Hedgeye Macro Analyst Christian Drake shares the top three things in Keith's macro notebook this morning.
Hedgeye Macro Analyst Christian Drake shares the top three things in Keith's macro notebook this morning.
Hedgeye’s Macro and Energy teams will host a guest speaker call on Wednesday, January 21st at 1 p.m. EST to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.
The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”). R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers. Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management. Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.
Topics for Discussion:
About Risked Revenue Energy Associates:
R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests). R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.
Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.
Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.
TICKERS: CZR, SJM, H, RCL
The David Group – there is chatter that the David Group, a top-10 junket with 3-5% of total VIP rolls in Macau, is closing its VIP rooms. David Group has 2 VIP rooms at Wynn Macau, 1 at Galaxy, 1 at Sands China, 2 at MGM China and 1 at SJM (via 3rd party casino).
The junket operator had already closed VIP rooms in the Venetian Macao and City of Dreams last year.
Takeaway: Should be a drag on VIP and we will see more junkets close up shop. However, it's market dictated and not really an incremental negative.
SJM – Sociedade de Turismo e Diversões de Macau SA (STDM) says it will look into complaints by employees of the Palacio Lisboa restaurant in the Lisboa Hotel that they are overworked and underpaid.
CZR – has declared voluntary Chapter 11.
H – announced the sales of five select service hotels for a total gross sale price of ~$53m. The transactions closed in December 2014. As part of the sales, Hyatt entered into franchise agreements with the purchasers, with all hotels retaining their existing Hyatt Place branding. The purchasers intend to spend a total of approximately $6 million in additional capital expenditures at the hotels.
Takeaway: These worn-down upscale properties sold at a low average price per key of $84k. There are consistent with Hyatt's asset recycling strategy.
RCL – Azamara Club Cruises is planning one of the largest drydock upgrade programs since it has owned Azamara Quest and Azamara Journey. While it's preliminary to share details, the vast majority of this 'significant' work will focus on passenger areas and accommodations, according to Azamara president and ceo Larry Pimentel, who called the projects 'an opportunity to ensure the ships stay in the up-market space. 'We're a destination-immersion product,' he added, 'but with this clientele it's incumbent to maintain the appropriate decor.'
Azamara Journey would begin its docking at the end of December and Azamara Quest in early January. Each project would stretch an estimated 3.5 to 4 weeks.
Takeaway: Dry docks costs for Q1 are heading higher.
Higher labor costs – The opening of Studio City and of Galaxy Macau Phase II will require gaming labor to expand by 16,000 to 18,000 within this year, which represents an expansion of 28%-31%. As the currently unemployed population of Macau accounts for just 6,900, labor costs in the industry are expected to soar as operators fight to staff their new resorts.
However, and bearing in mind that Galaxy started a recruitment process to hire 8,000 workers this month, MPEL CEO Lawrence Ho admitted that he was “a bit worried” about how this could be achieved.
While immigration is the main key to solving the problem, there are two factors that will contribute to increasing labor costs for gaming operators: the competition of gaming operators for the most experienced and talented workers and the prohibition of hiring non-resident workers as croupiers.
Takeaway: Finding sufficient labor for the upcoming Cotai resorts are not new news but it is a risk that cannot be discounted this year. Despite negative revenue growth, there is little the concessionaires can do to offset wage inflation. Volunteer, unpaid leaves of absences are one tool being employed.
Reno to NYC – Non-stop flights between Reno and New York City will be offered by JetBlue Airways starting on May 28. The route will make JetBlue the first carrier to offer daily nonstop service between New York City and Reno, which bills itself as the "Biggest Little City in the World."
Cyprus – According to Cyprus Commerce and Tourism Minister Yiorgos Lakkotrypis, 13 casino operators have expressed interest in running a casino.
Officials hope to pass casino legislation by end of January. There will be a competition process three weeks after the legislation is passed and to award the project to the successful bidder two months later.
Initial cost is projected at 500,000 euros (589,350 U.S. dollars) and the project includes at least 500 luxury rooms, at least 100 gaming tables and at least 1,000 gaming machines.
But the chosen operator can establish four other premises outside the casino with a maximum of 50 gaming machines each but no other casino gambling. The operation will be controlled by a 7-member Gaming and Casino Supervision Authority which will be tasked overseeing all casino activities and with making sure that it will be kept away from organized crime.
Takeaway: A small expansion opportunity for the Macau operators and slot suppliers.
Home sales – According to URA, developers sold 230 units of new homes in December, down 45.6% from the 423 units sold in November 2014. This was the lowest monthly sales figure since January 2009, when just 108 units were sold. Property sales are typically slower towards the festive year-end period. Home sales in Singapore have weakened considerably since the Government rolled out a series of cooling measures and loan curbs in recent years.
Retail sales – Retail sales gained 6.5% YoY in November due to strong auto sales. Ex motor vehicles, retail sales fell 0.4% YoY and 0.9% MoM in November 2014. However, Watches/Jewelry segment rose 4.2% MoM and 3.9% YoY.
Takeaway: Mixed macro signals for Singapore but the trend is tilting worse.
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.
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Takeaway: Closing Canada from a position of strength. Good move. But if former mgmt. could be so off on this call, what else could be buried here?
Target just announced that it is exiting Canada. Some conclusions…
Though we were right on the fundamentals with this one, that clearly did not matter – and most importantly we were definitely wrong on the stock. Rather than rush to cover today, we’re going to a) wait to hear what the company says on the conference call, and b) see where expectations shake out. The reality is that TGT is trading at 16x-17x 2015 EPS (assuming 2-3% comp). Aside from the fact that this is a peak multiple for TGT. It seems high to us for a levered company that has its weakest competitive positioning in a decade, and is likely to grow earnings at a sub-5% rate for the next three years. This name should hardly run away from us on the upside.
Takeaway: Join us for our call TODAY at 1pm EST outlining our Best Idea Short thesis on P. Dialing Instructions below.
We will be hosting a call today outlining our Best Idea Short thesis on Pandora Media (P). P’s user retention issues and waning TAM create a precarious setup into 2015. Further, Webcaster IV can derail P's entire business model in 2016.
Join us for our call TODAY at 1:00pm EST.
KEY TOPICS WILL INCLUDE
Conference ID/Password: 13598859
Materials: CLICK HERE (link will go live an hour before the call)
Hesham Shaaban, CFA
KKD – Prior to ICR, Krispy Kreme came out and reaffirmed FY15 EPS guidance of $0.69-0.74 and tempered expectations for FY15 EPS with guidance of $0.79-0.85. They also announced that TXRH CFO Price Cooper resigned to become the CFO at KKD. Cooper will succeed Douglas Muir, who has served as CFO of Krispy Kreme since 2007 and announced retirement plans last year.
The KKD story is powerful and one that we believe is being underappreciated by the street as it continues to invest for the future by focusing on 1) accelerating global growth 2) leveraging technology 3) enhancing the core menu and 4) maximizing brand awareness. Management has developed a flexible store model that will allow them to grow units at a double-digit rate for the foreseeable future. FY16 plans call for 11-13% unit growth (10-20 net new domestic units; 95-110 net new international units) and 10-18% EPS growth.
KKD is attractive to us for many reasons including its asset-light model, strong financial profile, compelling unit economics, strong FCF generation, impressive returns on incremental invested capital, feasible growth strategy, and established international presence.
ZOES – Differentiated, young concept that has identified its ‘niche’ in the fast casual category. Out of the most recent IPOs, this is the one we like the best as it is truly a unique concept that largely appeals to educated, affluent women and their families. Despite only having 132 locations in 15 states, ZOES has specifically identified 1,600 locations where the concept could work domestically and has three types of restaurant models to choose from (end-cap; free-standing; in-line). We like ZOES for its management, unique concept, attractive unit economics, impressive comps, and growth potential but are currently hesitant to add it to the Long List due to its rich valuation.
PLKI – Popeyes came out before ICR and pre-announced 4Q global comps of +9.8%, well above consensus estimates, and indicated full-year adjusted EPS would fall in-line with the street at $1.64-1.65 – good for 15% growth.
As many of you know, Popeyes was one of our favorite stocks throughout 2014. CEO Cheryl Bachelder has done an outstanding job since assuming her position in late 2007 and has positioned the company for tremendous domestic and international growth moving forward (double U.S. footprint; untapped international opportunity). PLKI’s commitment to its franchisees is not only admirable, but also paying dividends.
We recently pulled PLKI from our Long List given the current valuation, but are ready and willing to add it back given a notable pullback. The fact of the matter is, this is one of the best run companies in our space and investors have ample visibility into the company and its operations given its asset-light model, diversified revenue steam and stable cash flows.
JACK – JACK was another one of our favorites on the long side in 2014 that we recently moved down to the Long Bench due to the recent run it has benefitted from. We first turned bullish on JACK in early 2012, given the potential inherent in the Qdoba brand. Since then, CEO Lenny Comma has a tremendous job running the company while Qdoba President Tim Casey has successfully reignited comp growth at the brand. Management put to rest any speculation that Qdoba will soon be spun off, due to the fact that the street is (finally) properly recognizing the concept for the growth vehicle that it is.
We still like JACK and believe they’ve identified feasible opportunities to drive margins moving forward (shared services model), but are hesitant to champion the stock at current levels. The stock very well could find itself back up on our Long List at some point, but we’d likely need to see a notable correction first.
DFRG – Del Frisco’s found itself on our Short List in mid-2014 as we found street estimates to be far too aggressive and refused to credit the Grille as being a viable growth concept. To be frank, we we’re waiting for easy comparisons to pass before re-shorting this one, but may have tried getting a little too cute in regards to timing. The stock has been hit hard the past couple of days after revealing soft margins in the Class of 2012 and 2013 Grille restaurants, reaffirming our view that this concept is not ready to grow 38% next year.
Management predictably touted the company’s portfolio of brands, suggesting it allows them flexibility in what they need to do to grow – you likely know where we stand on that. It’s become clear to us that 1) Sullivan’s can’t grow 2) the Grille isn’t ready to grow (and may never be a viable growth vehicle) and 3) the Double Eagle Steakhouse can only grow at a rate of one restaurant per year. With the street looking for 19% and 27% earnings growth in 2015 and 2016, respectively, this is a name that could find itself back up on our Short List in the near future.
CHUY – Akin to Del Frisco’s, Chuy’s spent some time on our Short List last year and could find itself back on it in 2015 after delivering, in our view, an underwhelming presentation at ICR. For starters, Chuy’s dialed back its expansion plans by one unit to 10-11. Second, and more importantly, Chuy’s scaled back expectations for new unit economics, as it decreased AUV and cash-on-cash return targets for its restaurants (down from $4.2mm and 40%, respectively, to $3.75mm and 30%).
We don’t deny that Chuy’s isn’t an overwhelmingly successful concept in its core market (Texas). We do, however, question the company’s ability to generate similar returns outside of this market. Chuy’s classes of 2012-2014 stores in immature markets have been ~50% less profitable than those in its mature market, but management insists this is a short-term phenomenon and will be corrected by its backfilling strategy.
Chuy’s development strategy, in which it is targeting long-term annual restaurant growth of 20%, calls for 1) the identification and pursuit of development in major markets and 2) “backfilling” smaller existing markets to build brand awareness. If you are long this stock, you are essentially betting that this expansion plan into new markets will go smoothly and that immature markets will mature well. That’s not a bet we’re willing to make and if the stock runs, we’ll be looking to re-short it.
NDLS – Very close to adding this name to our Short List. While it’s an intriguing, proven concept with an experienced management team, its first full-year as a publicly traded company was one to forget and, quite frankly, that’s exactly what the street has done – but we haven’t. Management’s 2014 guidance was woefully off-target and this year’s guidance is similarly unsettling. In 2015, Noodle’s expects to deliver:
To be clear, the chances of this happening are slim. Yes, industry sales are currently strong, but we’d be foolish to expect this trend to continue throughout all of 2015. And, if our memory serves us correctly, the company is coming off a year in which it delivered 0% earnings growth. For the street to assume the company will grow earnings 27% and 30% in 2015 and 2016, respectively, is mind-boggling. We don’t see NDLS hitting its numbers this year, which suggests the stock is even more expensive than investors think. Trading at 56x an inflated forward earnings number, management has no room for error.
HABT – The Habit Burger Grille is a better burger concept with an impressive history of same-store sales, unit, revenue, and adjusted EBITDA growth. We like the operations-focused management team and believe the company has a strong enough infrastructure to support its growth. All-in-all, it’s an impressive concept. But, it’s a small concept and it plans on growing rapidly (over 20%+) for the foreseeable future.
Aside from an egregious valuation, what concerns us most about HABT is the declining returns on invested capital it expects to realize during its expansion. While existing units are generating average unit volumes of $1.7 million and 40% cash-on-cash returns, management expects new units to generate average unit volumes of $1.5 million and 30% cash-on-cash returns – and there’s no guarantee these numbers don’t move lower as Habit begins to saturate markets. It’s a viable concept that’s in the early innings of an aggressive expansion plan; one that typically doesn’t come without a fair amount of hiccups. When you’re stock is trading at 257.26x forward earnings, you can’t have those.
CBRL – We actually think management is doing a good job running this company and did a good job articulating the Cracker Barrel story at ICR this week. CFO Larry Hyatt outlined the company’s properly aligned strategic priorities: 1) extend the reach of the Cracker Barrel brand to drive traffic and sales 2) optimize average guest check through the implementation of geographic pricing tiers 3) apply technology and process enhancements to drive operating margins and 4) further grow the store base with the opening of 6-7 Cracker Barrel stores.
Cracker Barrel has rightfully been the direct beneficiary of the recent decline in gasoline prices (86% of its stores are off of highways), but we fear the stock may have gotten a bit ahead of itself. Family dining chains, in general, have done quite well lately as they generate comps momentum, but it’s unclear how long this will last. It’s not easy for us to poke holes in the Cracker Barrel story right now and 2015 EPS growth of 9% looks achievable. However, we can’t justify paying 21x forward earnings for a chain that is growing ~1% per year and has historically traded closer to 14x. It’s on our Short Bench until we identify a catalyst, one way or the other.
PLAY – The re-emergence of Dave & Buster’s brings back memories of the old, “big box” company that failed miserably as a public company. Will things be different this time around? Our inclination is to be very skeptical of the company’s growth trajectory, but there’s no denying that they are putting up compelling numbers. The PLAY model generates $10.3mm in AUVs per unit, with approximately 50% of its revenues from its restaurant and 50% of its revenues from its entertainment offerings ($5mm “Eat and Drink” revenue; $5.3mm “Play and Watch” revenue).
On the surface, PLAY’s valuation looks reasonable – trading at 10.7x EV/EBITDA. However, we have issues with this valuation metric considering it uses an inflated EBITDA number (the company has come up with its own definition of EBITDA) that adds back pre-opening costs, which we view as a real cost of doing business – particularly for a growth concept. Although the set-up for the first quarter looks fine, we’ll be keeping a very close eye on this one in 2015.
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