Hedgeye CEO Keith McCullough is back from Europe and comes out guns blazing on this morning's conference call with his latest market thoughts.
Hedgeye CEO Keith McCullough is back from Europe and comes out guns blazing on this morning's conference call with his latest market thoughts.
Takeaway: Earnings miss, but strong revenue growth, traffic growth, and same-store sales acceleration push CMG higher.
We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry. Revenues and same-store sales beat by 80 bps and 150 bps, respectively, which helps allay any concerns over the earnings miss. All told, the company reported a fairly strong 3Q in the midst of an unfavorable environment. While rising food costs are a point of contention, we believe management will be able to appropriately offset this headwind in the coming quarters with minimal price increases.
Chipotle, is one of the best managed restaurant companies in the space and we are confident that they will be able to mitigate any oncoming margin pressure. Last quarter, we wrote that CMG was well-positioned for the balance of the year and, after reviewing 3Q13 results, we have little reason to believe this will not be the case. For now, we expect 4Q to be another strong quarter.
What We Liked
What We Didn’t Like
Takeaway: HBI shows MFB accretion guidance is low. UA takes a page out of NKE's playbook. KMart turns to Nicki Minaj to halt sales decline. HIBB M TOY
EVENTS TO WATCH
VFC - Earnings Call: Monday 10/21 8:30 am
HBI - US: Hanesbrands to axe half of Maidenform's workforce
Takeaway: I guess we know why they bought MFB -- for the brands, and nothing else. This synchs with our view that this deal will be far more accretive than the company guided towards.
UA - Under Armour challenges techies to develop future products
Takeaway: Taking one right out of Nike's playbook -- again (as they should). Note that Nike held a major competition this summer for people to come up with new commercial product to elevate Nike's technological platform and marry with marketable product.
M - Macy’s strategy for Black Friday sales uncovered when ad leaked
Takeaway: They make it sound like it was a leak…but sounds to me like it was intentional.
KER - Gucci Awarded $144.2M Against Online Counterfeiters
Takeaway: The domain names are enforceable -- and therefore are history. But KER will never see a dime of the $144mm.
HIBB - Hibbett Sports Announces Transition Plan for Mickey Newsome
Takeaway: HIBB might be a tiny company, but Newsome is a major dominant force. Life without him will be a definite change for HIBB.
SHLD - Nicki Minaj Launches Fashion Line for Kmart
Takeaway: Nicki is definitely an influencer, but does her fan base shop at K-Mart? This is a binary event for SHLD, but the upside potential is greater than the downside risk.
TOYS - No Joy in Toys 'R' Us Land
Takeaway: Interesting article showing the dynamics behind the ownership structure at TRU. Be careful who you partner up with when when buying something.
Bonmarché - Bonmarché prepares stock exchange flotation
Takeaway: Does Bonmarché really deserve to be public?
New Research Uncovers Which Email Promotions Generate the Most Revenue for Online Retailers
Japan’s August Clothing Imports Up 21.4%
Takeaway: The biggest import number we've ever seen out of Japan. Ever is a long time.
E-Commerce Trends in China: By the Numbers
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One that doesn’t appreciate high growth, high cash flow, and a newfound propensity to distribute cash to shareholders.
LVS posted a great quarter. We’re very happy with the Macau fundamentals, the stability in Singapore, and potential expansion of gaming in Asia. Within that favorable industry construct, LVS is nailing it operationally. The LVS properties yielded up their Mass tables impressively which contributed to higher margins (see the charts in the Quarterly Review section below). And they’re not done yet. Table yields have a long way to go and with the company’s extensive room base, cross marketing initiatives, and premium Mass push, LVS is likely to continue share growth in the rapidly growing Macau market. On the margin and from a stock perspective, we’re probably most excited about LVS’s broadening appeal, growth and dividend investors alike.
LVS announced yet another dividend hike – this time a 42% increase, pulling the yield up to nearly 3% and $300 million in stock buybacks during the quarter. Meanwhile, leverage remains too low around 1x. With over $3.6 million in free cash flow next year, LVS could up its yield to a whopping 6% without levering up. And that cash flow will continue to grow with the opening of The Parisian in late 2015 and continued same-store EBITDA growth. We have no feel for whether LVS will pay out a special dividend – they could easily do it – but we would prefer continued buybacks and regular dividend hikes.
Valuation is the main push back but with LVS’s combination of growth and cash flow, should we really be concerned with an EV/EBITDA multiple of 13.x (excludes debt associated with Parisian)? Certainly not, especially when considering that a good portion of LVS’s profits are not taxed (approximately 55%), a benefit that isn’t captured by EV/EBITDA. Future high ROI projects in Macau (The Parisian), potential developments in Japan and South Korea are also not captured. LVS should continue to garner more widespread investor appeal with its emerging cash distribution focus (dividend investors welcome) along with the existing growth investors. We would argue that valuation concerns are of little relevance.
Per usual, we don’t want to recap the entire quarter. As can be seen in the chart below, LVS beat us quite handily.
Our focus is on table yields, specifically at Sands Cotai Central and Four Seasons. These are clearly the two properties with the most upside. Operationally, LVS is pushing the underpenetrated (for them) Premium Mass segment. Both Sands Cotai (who will have more mass tables coming in Q2 2014) and Four Seasons made significant progress as can be seen in the following table yield chart.
Table yields should continue to move higher for LVS and drive market share gains in the coming months (probably through year end 2014).
This note was originally published at 8am on October 04, 2013 for Hedgeye subscribers.
“Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be.”
-Jose Ortega y Gasset
Yesterday we (Keith and I) held a conference call with former Speaker of the House Newt Gingrich. We invited him to join us for a call because, frankly, he and former President Bill Clinton were the last two politicians to shut down the Federal Government, so he better than anyone understands the strategy of what is currently occurring in Washington, D.C. Even though he is an admitted conservative Republican, the call was both insightful and objective.
A key point that Gingrich raised is that a government shutdown is not as abnormal as it is being hyped and, in fact, may be a safeguard practice intended by the founding fathers. Certainly, government employees will be furloughed and people’s lives will be interrupted, but as the former Speaker pointed out, this has happened many times in U.S. history. In fact, it happened 12 times while Tip O’Neill was Speaker of the House. Overall, there have been 18 government shutdowns in U.S. history, including the current one.
Not surprisingly, most government shutdowns have been very short lived. In fact, the longest shutdown was 21 days in 1995 – 1996. The shortest government shutdown lasted only one day. In the Chart of the Day, we look at the length of every government shutdown over time. As the chart shows, the average government shutdown lasted 6.5 days.
Naturally, when we pressed Gingrich on how long he thought this shutdown would last, being the astute student of history he is, he answered 3 days to 3 weeks (which is what history shows). His view is that neither side has anything to gain by making this protracted. His caveat, though, was that there are currently no negotiations occurring as President Obama is unwilling to cede anything at all on the Affordable Care Act. According to Gingrich, while he and Clinton would go at each other in the press, and certainly had their differences, they would grind out solutions at the negotiating table.
The current set of actors are both polarized and talking matters personally, which is much different than the mid-1990s. There has never been much cross talk or cooperation between Boehner-Pelosi or McConnell-Reid, and it is seemingly only getting worse in this time of “crisis.” This unwillingness to negotiate and compromise is only exacerbated by the fact that neither President Obama, nor Speaker Boehner, have any concerns of getting reelected, so they are willing to expend personal approval for what they perceive as their party’s fundamental beliefs.
On the last point, disapproval is definitely mounting. As it relates to the President, his most recent approval polls are as follows:
Not great numbers for Obama to be sure, but the approval numbers for Congress are even worse. According to the most recent Economist poll, a full 74% of Americans disprove of the job Congress is doing. Clearly, our elected officials are on a collision course with the next midterm election in which the polls turn to votes. If any of them yearn to be re-elected, they have a lot of work to do over the next year to gain back America’s trust.
Coming back to the government shutdown, if the politicians in Washington have any acumen, they will resolve their differences over the next few weeks before the fear mongering on the debt ceiling begins to accelerate. The stock market has been weak due to the dysfunction in Washington, but if amateur hour continues as the debt ceiling looms, risk assets are likely to be sold even more aggressively.
The White House is actually starting to use the debt ceiling as a bargaining chip and the Treasury Department released a report yesterday that outlined the potential macroeconomic effects of debt ceiling brinkmanship. According to a preview released by the Treasury Department:
“The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse. By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion.“
In as much as the economy doesn’t need brinkmanship over a debt ceiling, it also doesn’t need fear mongering from the Secretary of Treasury . . . but I digress. Ironically enough, the fiscal outlook of the U.S. has actually been improving, so in theory the rating agencies should be upgrading their outlook on U.S. debt and not considering downgrades due to partisanship in the nation’s capital.
Next week, we will be releasing our quarterly themes and this focus on the dysfunction in Washington will be front and center as we update our views on the U.S. economy and outlook for the U.S. dollar. An emerging conclusion is that Europe is starting to get relatively more interesting, which is supported quantitatively by the recent move in the Euro.
As you head into the weekend, we’ll leave you with a quote from Gingrich:
“What is the primary purpose of political leader? To build a majority. If voters care about parking lots, then talk about parking lots.”
Sadly, none of our leaders, whether it be in Congress, the White House, Treasury Department, or Federal Reserve, know much about building a majority as of a late.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.65%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
The S&P 500 is up +3.1% for October. It's up +21.5% year-to-date. The perma fear-mongers nailed it. Right? Moving on… now with a lot of hands forced to cover-and-chase, there’s a lot to do. In a Burning Bernanke Buck tape, we like being #EuroBulls more than buying more USA up here. Yes, it’s been a great year being long US growth stocks, lock more of that in.
We are not selling our long Germany (via EWG) position. We like European Equities more than USA (from this price) for the exact same reason we got bullish on USA in December 2012. #StrongEuro and #StrongPound increases European purchasing power and pulverizes the inflation tax. That is a very good thing for consumption and #GrowthAccelerating.
Shame on Ben Bernanke and Janet Yellen if they don’t put a consistent tapering expectation back on the table. And soon. On the margin, Down Dollar, Down Rates is going to slow real-inflation adjusted growth from this healthy +2.5% US GDP level. What to I do? I go out and buy Europe and China ahead of USA on that.
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In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Google earnings up +36% (EPS $10.74 vs $10.36) as ad volumes rip - but "earnings season is a risk", eh? @KeithMcCullough
My goal is to get home every day in time for dinner with the family - and then we play with the kids for a while, and then I go to bed around the time they do and sleep from nine to three or nine to four. It's the same six hours everyone else gets. I'd just rather do my e-mails and my reading in the morning rather than late at night, that's all.
- David Einhorn
JPMorgan Chase has sold the One Chase Manhattan Plaza skyscraper to Fosun International for $725 million, the latest in a series of New York real estate purchases by Chinese investors.
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