Keith McCullough: One Minute Quantitative Analysis On Housing

In this excerpt from today's edition of RTA Live, Hedgeye CEO Keith McCullough talks about how we combine research with quantitative analysis and applies this process to our current view on housing and specifically the ITB (U.S. Home Construction ETF). 


RTA Live is a run-down of Hedgeye's Real-Time Alerts positions followed by live Q&A with Keith McCuollough, available EXCLUSIVELY to Real-Time Alerts subscribers. Sign up HERE for access.

Housing Is The Best Performing Sector YTD…And We Still Like It

In this excerpt from this Morning’s Institutional Macro Call, Housing Co-Sector Head Josh Steiner explains in granular detail the primary reasons why we are bullish on housing.



Watch today's entire 30-minute Morning Macro Call HERE 


Our short thesis is predicated on our belief that management does not have a feasible growth algorithm.  This is vital because, if we are right, an aggressive growth agenda will only come at the expense of shareholders.  To get to the heart of the matter, we specifically asked the company about this seven months ago on the 2Q14 earnings call.  Though we had our doubts, the answer, at the time, seemed legitimate:


Q – Howard W. Penney: Thank you for taking my question. As Matt was sort of pressing you on the performance of the current store base, can you go through what the economics are, given sort of the small number of stores in the comp store base and the total number of stores? Can you go through the economics of how you envision this unfolding – the Grille, excuse me -- how you envision this concept rolling out in terms of volumes, margins, and when you think you'll get to a fairly consistent performance? Thanks


A – Thomas J. Pennison: Sure, Howard. This is Tom. From the time we laid this out, we looked at the prototypical Grille was between $4.5 million and $6 million and we really saw a target in that $5.25 million is what our prototype was. So we target internally to be within that $5 million to $6 million AUV.


Within that AUV, we're looking to have a restaurant level EBITDA between 20% and 25%. Now, while we do have more favorable food costs, our cost of sales that our Grille gives us that was spoken to, we give a little bit of that back on our restaurant operating expenses because the lunch day-part has the labor to be a little bit higher as well as some of the premier spots we're utilizing, occupancy can be a little bit higher on that lower base, but that 20% to 25% is – we have been achieving that with the class of 2011 and 2012.


Unfortunately, we had such a large component of the Grille today is relatively new restaurants in a non-comparable group that's not fully visible yet, but we are between that 20% and 25% target for both 2011 and 2012 as well as already approaching that on a run rate with some of the 2013 openings.

Source: Bloomberg


At the ICR conference this past January, management unveiled Grille margins – and they weren’t close to what they’d depicted on the 2Q14 earnings call.




Oftentimes management will say what they need to until they no longer can.  If anything, this is further proof of that.  But our point is – and this should be the biggest takeaway – that Del Frisco’s growth algorithm is broken and the Grille is not ready to grow at such a rapid pace.  We’re trying to call out what no one else will.  The facts are in the chart above.  You can be the judge.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Cartoon of the Day: Lord of the Rates

Cartoon of the Day: Lord of the Rates - Yellen Gollum cartoon 02.25.2015


As Boromir famously said, "One does not simply raise interest rates…"

VIDEO | PENN: A Series Of Bullish Catalysts

Takeaway: Penn National Gaming Inc. was added to Investing Ideas on Tuesday, February 24th 2015.

Earlier today Gaming/Lodging/Leisure Sector Head Todd Jordan sat down with Hedgeye CEO Keith McCullough to discuss the myriad of bullish catalysts for Penn National Gaming Inc.   


The current macro environment, a new casino and a great management team are three factors in Todd's bull case for PENN.




Takeaway: Overall positive commentary out of NCLH. Pricing raised in last few weeks - a positive takeaway from the discussion




Jason Montague, President and COO Prestige

  • In the past, had acheived $25m total synergies off of $750m revenue base
  • Oceania yields bounced back to 2008 peak yields in 2012
  • Net revenue EBITDA margin should be metric to look at 
  • 50+ years old accounts for 80% of luxury consumers
  • Prestige:  Winter capacity -  Asia/Austrlaia/ French Polynesia/ Caribbean
  • 2015 capacity
    • Regent:
      • Caribbean: 10.9%
      • Europe: 36.0%
      • Alaska: 9.0%
      • Asia/Africa/Pacific: 29.1%
      • S America: 4.1%
      • Other: 10.9%
    • Oceania:
      • Caribbean: 15.7%
      • Europe: 34.1%
      • Asia/Africa/Pacific: 18.8%
      • Caribbean: 15.7%
      • S. America: 5.9%
      • World: 12.2%
      • Other: 8.3%
  • Prestige's visibility into future revs: 20-30% in advance of its industry peers
  • Prestige: only accounted for 1% of premium brand market in terms of passengers - huge opportunity
  • Sees continued double-digit international growth

Wendy Beck, CFO NCLH

  • 2015 guidance excludes Prestige-merger related amortizations in backlog, and customer relations: $101m in 2015, $38m in 2016, $35m in 2017 
  • Pricing raised in the past few weeks
  • Higher MGO grade fuel mix for 2015
  • On IPO call: wanted net leverage ratio below 4x. In 2014, Norwegian brand stand-alone net leverage was 3.8x
  • Longer-term goals:
    • 3-4% net yield growth
    • +30% ADJUSTED EBITDA margin
    • <4x net leverage ratio
    • Adjusted Net income growth: +30%
    • Adjusted EPS of $5.00 by 2017
      • From $2.80 FY 2015 (mid-point)
        • $1.74 from fleet growth  (including newbuilds); organic fleet should generate 2-3% growth
        • $0.13: scheduled interest expense 
        • $0.14- voluntary debt prepayments: $350m baked in 2016 and $440m in 2017
        • $0.19 - fuel hedges in 2015
    • ROIC: Double from IPO level's 7% to ~14% in 2018
    • Assume no share repurchases (if they use the cash to buyback shares rather than pay down debt, it will translate into additional 4 cents in EPS)
  • Weighted debt cost: 3.72%
  • Leverage targets (combined company)
    • 2015: 4.3x
    • 2016: 3.3x
    • 2017: 2.3x
  • ROIC targets (combined company)
    • Payback of Prestige ship: 4.5-5.5yr range
    • ~13% for 2017, 14% in 2018
  • Fuel:  Don't hedge MGO grade
  • Increased fuel hedges to 77% (68% previously) for 2015 currently and 12% for 2018 currently (8% previously)
  • 2014 FX exposure
    • 8% Euro (1 cent change in FX results in 4.3 bps in YoY change in yield)
    • 6% Pound (1 cent change in FX results in 2.0 bps in YoY change in yield)
    • 2% Aussie $ (1 cent change in FX results in 2.1 bps in YoY change in yield)

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.