The Yum! Brands press release this morning raising guidance combined with the list of presenters at this week’s annual investor meeting tells us that Yum!, once again, is going to be talking growth. I like to think of it as the global “white space” opportunity. Yes, I’m taking a cheap shot at the bull investment case for Dunkin’ Brands, because DNKN is being propped up by a very weak case for its “opportunity” in the US. Dunkin’ Brands is a global company but not to the extent of Yum!, McDonald’s or Starbucks. Yum! Brands’ growth profile and sustainability outlook are superior to those of Dunkin’ Brands yet, on an EV/EBITDA NTM basis, it trades at 11x versus DNKN at 14.5x.
Yum! Brands’ theme for this week’s investor meeting is, “On the Ground Floor of Global Growth…China and a Whole Lot More.” With respect for 2012, there is no change in the company’s earnings per share growth of at least 10%. The familiar refrain of “opportunity to dramatically improve performance” is becoming the motto of the US Division. While the US Division has been a disappointment for investors over the past five years or so, it is becoming less relevant over time. The company has already reached its target of a 3:1 international operating profit-to-US operating profit ratio by 2015 albeit due to the shrinking of US profits rather than the growth of the international profitability.
Below are some of the components of today’s updated guidance from the company:
Outlook – CHINA - operating profit growth of 15%.
- Double-digit units growth
- System sales growth of at least 13%
- Same-store sales growth of at least 5%
- Operating (G&A) leverage
Outlook - Yum! Restaurants International - operating profit growth of 10%.
- New unit development of 3 to 4%
- System sales growth of 6%
- Same-store sales growth of at least 2 to 3%
- Margin improvement and G&A leverage
HEDGEYE: If we get an update on China’s SSS in 4Q11, it will provide some cushion against those that are negative on the impact of China’s slowing economic growth impacting trends at KFC China.
Outlook - U.S. operating profit growth of 5%.
HEDGEYE: The million dollar question is, “how do they get to this target?” While its might be the 11th straight years of hitting the 10% earnings goal, the U.S. has not been a great help to the company in that regard.
The following is a list of presenters that will be speaking at the YUM investor conference in NYC on Wednesday:
David Novak, Chairman & CEO
HEDGEYE: Mr. Novak will give the Yum! cheer and another glowing overview of the company and its “white space” opportunity. My guess is that he will touch briefly on the USA, but the only real news in the domestic business is that Pizza Hut is seeing some real success in November from the introduction of the “Big Dinner Box” promotion.
Rick Carucci, CFO
HEDGEYE: Mr. Carucci will go through the numbers which, we believe, will likely be impressive.
Mark Chu, President & COO - Yum! China
Angela Loh, Chief Marketing Officer - Yum! China
Lily Hsieh, CFO - Yum! China
HEDGEYE: China defines YUM and the company has the numbers to prove it. If there is any news from China on Wednesday it will be that SSS trends in 4Q11 are “VERY” strong
Micky Pant, CEO – YRI
Martin Shuker, GM - KFC UK
Ivan Schofield, GM - KFC France
HEDGEYE: YRI represents a significant growth opportunity for YUM, 2012 will also have a restructuring componient that will incrementally help margin and profits in 2012.
Niren Chaudhary, President - Yum! India
HEDGEYE: Mr. Chaudhary is the current “rock star” at YUM with his recent promotion to President of Yum! India, a role in which he will be reporting directly to Mr. Novak. This message from India will be yet another “white space” opportunity for YUM and the growth rate is accelerating.
Greg Creed, CEO - Taco Bell US
HEDGEYE: I don’t want to minimize the importance of Taco Bell, but unless they give us a story about improving “the core” first, all the other initiatives are just noise.
A modest gain in Strip revenues expected despite tough slot and table hold comparisons.
Based on the latest airport/taxi data and assuming normal slot and table hold percentages, our predictive model estimates Strip revenues grew 1-3% in October. McCarran Airport October passenger traffic rose 4.5% YoY, while Nevada October taxi trips increased 8.2% YoY.
Volume growth was likely better than our revenue projection due to tough hold comparisons. We project total gaming volume ex Baccarat in October grew 7% YoY. As we mentioned in, “YOU TALKIN’ TO ME” (11/22/11), total gaming volume ex Baccarat has a statistically significant relationship with taxi trips. October table win growth, however, would only be in the low digits because of a difficult hold comparison last October.
Going forward, November faces a difficult slot comp since hold was abnormally high last year. The table business is up against low volumes last year but with normal hold.
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Growth may slow down to 15-20%
Average daily table revenues were only HK$668 million in the first 4 days of December versus HK$717 million for November. While early, we are currently projecting HK$21-22 billion in total GGR for December which would represent a YoY increase of only 15-20%. Remember that December faces a difficult hold comparison from last year.
The first 4 days’ revenues are a little disappointing especially considering that 2 out of the 4 days were weekend days. However, it’s only 4 days and we are hearing that Wynn is holding low so far in December. We also expect Wynn to continue to see volume share declines. LVS continues to make headway with its new junket program with share jumping 400bps from recent trend. MGM was the other standout so far in December.
VIP hold played a role but Mass was very strong.
November gross gaming revenues (GGR) increased 32% YoY to $2.88BN. Despite facing a difficult YoY hold comparison, November 2011 was an even luckier month which gave revenues a slight boost. Total direct play this month was 6.4% of the market, compared to 7.3% last year. The total market held at 3.13% vs. 3.08% in November 2010. Accounting for direct play and theoretical hold of 2.85% in both months, November revenues would have increased 31% YoY. Had hold been normal, GGR would've been 5% lower. High margin Mass business increased 40%, in-line with the 40% growth we’ve seen during the last 6 months.
Some other observations include:
- Despite the drop in market share, MPEL’s Rolling Chip volume was very strong and its Mass business gained share. MPEL posted its lowest market share since December 2009 but Mass share in November was the company’s highest ever. VIP hold percentage was the lowest among the operators which more than offset VIP volume that was in-line with recent trend. From a profitability perspective, high margin Mass is where it's at and MPEL continues to knock the cover off the ball.
- Wynn and LVS held the highest in the market in November
- Wynn’s VIP Rolling Chip volume share was its lowest ever at 12.2% while its mass share was the lowest in over a year. We think the VIP trend continues unless Wynn improves its junket offering. There’s not much they can do in the Mass space as growth continues to be concentrated on Cotai.
- LVS generated its lowest Mass share ever. Their junket push, however, appears to be paying dividends as Rolling Chip volume share climbed back to pre-Galaxy Macau levels owing to the opening of the Neptune tables and more aggressive junket credit. We’ll see how this junket for direct/Mass tradeoff works out from a profitability standpoint.
As we approach the next 2 months of the year, we expect YoY growth rates to decelerate, partly due to difficult hold comparisons and trends we are seeing in our sequential monthly projections (see “MACAU: EYE ON NOVEMBER” published on 11/2/11). Hold rates for December 2010 and January 2011 were approximately 3.15% and 3.10%, respectively. Normal hold levels would alone shave roughly 10% off YoY growth.
Y-o-Y Table Revenue Observations
Total table revenues grew 33% YoY this month, on top of 43% growth last November. November Mass revs rose 40%; VIP revs grew 30%; and Junket RC rose 30%.
Table revenues grew 35% YoY, showing a huge lift compared to recent trends due to the opening of junket rooms at Four Seasons. While the Venetian saw improved results, junket RC volume actually decreased slightly YoY. As we’ve written in several past notes, including last month’s review, we’ve heard that LVS has been extending additional junket credit and 2 new junkets are coming online at the Four Seasons this month. Neptune opened its rooms on November 1st.
- Sands was up 9% YoY. While hold was low, the comparison from November 2010 was also easy.
- Mass was up 17%
- VIP was up 4%. Sands held poorly in November. Assuming 15% direct play (in-line with 3Q11), hold was just 2.43% vs. 2.45% last November assuming the same level of direct play (also in-line with 4Q10)
- Junket RC was up 4%
- Venetian was up 24% YoY, driven by a Mass increase of 18% and a 27% increase in VIP
- Junket VIP RC fell slightly, down 1%
- Assuming 23% direct play in the quarter (just slightly below the 24% we saw in 3Q11), hold was 3.5% compared to 2.8% hold in November 2010 assuming 19% direct play (in-line with 4Q10)
- Four Seasons grew 227% YoY, driven by a tripling (297%) of YoY VIP revenue and to a much lesser extent, 53% increase in Mass revenues.
- Junket VIP RC increased 2.5x YoY
- Four Seasons is clearly seeing a benefit from LVS’s recent initiatives plus an easy YoY hold comparison. If we assume that monthly direct play volume was in the neighborhood of recent trends - ~550MM, that implies a direct play percentage of 23% and a hold rate of 2.94%. In comparison, if November 2010 direct play was in-line with the rest of 4Q10 at 54% then hold was just 1.35%.
Wynn table revenues were up just 4%, exhibiting the slowest growth of the 6 concessionaires, despite high hold. As we’ve written about in “Macau Observations” on 11/16, Wynn is in a bit of pickle given LVS’s recent initiatives, the general continued shifts of play to Cotai, and the general constraints at the property.
- Mass was up 21% and VIP increased 1%
- Junket RC decreased 5% - the first YoY decrease since August 2009
- Assuming 10% of total VIP play was direct (in-line with 3Q11), we estimate that hold was 3.6% compared to 3.4% last year (assuming 11% direct play – in-line with 4Q10)
Table revenues grew 15% - driven primarily by 72% growth in Mass and 4% growth in VIP
- Altira revenues declined 7%, due to a 11% decline in VIP somewhat moderated by a 41% lift in Mass growth. VIP revenues were negatively impacted by lower than normal hold and difficult comparisons.
- VIP RC increased 17%
- We estimate that hold was 2.7% vs. 3.6% last year (direct play is not material at Altira)
- CoD table revenue was up 30%, driven by 79% growth in Mass and 17% growth in VIP – negatively impacted by low hold and a difficult hold comparison
- Junket VIP RC grew 43%
- Assuming a 15.5% direct play level, hold was 2.7% in November compared to 3.1% last year
Revs grew 15% in-line with October growth
- Mass was up 77% and VIP was up 10%
- Junket RC was up 12%
Table revenues continued its streak of triple-digit gains, +166%; Mass soared 272%, while VIP gained 152%
- StarWorld table revenues grew 38%
- Mass grew 45% and VIP grew 37%, helped by high hold and an easy comp
- Junket RC grew 28%
- Hold was high at 3.31% compared to normal hold of 2.85% hold last November
- Galaxy Macau's total table revenues were $282MM, 17% lower than October’s seasonal high but 17% higher than September’s
- Mass table of $56MM, down $3MM from October but up $10MM from September
- VIP table revenue of $226MM, a 19% MoM decrease, despite high hold of 3.5% compared to 3.4% in October.
- RC volume of $6.5BN compared to $8.3BN in October, $7BN in September and $7.9BN in August
Table revenues increased 25% YoY, helped by high hold in the quarter
- Mass revenue growth was 10%, while VIP grew 28%
- Junket RC increased 41%
- Assuming a direct play level of 8%, we estimate that hold was 3.1% this month vs. 3.3% in November 2010, assuming direct play of 11%
Sequential Market Share
LVS was the big share gainer in November. Share increased 1.6% sequentially to 15.6%. This compares to 6 month trailing market share of 14.7% and 2010 average share of 19.5%
- Sands' share increased 50bps to 4.0%
- Both Mass and VIP rev share increased 30 bps
- Venetian’s share remained flat at 8.1% share
- VIP share improved 80bps to 6.7%, above the prior TTM average of 6.5%
- Mass share dropped 3% sequentially to 12.5% - an-all time low for the property
- Junket RC remained flat at 4.7%
- FS share improved 1% to 3.0%
- VIP share increased 1.6% to 3.4% the best share since January 2011
- Mass share dropped 70bps to 1.6%
- Junket RC improved 140bps to 2.9%
Wynn’s share ticked up 20bps to 13.3% share - although still below its 6 month trailing average share of 13.6% and well below its 2010 average share of 15%. Wynn’s share should continue to struggle with the opening of Sands Cotai Central in March and with the ramp of new junkets at the Four Seasons.
- Mass market share fell 90bps to 12.3%
- VIP market share increased 90bps to 14.5%
- Junket RC share fell 1.3% to 12.2% - the lowest share since October 2007. This compares to Wynn’s 6 month trailing average of 14.4% and 2010 average of 15.2%.
MPEL had the largest share loss in November. Market share fell 1.7% points to 12.9% - its lowest share since October 2009. This compares to their 6 month trailing share of 14.8% and 2010 share of 14.6%.
- Altira share fell 50bps to 4.2%, below the property’s 2010 share of 5.6%. Mass share improved 40bps while VIP share dropped 60bps.
- CoD’s share dropped 140bps to 8.4% driven by share losses in VIP (which was impacted by hold) that were partly offset by strength in Mass
- Mass market share increased 1.2% points to 10.4% - an all-time high record for the property
- VIP share fell 2.3% to 7.8%
SJM gained 1.2% share in November to 27.2%, which was still below their 6-month trailing average of 28.6% and below their 2010 average of 31.3%.
- Mass market share increased 2.6% to 36.6% - off all-time lows in October
- VIP share improved 50bps to 25.0%
- Junket RC share was flat at 28.3%
Galaxy lost 60bps to 20.3%. November share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 18.0%.
- Galaxy Macau share declined 30bps to 10.2%
- Mass share ticked up 10bps to 8.3%
- VIP market share fell 40bps to 10.8%
- RC share ticked down 40bps to 10.4%
- Starworld lost 40bps of market share to 8.8%, 30bps below its TTM share of 9.1% pre-Galaxy Macau level.
Lost 60bps to 10.6% due to share losses in VIP share. November share compares with an average share of 10.3% in 2010 and a 6 month trailing average of 10.4%.
- Mass share increased 20bps to 7.1% but was more than offset by a 70bps decrease in VIP share to 11.6%
- Junket RC gained 1.2% share to 11.5%, above the property’s 2010 average of 8.4% and above its 6 month trailing average of 10.4%
Slot revenue grew 25% YoY – for a total of $33MM – flat sequentially.
- As expected, GALAXY slot revenues grew the most with 356% YoY to $13MM
- MGM slot revenues had the second best growth at 35% YoY to $16MM
- LVS slot revenues grew 28% YoY to $33MM
- SJM slot revenues grew 13% YoY to $14MM
- MPEL slot revenues grew 7% YoY to $21MM
- WYNN slot revenues fell 6% YoY to $18MM – the lowest absolute level since June 2010
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* The TED spread made a new YTD high at 53.3 bps, indicating risk in the banking system continues to rise. We consider the TED spread to be a more sober reflection of systemic risk in the banking system. This is a strong cautionary note amid widespread equity gains.
* Credit default swaps for Eurozone countries mostly tightened on Monday. Spanish swaps were particularly noteworthy, tightening 23% compared to the prior week.
* Credit default swaps for American financial companies tightened 20% or more across the board (RDN, MTG, AGO the only exceptions).
* The Markit MCDX, a measure of municipal credit default swaps, tightened 20 bps to 193 bps from 173 bps in the prior week.
* The high yield corporate bond index saw a 50 bps increase in yields.
* Our macro quantitative model indicates that in the short term (TRADE), there is currently around 1.5 times more upside than downside in the XLF (1.5% downside vs. 2.3% upside).
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Positive / 6 of 11 improved / 3 out of 11 worsened / 2 of 11 unchanged
- Intermediate-term (MoM): Negative / 1 of 11 improved / 5 of 11 worsened / 5 of 11 unchanged
- Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged
1. US Financials CDS Monitor – Swaps tightened for 26 of 27 major domestic financial company reference entities last week.
Tightened the most vs last week: GS, ACE, XL
Tightened the Least/ widened the most vs last week: MTG, RDN, AGO
Tightened the most vs last month: COF, ACE, MMC
Widened the most vs last month: BAC, SLM, RDN
2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 35 of the 40 reference entities. The average tightening was 9.2% and the median tightening was 22.6%.
3. European Sovereign CDS – European sovereign swaps tightened last week. Spanish sovereign swaps tightened by 23% (-108 bps to 360.5) and French by 21% (-49 bps to 185).
4. High Yield (YTM) Monitor – High Yield rates rose 50 bps last week, ending the week at 8.95 versus 8.45 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4 points last week, ending at 1576.
6. TED Spread Monitor – The TED spread rose 3 points last week, ending the week at 53.3, another new YTD high.
7. Journal of Commerce Commodity Price Index – The JOC index rose 3 points, ending the week at -21.19 versus -24.16 the prior week.
8. Greek Yield Monitor – In contrast to improvement across the rest of European sovereigns, the 10-year yield on Greek debt rose 72 bps last week, ending the week at 3059 bps.
9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads tightened, ending the week at 173 bps versus 193 bps the prior week.
10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 59 points, ending the week at 1866 versus 1807 the prior week.
11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread widened to 178 bps, 8 bps wider than a week ago.
12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 2.3% downside to TRADE support.
Margin Debt in October
We publish NYSE Margin Debt every month when it’s released.
NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October’s print of +0.78 standard deviations. But overall, this setup represents a material headwind for the market.
One limitation of this series is that it is reported on a lag. The chart shows data through October.
Joshua Steiner, CFA
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