Link to Report: Monday Mashup

  • Key Callout: removing short PNRA from our Investment Ideas list

European Banking Monitor: Swaps Tighten Ahead of QE

Takeaway: The U.S. market read the favorable jobs report as bad news while the global risk perception decreased as ECB bond buying is set to begin.

Key Takeaway:

Risk perception decreased, as Mario Draghi announced that the ECB would begin buying bonds today, March 9th. In our heatmap below, risk measures on the short term are mixed, while intermediate-term measures are mostly positive.


European Financial CDS - Swaps mostly tightened among European banks last week with Mario Draghi announcing that ECB bond buying will begin today, March 9th.


European Banking Monitor: Swaps Tighten Ahead of QE - chart1 financials CDS


Sovereign CDS – With ECB bond buying approaching, sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -14 bps to 83 bps, and Portuguese swaps tightened by -17 bps to 118 bps.


European Banking Monitor: Swaps Tighten Ahead of QE - chart2 sovereign CDS


European Banking Monitor: Swaps Tighten Ahead of QE - chart3 sovereign CDS


European Banking Monitor: Swaps Tighten Ahead of QE - chart4 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 was unchanged at 11 bps.


European Banking Monitor: Swaps Tighten Ahead of QE - chart5 euribor OIS Spread



Matthew Hedrick 



Ben Ryan






GLPI's offer to buy PNK looks like a good deal for both sets of shareholders




  • Somebody knew something as PNK traded up 7% last week versus PENN down 2% and BYD down 4%
  • GLPI’s effort goes against conventional wisdom that there can’t be a hostile takeover in gaming because of the regulatory scrutiny. PENN/GLPI management has consistently argued: why not?  I guess they’re putting their money where their mouth is
  • The likelihood GLPI will need to raise their bid is fairly high in our opinion, but it would likely be a “saving face” gesture to appease PNK’s senior management. Thus, we don't expect the sweetener will be material
  • We don’t exactly agree with the offer valuation provided by  GLPI: 
    • Specifically, GLPI values its offer at $35.77 per PNK share, comprised of $22.13 for the value in Pro Forma GLPI and $13.64 in value for Pro Form Pinnacle OpCo.  Our issue is with the latter. 
    • We do not believe a 7.5x multiple is appropriate.  While the best OpCo comp would be PENN and PENN does indeed trade at 7.5x EV/EBITDA, that multiple is based on 2015 EBITDA.  With full year contributions from 2 new properties opening in 2015 and 2016, PENN’s EBITDA is poised to grow 14% in 2016 while PNK OpCo will likely be flattish. 
    • Looking out to 2016, PENN trades at only 6x, a much more appropriate multiple for the PNK OpCo in our opinion. 
    • OpCo’s deserve low multiples in domestic gaming given the lack of growth, oversaturation, demographic headwinds, and the volatility of revenues without the underlying real estate value. 
    • As a pure play on regional gaming, we believe PENN is better managed and would warrant a higher multiple.
    • Our estimates for PNK are close to the numbers used in GLPI’s analysis
  • PNK is now trading at $33, below the GLPI assessed valuation of $36.  Investors seem to agree with GLPI’s 7.5x valuation of OpCo.  Using a more appropriate 6.0-6.5x valuation for OpCo, we arrive at only $30-32 in value per PNK share.  
  • Considering the 9 months to close for this potential deal, the uncertainty of the PNK board and shareholders accepting the deal, as well as the potential risks of not receiving all the necessary regulatory approvals, PNK’s stock looks overvalued here, even after incorporating $1-2 per share associated with a higher offer.
  • GLPI is currently up 9% in trading which looks appropriate

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QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei

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It was a monster melt-up in USD #Deflation last week, with the Dollar climbing +2.5% to +8.3% YTD. Over on the Burning Euro front, the Euro was torched for another -3.1% weekly loss. It’s down -10.4% YTD.

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei - Draghi 09.04.2014


Perversely, both Japan and Europe are perpetuating Global #Deflation via their burning currency policies.

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei - Deflation cartoon 10.02.2014


On a related note, Japan’s “Weimar Nikkei” finally stopped going up every single day. It was down -1% overnight, after being up about that last week.


Japanese GDP? It missed again. But who cares? That only gets them to print moarrr Burning Yens!

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei - Abenomics cartoon 11.18.2014

YELP: Hiding the Bodies

Takeaway: Mgmt is getting shadier by the day. YELP may see a short-term reprieve on its stock, but at the cost of a much worse blow-up in 2H15.


  1. THE MODEL IS DETERIORATING: YELP’s business model isn't sustainable; we're already seeing signs that its model is breaking down at a progressively worse rate within its reported metrics. 
  2. HIDING THE BODIES: In response, management is now manipulating its reported metrics to mask what's really happening.  In addition, YELP made a very questionable acquisition, and potentially understated its expected revenue contribution (link) to make its core business look better.
  3. PENDING IMPLOSION: The overriding theme is that these suspect moves aren't any more sustainable than its current business model.  Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on a fading buy-side growth story.



YELP’s Local Advertising segment is riddled by an absurd level of attrition, which is becoming increasingly more challenging to overcome as the company presses up against a limited TAM that can’t support its model.  We can already see YELP’s model breaking down in its reported metrics.  So in response, management is now manipulating that very data in order to hide what’s really going on.


YELP: Hiding the Bodies - YELP   New Acct vs. Sales 4Q14



Below are series of suspect moves that management has taken to mask its rampant attrition issues, and overstate the fading strength in its core Local Advertising segment. 

  1. FLUFFING LOCAL ADVERTISING METRICS: Starting in 2015, YELP will be reclassifying the revenues from its SeatMe reservation service from “Other Services” segment into “Local Advertising” Segment.  In turn, YELP will be printing an artificial lift through 2015 in both Local Advertising Revenue and its Local Advertising Accounts.  The sell-side bulls will confuse that as fundamental strength.
  2. HIDING THE BODIES: Starting in 2015, YELP will no longer provide its legacy Active Local Business Account metric in favor of a new metric called “Local Advertising Accounts”, which only includes accounts contributing to its Local Advertising Revenue.  There are two implications here. 
    1. Pulling the Wool Over Your Eyes: This makes it easier to hide the SeatMe reclassification into Local Advertising since it will be pulling SeatMe from its larger legacy account metric that it will no longer be reporting. 
    2. Buying Some Deniability: YELP’s customer repeat rate is based off the legacy account metric mgmt will be retiring. This means that we can’t explicitly calculate its customer mix (and attrition) moving forward.  This gives management deniability, but doesn’t change anything.
  3. BUYING GROWTH: YELP has a history of making questionable acquisitions to mask weakness elsewhere in its business.  With its most recent Eat24 acquisition, there's a good chance that management grossly underestimated Eat24's expected revenue contribution given that associated $36M revenue guidance raise is roughly inline with what Eat24 may have been generating back in 2013 (link).
    1. SeatMe: Reservation service acquired into 3Q13.  SeatMe accounts were reclassified into Active Local Business Accounts beginning 2014, and its revenues are being reclassified in Local Advertising starting 2015.
    2. Cityvox SAS/Restaurant-Kritik: International competitors acquired in 4Q14 after YELP couldn’t produce revenue growth off its international Qype acquisition from 4Q12. 
    3. Eat24: Food-ordering service acquired in 1Q15.  We have no idea how YELP will account for the service, but if it can reclassify its SeatMe reservation service as Advertising business, there is nothing stopping them from doing the same with Eat24.



The overriding theme is that these suspect moves aren't any more sustainable than its current business model.  Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on an a fading buy-side growth story. 


This is how we see the progression of the YELP's earnings releases as we move through the year.

  1. 1Q15: Let's say YELP knocks the cover off the ball on the 1Q15 release and raises guidance. Consensus then raises estimates even higher as they always have (likely 2H15 weighted, with 2016 even higher).  
  2. 2Q15: the bar is now higher.  YELP could produce 2Q15 upside, but its 3Q15 guidance release is likely less impressive, if not light.  
  3. 3Q15: YELP can't guide 4Q15 estimates above consensus estimates since the sell-side has raised the bar too high throughout the year.  
  4. 4Q15: Consensus expectations for 2016 have steadily risen throughout 2015 with the sell-side trying to justify their price targets.  Now, YELP needs a much bigger acquisition and/or a more egregious accounting maneuver to distract the street...while hoping no one catches on.

In short, the setup for YELP will become progressively more challenging as we move through 2015 into 2016.  Even if the stock pops on the 1Q15 release, it likely ends the year lower than it started once YELP doesn't raise guidance above expectations (likely 2H15).



Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA




HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE

Takeaway: Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.

Editor's note: This research note from Hedgeye's Restaurants team was originally published February 12, 2015 at 13:18. The stock is down over -4% since.

CAKE delivered one of the worst prints we’ve ever seen out of them, missing top line and bottom lines estimates by 177 bps and 2025 bps, respectively.  Comps also disappointed, coming in at +1.4% vs the +1.9% consensus estimate.  After reading the press release, and seeing the massive level of margin deterioration, we didn’t think it could get much worse – and then the earnings call started. 


HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - uno


HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart2



Management’s commentary on food and labor inflation was critical on a couple of levels: 1) CAKE will be hard pressed to grow margins in 2015 and 2) this is awful news for the small and weak players in the industry. 


To the first point, CAKE’s food cost pressures in 2014 were widely recognized due to higher dairy and seafood prices.  But the degree to which this line de-levered over the course of the year was astounding.  Management conceded that it is considering supplementing its contracting with direct hedging, but to what extent this will help is unknown.  While many expected CAKE to be one of the largest beneficiaries of the retreat in dairy prices, beef and, to a lesser extent, chicken are expected to drive 2-3% commodity inflation in 2015.  They will have a very difficult time leveraging this line further without delivering a 2%+ comp, a feat they haven’t accomplished in over two years.


HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart3


Labor inflation was a much less publicized issue throughout the year that the company mainly attributed to unusually high group medical claims.  This pressure, however, is expected to continue in 2015 and could be compounded by minimum wage increases in select states across the nation.  All in, management expects $10-12 million in wage inflation.  We wrote in a bearish Black Book last January that the margin story was over for CAKE and it certainly appears to be.  They haven’t driven labor leverage since 1Q13 and probably won’t anytime soon.


HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart4


To the second point, and we’ll have more on this in a later post, the pressure CAKE is seeing is not limited to them.  If a well-established player in the casual dining industry is struggling to control these costs, what does that mean for smaller, rapidly expanding players in the industry?  They’re going to feel a bigger impact – and it’s not going to be pretty.  Minimum wages increasing and the restaurant job environment is improving.  It’s getting increasingly difficult and expensive to retain employees – an issue that, just today, Panera referred to as the “war for talent.”  In the coming days, we’ll unveil a list of companies that we believe will have a much more difficult time operating in this environment than consensus expects.  And, yes, we’d short all of them.



“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way.”

-Howard Schultz, Chairman/President/CEO/Founder


Howard Schultz made this remark last year on his company’s 1Q14 earnings call – and we think it’s spot on.  If it’s not, CAKE’s traffic isn’t doing much to suggest so.  Traffic declined -1.2% in 4Q14, marking the ninth consecutive quarter of negative traffic.  Management insists it’s not related to the secular decline in mall traffic but, if that’s the case, they need to prove it.  The traffic and margin decline we’re seeing suggests this company is operating a broken model and, if it’s to be fixed, it will take significant time and investment.


HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart5



CAKE guided FY15 EPS to a range of $2.08-2.20 on 1.5-2.5% comp growth, a far cry from the current $2.42 consensus estimate.  If they want to hit this range, they’ll need to deliver strong comp growth and, with limited drivers in place, we’re not sure how they do that.  Speaking to the lack of incremental leverage in the business model, management actually admitted that it needs to either develop or acquire a growth concept in order to deliver long-term EPS growth in the mid-teens.  And you probably already know how we feel about multi-concept operators.  This brand is in trouble and, if it weren’t down 10% today, we’d short it.  In fact, if it bounces meaningfully, we’d likely jump at the opportunity.


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