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Monday Mashup: CMG, WEN and More

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: CMG, WEN and More - 4 21 2014 9 10 59 AM

 

EAT – We're pulling Brinker from our long list.  The stock has acted well for us over the past year, but the departure of CFO Guy Constant, declining traffic trends and rising food costs are beginning to concern us. 

 

MCD – We’re relegating McDonald’s to the short watch list.  We removed it from our Best Ideas list back in mid-February amid concerns of a potential financial engineering event.  It could be through refranchising or a leverage event, we’re not quite sure, but we don’t want to be in the way.  We still believe the McDonald’s business is in secular decline, but there are several reasons, including easy comparisons and an attractive dividend, that give us reason to believe the stock has support.

 

BWLD – We’re relegating Buffalo Wild Wings to the short watch list.  While we believe the stock is fully valued, we see very few short-term catalysts that suggest near-term downside.  Declining new unit sales performance, ROIIC, and CFFO/Net Income are three metrics that make us bearish, but we believe the company has enough near-term drivers to support the stock.

Recent Notes

04/14/14  Monday Mashup: DRI Comes Under Fire

04/14/14  The Casual Dining Dilemma

04/15/14  Investment Ideas: Longs

04/16/14  Investment Ideas: Shorts

04/18/14  CMG: Building Market Share

Events This Week

04/22/14  MCD earnings call 11:00am EST

04/23/14  YUM earnings call 9:15am EST

04/23/14  EAT earnings call 10:00am EST

04/23/14  CAKE earnings call 5:00pm EST

04/24/14  DNKN earnings call 8:00am EST

04/24/14  DAVE earnings call 11:00am EST

04/24/14  SBUX earnings call 5:00pm EST

Chart of the Day

WEN trades at a discount to BKW and YUM and in-line with a market-saturated MCD despite having significantly more runway to improve revenues, margins and returns.  Despite strong performance in 2013, Wendy’s continues to be an out of favor name giving value-oriented investors a compelling opportunity.  We expect to see meaningful multiple expansion as Wendy’s continues to reimage its restaurants, rebalance its franchise mix and generate stronger returns.

 

Monday Mashup: CMG, WEN and More - 2

Recent News Flow

Monday, April 14

  • PLKI announced the resignation of CFO Melville Hope, who plans to depart in May to pursue opportunities.  The company has begun a search for his successor.    

Tuesday, April 15

  • SBUX announced the relocation of its European headquarters from the Netherlands to the UK
  • SONC upgraded to buy at Sterne Agee with a $25 PT

Wednesday, April 16

  • TAST announced it will hold a secondary stock offering to raise $60 million.  The proceeds are expected to be primarily used to accelerate the 20/20 restaurant reimage program and acquire franchised restaurants.  

Thursday, April 17

  • CMG reported a strong quarter with same-store sales up 13.4%, primarily driven by traffic.  Despite this, the company is seeing margin compression from rising food costs and announced plans to take mid-single digit price beginning at the end of 2Q14.  Chipotle continues to take market share in an increasingly competitive environment.

XLY Quantitative Setup

The XLY (+1.0%) underperformed the SPX (+1.7%) last week, as both casual dining and quick service stocks, in aggregate, underperformed the broader XLY benchmark.  From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.

 

Monday Mashup: CMG, WEN and More - 3 

Casual Dining Restaurants

Monday Mashup: CMG, WEN and More - 4

Monday Mashup: CMG, WEN and More - 5

Quick Service Restaurants

Monday Mashup: CMG, WEN and More - 6

Monday Mashup: CMG, WEN and More - 7

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


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European Banking Monitor: Swaps Tighten Marginally

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

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European Financial CDS – Most swaps tightened marginally in Europe last week. The Greek banks continue to tighten notably, dropping an average of 15 bps in the past week and 195 bps in the past month. Russia’s Sberbank widened by 20 bps this past week; however, the bank remains tighter on the month by 24 bps.

European Banking Monitor: Swaps Tighten Marginally - chart 1 financials cds

 

Sovereign CDS – Sovereign Swaps either tightened or remained the same over the past week. Japanese sovereign swaps tightened by 4.9% (2 bps to 46) and US sovereign swaps tightened by 4.8% (1 bp to 17).

 

European Banking Monitor: Swaps Tighten Marginally - chart 2 sovereign cds

European Banking Monitor: Swaps Tighten Marginally - chart 3 sovereign cds

European Banking Monitor: Swaps Tighten Marginally - chart 4 sovereign cds

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 15 bps.

European Banking Monitor: Swaps Tighten Marginally - chart 5 euribor OIS spread

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 

 


10 Scary US Charts; 5 Not-So-Scary Chinese Charts

Takeaway: Expectations should weigh on the growth style factor in the US. Chinese growth is bottoming out – on both a reported and prospective basis.

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 2

CONCLUSIONS (United states)

  • While we’re likely to see post-winter optical strength in the March/April timeframe, we continue to believe that the trend in domestic economic growth is decelerating and will continue to decelerate over the intermediate term. An acceleration in reported inflation coupled with a slowdown in both house price appreciation and housing sector activity remain our primary catalysts for the aforementioned deceleration in the consumption-heavy US economy.
     
  • This is especially true in the context of consensus expectations that continue to bake in our team’s 2013 bull case as the base case scenario for 2014 and beyond.
     
  • The likelihood that US economic growth continues to slow relative to those expectations should perpetuate what we have been appropriately signaling as a regime change in market leadership that is likely to be supported by the introduction of easier monetary policy (both on an absolute basis and relative to existing expectations) over the intermediate term.
     
  • As such, we continue to favor high-yielding assets (i.e. Treasuries, REITs, Utes), carry trading strategies (i.e. emerging markets) and inflation hedges (i.e. TIPS and commodities) in lieu of consumer exposure and high-growth/high-beta names, at the margins.
     
  • The biggest near-term risk to our view is that likely sequential strength in reported economic data over the next 1-2 months is extrapolated as confirming evidence of a consensus bias towards favoring the growth style factor in domestic capital markets. The biggest long-term risk to our view is a Federal Reserve that openly supports a #StrongDollar = #StrongAmerica economic policy. For now, neither risk appears particularly probable.

CONCLUSIONS (CHINA)

  • Chinese real GDP growth slowed in 1Q14, coming in roughly in line with our and the Street’s expectations. There were some bright spots in the higher-frequency data, but the general trend in Chinese economic growth remains negative.
     
  • That being said, we are of the ilk to side with the now-consistent rhetoric of Chinese policymakers in anticipating that Chinese economic growth is at/near a cyclical bottom from a rate-of-change perspective.
     
  • Specifically, either said policymakers have visibility into the Chinese economy that we lack as investors/analysts or they are effectively signing off on a plan to provide meaningful stimulus if growth continues to slow from here.
     
  • Our favorite leading indicator for the slope of Chinese economic growth (i.e. the slope of the average year-over-year percent change in rebar, iron ore and coal prices) is supportive of the former outcome; the dramatic easing of Chinese monetary conditions and sharp tightening of credit spreads in recent months is supportive of the latter outcome.
     
  • We are currently doing the work to re-quantify the risks embedded in the Chinese financial sector in order to appropriately handicap the probability of a severe and prolonged crisis (conference call date TBD). To the extent we find those risks are priced in, consensus expectations for Chinese economic growth are depressed enough to warrant bargain hunting on the long side of CNY/CNH-denominated capital markets.  

US GROWTH CHARTS

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 1 large

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 2

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 3

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 4

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 5

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 6

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 7

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 8

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 9

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - 10

CHINESE GROWTH CHARTS

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - China GDP Growth

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - China Iron Ore  Rebar and Coal YoY

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - China 7 day Repo Rate Monthly Avg

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - China 5Y AAA Spread.tif

 

10 Scary US Charts; 5 Not-So-Scary Chinese Charts - China GDP Expectations

 

*   *   *   *   *   *   *

 

Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on April 16, 2014 by Hedgeye Macro Analyst Darius Dale. Follow Darius on Twitter @HedgeyeDDale.

SUBSCRIBE TO HEDGEYE.

 


MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE

Takeaway: Last week saw modest widening in interbank risk measures domestically and in Europe as well as further upward commodity inflation pressure.

Key Callouts:

Looking at the Risk Monitor, we see tightening in US, European, and Sovereign swaps, a change from the slight widening seen in the previous week. On the interbank risk front, the US TED Spread rose 1 bp, Euribor-OIS rose 2 bps and China's Shifon Index fell 57 basis points. Overall, none of those datapoints are terribly exciting, but the +2 bps move in Euribor bears watching going forward.

 

* U.S. Financial CDS - Swaps tightened for 18 out of 27 domestic financial institutions. The Global US banks were all tighter, by an average of 4 bps w/w, as well as 4 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantor MBIA, where swaps widened out 20 bps w/w and 126 bps m/m.

 

* European Financial CDS – Most swaps tightened marginally in Europe last week. The Greek banks continue to tighten notably, dropping an average of 15 bps in the past week and 195 bps in the past month. Russia’s Sberbank widened by 20 bps this past week; however, the bank remains tighter on the month by 24 bps.

 

* Sovereign CDS – Sovereign swaps either tightened or remained the same over the past week. Japanese sovereign swaps tightened by 4.9% (2 bps to 46) and US sovereign swaps tightened by 4.8% (1 bps to 17).

 

* Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 57 basis points last week, ending the week at 2.18% versus last week’s print of 2.75%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 15 2

 

1. U.S. Financial CDS -  Swaps tightened for 18 out of 27 domestic financial institutions. The Global US banks were all tighter, by an average of 4 bps w/w, and 5 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantor MBIA, where swaps widened out 20 bps w/w and 126 bps m/m.

 

Tightened the most WoW: C, XL, MS

Widened the most WoW: MBI, CB, ACE

Tightened the most WoW: MS, GNW, AIG

Widened the most MoM: MBI, TRV, SLM

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 1

 

2. European Financial CDS – Most swaps tightened marginally in Europe last week. The Greek banks continue to tighten notably, dropping an average of 15 bps in the past week and 195 bps in the past month. Russia’s Sberbank widened by 20 bps this past week; however, the bank remains tighter on the month by 24 bps.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 2

 

3. Asian Financial CDS – It was a mixed bag for Asian financials last week as Chinese and Indian banks widened nominally, while Japanese financials tightened by an average of 1.75 bps w/w.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 17

 

4. Sovereign CDS – Sovereign Swaps either tightened or remained the same over the past week. Japanese sovereign swaps tightened by 4.9% (2 bps to 46) and US sovereign swaps tightened by 4.8% (1 bps to 17).

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 18

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 3

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 1.4 bps last week, ending the week at 5.63% versus 5.65% the prior week.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week at 1855.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 6

 

7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 20.1 bps this week versus last week’s print of 18.85 bps.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 311 versus 310 the prior week. As compared with the prior month, commodity prices have increased 2.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 15 bps.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 45 basis points last week, ending the week at 2.298% versus last week’s print of 2.75%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 10

 

11. Chinese Steel – Steel prices in China rose 0.5% last week, or 16 yuan/ton, to 3383 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 12

 

12. 2-10 Spread – Last week the 2-10 spread widened to 233 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: COMMODITIES & INTERBANK RISK MEASURES RISE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


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