BOBE: The Clock is Ticking

BOBE remains on the Hedgeye Best Ideas list as a long.


Investment Thesis

We continue to believe BOBE represents an under-the-radar special situation story.  The company first caught activist investor Sandell Asset Management’s eye back in July 2013.  Bob Evans successfully fended off the activist for over a year.  However, in August 2014, Sandell won four seats on Bob Evans’ board of directors.  We understand Sandell’s infatuation with the company, due in large part to an abundance of low-hanging fruit.  In our view, these opportunities would undoubtedly narrow the gap between the stock’s current price and its intrinsic value.


We believe the board could create significant value for shareholders in a variety of ways, the most appealing of which would be a spinoff of BEF Foods, which has an estimated enterprise value of $600-800 million.  Not only would this immediately generate a substantial amount of cash for a cash-strapped company, but it would allow management to re-focus its efforts on efficiently running its restaurants.  We continue to believe a separation of the foods business is likely, considering the board recently engaged Lazard to serve as an independent financial advisor (this time under a different scenario).  Outside of this, opportunities exist to refranchise restaurants, cut excess SG&A, and explore the sale of restaurants and real estate. 


With a spinoff of BEF Foods and harsh SG&A scrutiny, we value the stock at approximately $70-80 per share.


The quarter was slightly disappointing, but we didn’t expect much else.  For what it’s worth, FY15 earnings guidance looks achievable, but we’re waiting for a transformational transaction.


The Good in 2Q15

  • 3Q15 QTD same-store sales running at 2.7% (3Q15 estimate at +1.7%)
  • Guided FY15 same-store sales between +1.5-2.5% (above current estimate of +0.7%)
  • Broasted Chicken platform drove same-store sales at lunch and dinner; outperformed restaurants without the platform by 130 and 690 bps at lunch and dinner, respectively, during the quarter
  • Off-premise sales were strong at Bob Evans Restaurants, up +13.5% in the quarter
  • Plant efficiencies at BEF Foods resulting in a 280 bps y/y improvement in adjusted operating margin
  • Side dish volumes up 9% y/y at for BEF Foods
  • BEF Foods should benefit from reduced full-year forecasted sow costs (down from $1.80-1.90 to $1.78-1.82), operating efficiencies, and higher sales volumes
  • Company is exiting its interest in a private aircraft
  • Board of Directors' Finance Committee (3/5 members newly elected to the Board) is "engaged in a comprehensive, fresh review of strategic, financial and capital allocation plans"
  • Finance committee has engaged Lazard to serve as an independent financial advisor
  • Company has retained Deloitte to complete a review of the company's SG&A structure
  • Company is exiting its interest in a private aircraft
  • Plan to drive 300-350 bps of operating margin improvement by FY18


The Bad in 2Q15

  • Missed revenue estimates and guided FY15 consolidated sales to $1.35-1.37 billion (below current estimate of $1.38 billion)
  • On-premise sales were weak at Bob Evans Restaurants, down -1.7% in the quarter
  • On-premise sales deteriorated across all three dayparts (breakfast, lunch, and dinner)
  • Food costs expected to increase 60-80 bps y/y in 2H15
  • Off-premise sales driving higher cost of sales, due in large part to higher packaging costs
  • Expect continuation of increased healthcare costs in 2H15
  • BEF Foods' net sales were flat y/y and guided FY15 net sales to $3.88-398 million (below current estimate is $412 million)
  • -16.4% decline in sausage pounds sold at BEF Foods


Howard Penney

Managing Director


Fred Masotta


McCullough on Fox Business: Reading the Market Signals

Hedgeye CEO Keith McCullough discusses his outlook for the markets, economy and Fed with Fox Business "Opening Bell" host Maria Bartiromo.

If There Was A Spot To Play For A Short-Term Reversal In Japan...

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If There Was A Spot To Play For A Short-Term Reversal In Japan... - 23


The Weimar Nikkei was +0.3% overnight, taking its centrally planned ramp to +22% since Oct 17th. Right now (into the FX event in Europe tomorrow) the Yen is signaling immediate-term TRADE oversold at $119.56 (and, not surprisingly, the Nikkei is signaling immediate-term TRADE overbought).


If there was a spot to play for a short-term reversal, we think this is it…


If There Was A Spot To Play For A Short-Term Reversal In Japan... - weimarnikkei

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Risk Managed Long Term Investing for Pros

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Macro Notebook 12/3: Nikkei | Euro | UST 10YR


Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.

LEISURE LETTER (12/03/2014)

Tickers:  IKGH, PENN, IHG, L, LQ, FCH


  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 8: Golden Nugget Lake Charles Opening
  • Dec 12: Trump Taj Mahal Closing
  • Dec 14: City of Dreams Manila Opening
  • Dec 17:  Upstate NY Casino Decision


China Conducts Immigration Sweep in Macau – through our local contacts in Macau, we understand Mainland Chinese immigration officials recently conducted an immigration sweep through Macau bars, restaurants and casinos and rounded up several thousand Chinese nationals who had overstayed their visas.  Chinese officials then returned the nationals back to mainland China

Takeaway: Combined with yesterday's news of the new Transit Visa scheme, the sweep indicates that Macau/China are serious about the cleaning up Macau before the China President's visit in a few weeks.  VIPs are likely to stay away this month which could dampen GGR even more than the 20-25% YoY decline we're forecasting.


GENS.SP – Genting Singapore today repurchased 10 million shares (43.7% of today's trading volume) for S$11.284 million, following Monday and Tuesday's similar repurchase activity of 10 million shares each day. Cumulative shares repurchased year-to-date = 97,665,000.  Following today's share repurchase, the total shares outstanding = 12,150,371,480

Article HERE


IKGH – acquiring small junket operators in Macau is one of its main opportunities to grow its business. 

Article HERE

Takeaway:  While this could be a good growth strategy for IKGH given the likely low valuations, it would be a risky one. The smaller junkets are in difficult financial positions right now. #riskreward 


PENN – Hollywood Casino in Lawrenceburg is laying off “a limited number” of employees this week in response to a weak gaming market in Cincinnati. The company has not confirmed how many employees are being let go this week but its total employment after this week's cuts is 450 less than its 1,400-person head count after a big round of layoffs in 2012.

Article HERE

Takeaway:  Not surprising given steep revenue declines and suffocating competition e.g. OH, WV, MD


L & IHG – Loews Hotels & Resorts has a new CEO, and it's Kirk Kinsell, who is currently president of the Americas for InterContinental Hotels Group. He is replacing Paul Whetsell, who was held the top job at Loews Hotels since 2012, with the charge to expand the brand's footprint, which he did mostly through acquisitions and conversions.

Takeaway:  We knew Kinsell in some of his roles at IHG. Looks like a good hire.


LQ – announced Mit Shah was appointed as Chairman of the Board. Mit Shah has served on the boards of directors of La Quinta and its predecessor entities since 2013 and is currently Chief Executive Officer and Senior Managing Principal of Noble Investment Group, which he founded in 1993 and which specializes in making opportunistic investments in the lodging and hospitality real estate sector.


Silversea–  Silversea Cruises designated 31 cruises as part of its 2015 Silver Wave program, which provides a suite upgrade and up to $1,000 in onboard credits as a booking incentive.  The offer, which expires Dec. 31, applies to both Silversea’s traditional luxury cruises and its expedition ships. It is capacity controlled and subject to availability, Silversea said.

Article HERE

Takeaway: Rare luxury promotion. 


Insider Transactions:

FCH – Tom Corcoran Jr. Chairman of FelCor Lodging Trust sold 75,000 shares in two non-option related sales of 72,100 at an average price of $10.2535/share and 2,900 at an average price of $10.2089/share on December 1 and 2, respectively.  Mr. Corcoran now directly owns 417,215 shares as well as 32,847 shares indirectly.

Takeaway: Not a lot of insider buying in hotel stocks these days


Chinese Corruption Worse in 2014 than 2013 – Despite this year's well-publicized campaign to combat graft and crack down on corrupt public officials, China was labeled more corrupt this year than it was in 2013. China posted one of the worst rises in corruption of any country in this year's "Corruption Perceptions Index" by lobbying group Transparency International. The country dropped to 100th out of 175 countries, from 80th in 2013.  

Article HERE  and HERE

Takeaway: This report will not likely sit well with the CPC officials in Beijing given the CPC's efforts to improve transparency and accountability by party officials.  


Macau Economic Recession – The gaming slump will deprive the industry of MOP60 billion (US$7.51 billion) in revenue and the government of MOP20 billion in direct gaming taxes in the 12 months ending next June and the shortfalls mean the economy will contract for four quarters in a row, thus causing a recession.

Article HERE

Takeaway: We noted yesterday Macau GDP contracted by 2.1% in Q3 2014. Given Q4 2014's sickening GGR contraction, we'd bet Q4 GDP will also be negative.  Two consecutive quarters of negative GDP is a recession.


Pachinko Arrives in Hong Kong – following the successful HKSE listing by Dynam Japan Holding (6889.HK) at least four additional pachinko-hall operators are considering similar HKSE listings.

Article HERE


Atlantic City Casino Tax Relief – Atlantic City's eight surviving casinos would get a break on taxes and the city would get help making up for lost revenue under a rescue plan unveiled by two New Jersey state senators. The plan, introduced in the Legislature late Monday and announced on Tuesday by State Senate President Steve Sweeney and Sen. James Whelan, would let the casinos collectively pay $150 million in lieu of taxes for two years. It would redirect an investment alternative tax, currently used for redevelopment projects, to help pay off $25 million to $30 million of Atlantic City's debt a year.

Article HERE

Takeaway:  This would be an important lifeline for the AC casinos and would help stem their losses. $BYD and $CZR


Group Hotel Bookings Uptick in November – According to TravelClick North American Hospitality Review, new group hotel reservations increased 10.5% during November 2014.  Additionally, for the first quarter of 2015, group hotel bookings experienced an increase in ADR of 2.6% and increase in occupancy of 4.3%. 

Article HERE

Takeaway: Strong Group lodging segment fundamentals provide a positive look through for RHP as well as HLT. 


China November PMI data

Official services PMI 53.9 vs 53.8 in October

HSBC services PMI 53.0 vs 52.9 in October

Employment 49.5, fifth consecutive month below 50

New orders rose at quickest pace in 2 1/2 years


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.



Takeaway: Below we highlight the ongoing weakness in domestic consumption data and debate a potential inflection in Chinese economic growth.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares MSCI European Monetary Union ETF (EZU)
  2. iShares MSCI France ETF (EWQ)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)



Quick Check-In w/ the U.S. Consumer: While it’s been nothing shy of fascinating to watch the legacy financial media [positively] spin poor Black Friday and disappointing Cyber Monday results, the data was actually brutal – both from a rate of change perspective and relative to the Consensus Macro “falling gas prices” narrative. While I can spend the next 20 minutes ranting about how embarrassing such mischaracterizations are to our profession, you are probably already well versed in our disappointment with the #OldWall and its bull market marketing appendages. Sparing you from that diatribe, we thought we’d take a second to highlight recent consumer spending data, which remains unequivocally negative from a 2nd derivative perspective on both a sequential and trending basis. Friday’s Jobs Report is the next major data point; will the trend of deceleration inflect or will it continue as U.S. corporations increasingly opt for inflating shareholder returns at the expense of American job growth? As we detailed in our November 26th edition of the Macro Playbook, we still think it pays to wait on rotating into early-cycle consumer exposure.








“I Bout ‘Em Because China Told Me To”: To borrow a key excerpt from our 11/21 note titled, “CHINA: WHY DID THE PBOC CUT? WILL IT EVEN MATTER?”: “From a forward-looking perspective, this [rate cut] a good thing only if it signals a sustained move away from the “proactive fiscal policy and prudent monetary policy” they’ve been guiding to and implementing for over two years now… In and of itself, this rate cut will hardly do anything to arrest the rate of decline in Chinese economic growth; nor will it offset the “increasing downward pressure” upon the Chinese economy over the NTM, as most recently reiterated Xu Shaoshi (head of the National Development and Reform Commission) just two days ago.”  Again, Chinese economic growth continues to slow precipitously and the rate cut only confirms our bearish bias on the Chinese economy (i.e. NOT its stock market). If, however, we see continued stabilization in China’s property market and a continuation of more aggressive policy support, it is likely that China joins the U.S. in #Quad1 in 1Q15, which would, in fact, support recent optimism among U.S. equity investors. The next few weeks of guidance out of Beijing are crucial in that regard. All told, if you bought ‘em on the Chinese rate cut news, we hope you allocated capital to the right sectors. In a hypothetical game of 8-on-8, #Quad4 is clearly winning the U.S. equity market; the top-8 VAMDMI readings are all sectors and style factors that tend to outperform in #Quad4, while the bottom-8 are those that tend to deflate in #Quad4.






THE HEDGEYE MACRO PLAYBOOK - China Iron Ore  Rebar and Coal YoY vs. GDP






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#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Golden Headfakes (12/2)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


QE Conundrums – Draghi’s Misguided Intervention? (11/26)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: S&P500 Levels, Refreshed (11/18)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

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