We continue to hold a positive view of YUM on all three durations (trade, trend and tail). The earnings call tomorrow at 9:15am will offer a chance for analysts and investors to hear further details about 2011 and trends in 2012 to-date.
With both MCD and SBUX seeing their stocks decline on 4Q11 earnings results that were strong but not strong enough, the pressure was on YUM to print an exceptional quarter and, on the surface, it looks like they delivered.
Yum! Brands’ stock had a tremendous 4thquarter, outperforming the S&P 500 by 8.3%. At first take, there does not seem to be many holes we can poke in the results such that we can say that the momentum is going to slow in the near term. The top-line momentum in YUM’s China division is strong although food and labor inflation continue to pressure margins.
We’ll be waiting for additional color from management tomorrow on the call. The US division might be turning as the compares get easier from here and the worst for Taco Bell appears to be over.
- The China division reported $5.56 billion in revenues in 2011, up 35% versus 2010
- System sales grew 40% year-over-year in the fourth quarter (33% excluding FX), while comparable restaurant sales came in at 21% versus 17% consensus
- By concept, KFC comps were 22% in the fourth quarter while Pizza Hut delivery and casual dining comps gained 25% and 15%, respectively, during the fourth quarter
- Restaurant margin decreased 240 basis points to 15.8% in 4Q11 due to 11% commodity inflation and 18% wage rate inflation. FY11 commodity inflation was 8% and labor inflation 20%
- YRI reported system-sales up 11% (up 10% excluding FX) with same-store sales of 3%, slightly above consensus
- Comparable restaurant sales of 3% implied two-year average trends flat with 3Q11
- Restaurant operating margin decreased by 67 basis points to 11.6% in 4Q11
- The most significant 4Q11 upside surprise came from the US division
- 4Q comparable restaurant sales were up 1% versus consensus of -2.5%. KFC comps decline -1%, Taco Bell comps declined -2% and Pizza Hut comps were up 6% versus 4Q10. “The Box” promotion drove high single-digit comps in the latter stages of 4Q11
- 4Q restaurant operating margin declined by roughly almost 75 basis points driven by commodity inflation of 7%
Conclusion: Latin American JAN growth and inflation data continues to come in in-line with our views at the start of the year. Looking forward, however, the intermediate-term outlook has changed with the potential introduction of another round of The Bernank Tax.
All % moves week-over-week unless otherwise specified.
- Median: +3%
- High: Peru +4.8%
- Low: Venezuela +0.2%
- Callout: Latin American equity markets are up +12% YTD on a median basis
- FX (vs. USD):
- Median: +1.6%
- High: Mexican peso +2.4%
- Low: Argentine peso flat wk/wk
- Callout: Latin American currencies are up +8.2% vs. the USD YTD on a median bass
- S/T SOVEREIGN DEBT (2YR YIELD):
- High: Colombia/Mexico +2bps
- Low: Brazil -2bps
- Callout: Brazil -54bps YTD
- L/T SOVEREIGN DEBT (10YR YIELD):
- High: Mexico +16bps
- Low: Colombia -2bps
- Callout: Brazil +8bps YTD
- SOVEREIGN YIELD SPREADS (10s-2s):
- High: Mexico +14bps
- Low: Colombia -4bps
- Callout: Brazil +62bps YTD
- 5YR CDS:
- Median: -4.7%
- High: Argentina -2.3%/-17bps
- Low: Chile -6.5%/8bps
- Callout: Latin American 5yr sovereign CDS have tightened -13.9% YTD on a median basis
- 1YR O/S INTEREST RATE SWAPS:
- Median: +2.8%
- High: Colombia +6.3%/+32bps
- Low: Brazil -0.7%/-7bps
- Callout: Colombia +8.4%/+42bps YTD vs. Brazil -5.6%/-57bps
- O/N INTERBANK RATES:
- Median: flat wk/wk
- High: Colombia +5.2%/+24bps
- Low: Mexico -0.4%/-2bps
- Callout: Brazil down -16.9%/-210bps over the last six months vs. Argentina +4.1%/+40bps
- CORRELATION RISK: Globally-interconnected growth/inflation expectations continue to be priced into Latin American equity markets, based upon their 90% positive correlation to the 10yr U.S. Treasury Yield over the LTM.
Full price and performance tables can be found at the conclusion of this note.
CHARTS OF THE WEEK
The latest batch of PMI data shows Brazil improving, on the margin, relative to the other key economy in the region:
Argentina’s flurry of financial repression has achieved the desired results – for now:
The U.S. Dollar remains between the proverbial “rock and a hard place”, clouding the region’s intermediate-term growth/inflation/policy outlook:
Growth – Growth across the region was fairly mixed in JAN, but easing speculation has been highly supportive of growth expectations and capital markets inflows:
- Brazil: Both Manufacturing and Services PMI readings ticked up in JAN to 50.6 (vs. 49.1 prior) and 55 (vs. 54.8 prior), respectively. Export growth came in slightly faster in JAN as well: +6.1% YoY vs. +5.8%.
- Brazil: Lower volatility across global financial markets have been supportive of EM FX in the YTD, as capital flows in the form of repatriated USD-debt issuance and foreign portfolio direct investment pick up after a subdued 2H11. Brazilian corporations issued $12.3B in USD-denominated paper in JAN alone and the real closed the month +6.7% higher vs. the dollar. A rising trend of selling existing bonds on which the paperwork has been previously filed indicates this rush by Brazilian corporations to secure financing while pricing conditions are favorable.
- Mexico: Both Manufacturing and Services PMI readings ticked down in JAN to 51.8 (vs. 52 prior) and 51.7 (vs. 54.4 prior), respectively. On the consumer front, Confidence ticked up in JAN to 95.4 vs. 90.8 prior.
- Chile: The country’s Economic Activity Index (proxy for GDP) accelerated in DEC to +5.3% YoY vs. +4% prior.
- Colombia: The Urban Unemployment Rate ticked up in DEC to 10.4% vs. 10.3% prior.
Inflation – While reported inflation continues to trend down within the construct of our Deflating the Inflation II thesis, another round of The Bernank Tax is creating consternation within Latin American inflation expectations:
- Argentina: Argentine inflation-linked bonds are having their best start to the year since 2009, after the IMF failed in its mission to get the country to improve the quality of its inflation statistics – suggesting that Argentina’s trend of dramatically underreporting CPI will continue indefinitely. The notes are up +9.6% YTD vs. +1.4% for similarly-structured Brazilian paper.
- Colombia: CPI slowed in JAN to +3.5% YoY vs. +3.7%. We continue to look to the USD’s quantitative setup for clues as to what degree The Bernank Tax will limit any further downside/spur upside in LatAm inflation readings over the intermediate term.
- Peru: CPI slowed in JAN to +4.2% YoY vs. +4.7% prior.
Policy – Latin American policy continues to be highly interventionist, particularly with regards to exchange rate management:
- Brazil: The central bank bought dollars in the FX forwards market for the first time since JUL last week, in an attempt to slow the real’s appreciation (+8.6% YTD through Friday).
- Argentina: In what has become a near-weekly announcement of some new form of Big Government Intervention, the President Fernandez’s regime will require importers to seek authorization from the federal tax agency prior to purchasing goods abroad. The measure, which is another backdoor attempt at financial repression via keeping pesos from leaving the country, is estimated to slow production and create product scarcity among 5,500+ Argentinean producers – with the latter being supportive of even higher rates of structural inflation in Argentina (currently estimated at/above +25% YoY). While decidedly negative for Argentina’s long-term TAIL, the recent flurry of repressive measures have had the desired effect in the near term, however, with the benchmark Badlar rate falling to a four-month low of 14.75%.
- Colombia: Banco de la Republica, the country’s central bank, announced that it will purchase a minimum $20M USD per day in auctions for at least three months to “boost the nation’s international reserves”. We interpret that as a bid to stem the rally in the peso, which is up +8.5% for the YTD.
MOSHE’S BRAZIL NUGGETS
Moshe Silver, our Chief Compliance Officer, is fluent in Portuguese and mines the local Brazilian press for hard-to-get data points for us each day. Below, we flag his top three callouts from the previous week:
- Brazil strengthens bank requirements – in the aftermath of the Banco PanAmericano fraud scandal, the central bank undertook an examination of the banking sector which has now resulted in a large number of small and mid-sized banks seeing their reserve requirements boosted, some by a significant amount. The review is ongoing and bank authorities say further adjustments are likely.
- Real estate prices climb – building prices in Rio and SP, the nation’s two leading real estate markets, rose +1.2% and +1.3% MoM, respectively, in January, countering faltering price trends that have prevailed since September. No reasons for the price rise were given in the reporting, but we note that the biggest price rises are from small buildings and one-bedroom apartments. We speculate this corresponds to the recent trend among Brazilian business owners and executives who have been acquiring small pied a terre residences in the downtown areas of Rio and Sao Paulo, in order to avoid the multi-hour commutes. A growing number of people who work in the cities have taken to living near their offices during the week, and retreating to their homes for weekends.
- Major appliance sales up – the government’s decision to reduce sales tax on major manufactured goods spurred demand for white goods. Sales of refrigerators, ovens and washing machines were up 56% in December MoM, and up 30% YoY. Demand continued strong through January, resulting in inventory shortfalls. Retailers say there are not enough refrigerators to meet demand.
THE WEEK AHEAD
Key economic data releases and policy announcements:
- Chile: JAN Trade Data
- Venezuela: JAN CPI
- Brazil: JAN CPI (unofficial IGP-DI series)
- Chile: JAN CPI
- Mexico: JAN CPI
- Argentina: JAN CPI; JAN WPI
- Colombia: JAN CPI; Monetary Policy Minutes
- THIS WEEKEND:
- NEXT MON:
- Mexico: DEC Industrial Production
Conclusion: We have reversed course on gold and added a long position in the Virtual Portfolio. The key factors driving this shift are monetary policy and price movement in the long term Treasury market.
Position: Long Gold via the etf GLD.
James Bond: What do you know about gold, Moneypenny?
Miss Moneypenny: Oh, the only gold I know about is the kind you wear... you know, on the third finger of your left hand?
Similar to Miss Moneypenny, who has a strong affinity for all things gold in the well known James Bond film “Golden Finger”, we acquired gold in the Virtual Portfolio earlier today. This is definitely a shift from our previous research note that discussed gold on January 23rd in which both value and demand factors were driving our cautions outlook on gold, specifically we wrote:
“From a relative price perspective, we also took a look at the gold / copper ratio going back more than twenty years. Based on this ratio, and as the chart below shows, copper is near its cheapest level as priced in gold. Currently, one ounce of gold can buy 440 pounds of copper.”
“It is also noteworthy to highlight that the world’s largest importer of gold is India, who is expected to import 54% less gold in Q4 2011 than in Q4 2010.”
So, what’s changed in the last three weeks? Well simply, monetary policy has become incrementally loose, inflation expectations have heightened, and, as noted in the chart directly below, gold is now in bullish price formation.
In terms of monetary policy, Chairman Bernanke and the FOMC were very explicit in the January 25thstatement:
“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Setting aside our amusement at the irony of the FOMC thinking they can predict economic conditions almost three years out when they have a proven track record of not being able to project out a couple of quarters, this verbiage, if taken at face value, does imply monetary policy will remain at Depression like levels until late 2014.
The key shift for us is that we had an expectation that the next move by the FOMC would be to become, even if on the margin, more hawkish. In fact, the opposite occurred and the FOMC extended their current “exceptionally low levels for federal funds rates” by a year from the prior statement on December 13th, 2011. This is inherently inflationary and, thus, a positive tailwind for gold.
In the chart below, we compare TIPS to Treasuries over the course of the past three weeks. This chart emphasizes that inflation expectations have increased in conjunction with the FOMC’s shift in monetary policy. Since January 17th, the TIP / IEF ratio has expanded almost consistently every day, signaling the market’s increasing view of inflation.
Coincident with this has been the bearish formation in long term treasury rates. As the chart below shows, the 10-year yield on Treasuries broke through the TREND line of resistance of 2.02% right about the time of the FOMC’s January 25th announcement and remains solidly broken. Obviously a declining yield on Treasuries is consistent with decline rates of return for fixed income.
Golden Finger is first and foremost a well known James Bond movie, but it is secondarily what Chairman Bernanke appears to be giving the nation’s saving class in providing them no return on their savings accounts or fixed income investments. When a savings account earns literally zero, gold is and will remain a reasonable alternative to capture absolute value.
Daryl G. Jones
Director of Research
Keith re-shorted PNK in the Hedgeye Virtual Portfolio at $10.37. According to his model, the TRADE and TREND resistance levels for PNK are $10.42 and $10.86, respectively.
As we wrote in PNK 4Q11: A MISS MAYBE IN THE CARDS (1/30/2012), we believe PNK may miss Street estimates when they report earnings on Feb 15. This is attributed to a less strong performance from L'Auberge and aggressive margin expectations for Q4. While favorable weather is boosting YoY regional gaming trends here in 2012, PNK maintains most of its exposure to warm weather climates not impacted by weather.
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