governor Stefan Ingves in which he said that Swedish lenders should “mull imposing tighter standards than those set out by the Basel Committee and enforce the rules faster”, also weighed on the Swedish market today. Nordea Bank CEO Christian Clausen was quick to criticize the remarks due to competitiveness issues vis-à-vis European banks, and rightfully so in our opinion.
You’ll remember that the Swedish banking system is just getting back on its feet. Grave concerns arose in late 2008 and into 2009 due to its bank leverage to the Baltic states. In July 2010 the major lenders -- Nordea Bank, Svenska Handelsbanken, SEB, and Swedbank-- passed the EU stress tests with a “comfortable margin” according to the Swedish Financial Supervisory Authority, showing a core Tier 1 ratio (a measure of financial strength) in the range of 8.9% to 10.3%.
Since then, Swedbank, which return to profit in 3Q10, had a core Tier 1 capital ratio of 13.4% at the end of the 3Q, above the so-called Basel III rules for banks which mandate a 13% level, and compared with the 7% minimum set by regulators. (Basel III rules are scheduled for full implementation by 2019).
In short, Swedish lenders look to be well capitalized and cognizant that banks can’t take on the risks they did pre-Lehman, emphasizing the importance of raising tier 1 capital ratios, however not above their European peers as to make Swedish banks less competitive.
The following is a monthly look at restaurant trends, valuations, and key macroeconomic factors. For a complete look at my overview of the restaurant space for January, please click here for a pdf, or copy and paste the link into your browser: http://docs.hedgeye.com/Restaurant%20Perspectives.pdf
- Consumer stocks are underperforming in January and Restaurant stocks underperformed the S&P 500 by 180bps in January.
- Heading into what I believe will be a turbulent year for restaurant stocks from a commodity cost perspective, there is a divergence between companies that have simplified their focus and operations and those that are less focused and, therefore, more exposed.
- EAT, SBUX, COSI, and – most recently- WEN, are a few of the management teams that I think are focusing their energy in the right areas and best positioning their companies to navigate 2011.
- I still like where SBUX is going with is business model and that is good for PEET and bad for GMCR.
- I continue to believe that MCD faces serious challenges in 2011, as detailed in my Black Book released mid-January. The company has been less and less focused on its core business over the past couple of years. While that worked in the short term, boosting comps through frappes and smoothies, in 2011 I believe MCD will face serious issues with slowing sales and soft margins.
- DRI’s inflation outlook for FY 2012 is sobering and the company will likely experience margin compression in FY 2012.
QSR VALUATION THOUGHTS:
- CMG continues to maintain its premium valuation, as it has been for some time. While its food with integrity resonates with consumers, concerns are emerging about the company’s commodity exposure. Longer term its new focus on an Asian-style chain will likely be a negative, not a positive, for the stock.
- I expect GMCR’s multiple to contract as SBUX paves its own way through different channels of the coffee category.
- WEN is cheap and set to improve returns with a more focused approach now that Arby’s is on the block.
FULL SERVICE VALUATION THOUGHTS:
- EAT remains one of the cheaper names in this category from a valuation perspective and the potential upside remains significant. I expect a continued improvement in the relative fundamentals of the company on the top line as well as marked progress towards the net 400 bps of margin expansion management is targeting.
- Like it or not, weather is an issue for the group.
THE HEADWINDS FACING THE CONSUMER:
- Inflation – it’s not just in Egypt that people are fed up with high food costs.
- Unemployment – the jobs picture has been improving but at a crawl.
- Consumer sentiment – points 1 and 2 are keeping sentiment down. There is a disconnect between sentiment surveys and the SPX.
- The Government continues to support consumer spending trends, but the impact will wane as we move through 2011.
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POSITION: no position in SPY
The SP500 scaled all the way up to its new perch yesterday of 1307. That was a new closing high for this intermediate-term cycle. From here, the view gets a lot steeper. There are no immediate-term TRADE lines of downside support until 1292.
Steeper doesn’t mean this bullish bid can’t be scaled higher. As everyone knows, higher-highs are bullish, until they become lower-highs. Then again, if you use a long-term TAIL duration, we’ve been making lower-highs for 3 years. This entire debate about how much higher from here smells Japanese.
What’s fascinating to me is that if this market scales all the way up to 1340, that it will only be -14% from its all-time highs. That’s not to say it’s going there, but it definitely could. And the more expedited its ascent, the higher the probability that it comes crashing down on everyone who chases it.
For now, we have no position.
Keith R. McCullough
Chief Executive Officer
In preparation for HOT’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HOT’s Q3 earnings release/call and subsequent conferences.
- “Both business and leisure travel continue to show strength in the quarter.”
- “Trends in group business remain robust, particularly in-the-quarter, for-the-quarter bookings. In September, for example, bookings for 2010 were up 19%. As we have entered the back half of 2010, 2011 bookings are picking up nicely. Again, looking at September bookings, revenues for 2011 jumped almost 30%, driven by room-night volumes up 22% and rates up 7%.”
- “2011 group pace has improved by almost 15 points over the last six months, and is now flat.”
- “We’re also keeping a tight lid on corporate costs. Headcount is flat over 2009 and will remain flat through 2011. So despite adding new hotels, we expect SG&A spend in 2011 to be similar to 2010 levels.”
- “We expect to see strong pricing power in the industry, particularly in the gateway cities”
- 2011 commentary:
- “We expect corporate rates to be up high single-digits”
- “Group business in 2011 is also trending well, with strong volumes and steadily improving rate, and the overall trajectory of business appears to have stabilized at current levels”
- “If the current trends continue, we would expect to deliver worldwide RevPAR growth of 7% to 9% in 2011. With our demonstrated ability to control costs, we expect that this RevPAR growth will result in an EBITDA within the range of 950 to 980 million.”
- RevPAR composition: “Rate two-thirds, occupancy one-third”
- “Most of our emerging markets will be lapping some hefty growth from 2010, and we will not have events like the World Expo in Shanghai that helped China. As such, it would be reasonable to expect that the rate of growth will slow down sequentially year over year, and the growth delta between emerging and developed markets will narrow."
- “EPS range of $1.44 to $1.55"
- “Owned margins to improve 150 to 200 basis points with a focus on revenue management and continued cost control.”
- “Our vacation ownership business will be flattish, with a continued focus on cash generation.”
- “Overhead will only grow 1% to 2%”
- “I feel very comfortable that we will end the year with EBITDA of 840 to 845 million, which is at the high end of our prior guidance range of 815 to 845 million. We expect 2010 global RevPAR growth at company-operated hotels of 8% to 9% in constant dollars, also at the high end of our prior range… This implies a Q4 EBITDA range of 230 to 235 million.”
- “I want to point out that our year-over-year comparisons are muddied by a variety of factors in Q4. In our vacation ownership business, we had a large gain from securitization last year, as well as the accounting change. In the owned hotel business, we had some asset sales as you know, and some one-time items that helped our Latin American business last year… we had a termination fee last year. In SG&A, we had higher incentive compensation this year. Also we had some items moving between Q3 and Q4 this year, helping Q3 to some extent and reducing Q4.”
- “We expect global RevPAR growth at company-operated hotels in Q4 of 7% to 9% in constant dollars.”
- “We still expect to receive a 200 million-plus tax refund before the end of the year. With the refund, we expect our excess cash balance to climb to 500 million by year-end, and our net debt to be under 2.3 billion.”
In preparation for the LVS Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from LVS’s Q3 earnings release/call, subsequent conferences, and media interviews.
Post Earnings Commentary
- [Sites 5 & 6] “The bottom line is that we’re satisfied that we’re going to have enough people.”
- [Galaxy Macau] "It has about 3,300 Macanese workers they’re going to let go between January and February. We have come to an agreement with them that we are going to pick up those workers.”
- “Our competitor, Genting, believes that junket reps will be approved. I don’t know whether or not they are going to be approved. I personally do not have a confidence level high enough that says it will be approved.”
- “We are now up to about 260, 270, I believe U.S. in ADR and we are at about 85% occupancy. So I think we ought to be able to do pushing 225 to 250 million in fully ramped up room income. Now we’re getting 600, 700 tour operated rooms a day. We are getting about 600, 700 FIT rooms a day and it’s going very well. I think that the rooms by the conventions are coming in strongly and steadily.”
- “We have 650,000 room nights booked for 2011.”
- “We’re seeing, particularly on the weekends, a pick up over the last several months and we’re seeing an increase in the ADRs on the weekends. And the group business, the conventions and the trade shows will be a catalyst for the midweek occupancy and the midweek ADR to rise.”
- “The attrition rate is still something that comes in, but right on the books, it’s very, very vibrant. The rate has moved up a little bit, not a lot, in groups because it is still pulled down by the competition for the group market. But I think the group business is back.”
- “On the table games side, honestly it’s driven primarily by the Asian business anyway. Our high-end business gets more important every day to us, as a percentage mix on the table games side. On the slot side, we’re going to reduce our offer somewhat and be more judicious and hope to fill more from the cash side.”
- “We expect that they are going to submit a draft of a gaming law to the Diet, the Japanese parliament, sometime this session, which is from I think January or February through June. And then they are supposed to have a vote on that before June.”
- Diet will convoke Jan 24 and will last 150 days
Q3 Conference Call
- [The month of October] “Adjusted EBITDA on pace to grow an additional 31%....Net revenue is projected to increase 12%.”
- “The capitalized interest number is around 32 million for this quarter. It will go up probably right through the 4Q of 2011.”
- “The airport is expanding with an additional runway, but it doesn’t really do us much good because unless you get more lift into Las Vegas, U.S. Air and Southwest and whatever have cut back some of their lift into Vegas, which has caused, I believe it’s something like 800,000 less passengers this year coming into the airport….McCarran can handle more traffic. It’s just a question of getting more planes in.”
- “LV ADR is lagging. We’re probably in the 180/190 range, so we’re not getting the 200 bucks back.”
- “I think our market share will be at least equal. We are focusing on the high-end of the market, I believe more so than what Genting is. Genting is doing a very good job at the mass end, by the way, but they’re just not experienced in granting credit, and they really want junket reps, and they’re sponsoring a number of them.”
- “Gross gaming revenue (tables) reached 8.4 million per day in October.”
- “Rolling volumes have increased 182% since May to reach 116.3 million per day in October. At that rate, we will roll 42 billion annually approximately.”
- “Gross gaming revenue from our mass tables and slots increased 49% since May to reach 3.2 million per day in October.”
- “Non-rolling drop increased 21% since May to 9.6 million per day in October.”
- “Slot handle increased 165% to reach 18.3 million per day in October.”
- “The slot win per unit per day increased 43% since May to reach $517 per unit per day so far in October.”
- “Our strong belief is that the appropriate measure of our financial performance is EBITDA.”
- “I can’t see margins going much more than 60%. We’d have to have a very consistent high end of the market return every single day to get beyond 60%.”
- “EBITDA up 40% from September to October.”
- “We expect the occupancies to go significantly higher towards the end of the year. On the retail, we’re still not completely open. All the retail with a possible exception of Louis Vuitton will be open by the end of the year, and it’s starting to ramp not as well as we would have thought in the early going because the construction is going on, but it’ll basically be finished so that will be a contributor in 2011 that we think significantly.”
- “VIP is pushing 60% of total gaming income….we’re going to make sure we have enough private gaming rooms."
- “We’ve got about a couple hundred million dollars of receivables outstanding, and we’ve got about a 12% reserve against that and no significant issues to really report.”
- “Singapores at casino stands about 38%.”
- “Our expectation is that we should be building up to roughly 300,000 room nights a year on MICE business as we get ramped up. Probably ‘12 we’ll get that. Probably we’ll be lower than that in ‘11.”
- “‘12 will be a very interesting year because I think ‘12 is where the retail business will really start to move dramatically because the subway system will open that runs right into the retail area. We’re working on some other transportation mechanisms now to get people in there to drive that up as well. So I think by the time ‘12 we should be in a situation where we’re getting the maximum out of the total facility, not counting the casino, of course, which will continue to grow.”
- “I see the Plaza at the Four Seasons not equaling but starting to approach within a striking range the numbers we’re experiencing at Sands Macao.”
- [Sites 5 & 6] “We’re still looking at the end of the last quarter of ‘11 to open Phase 1.”
- “We’ve got a reserve or allowance for collection of about 42% against the gross casino accounts receivable in total. And if you take a look at that after kind of the immediate collections that come right after the end of the quarter, it’s almost 48%.”
- “We’re hoping to keep the direct business where it is. I think it’s somewhere between 25% to 30%.”
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