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1Q15 Investment Ideas Earnings Preview

1Q15 Investment Ideas Earnings Preview - 99999

 

YUM: Yum! Brands, Inc.

Consensus Outlook: The street is looking for 1Q15 EPS of $0.72 (-17% YoY) on sales of $2.652 billion (-3% YoY). The system-wide comp outlook (-0.5%) is hampered by an anticipated slow recovery in China (-14.5%), partially offset by solid performances at KFC (+3.1%), Pizza Hut (+1.2%), and Taco Bell (+5.2%).

 

Hedgeye Outlook: The pace of the China recovery has been slower than originally anticipated and is a legitimate cause for concern.  But it’s this that further convinces us that changes are needed.  The likelihood of an activist entering the name is increasing.  With that being said, there’s a chance management may have been too cautious in their comp guidance and any upside would flow through nicely to the bottom line (+/-1% comp in China = +/-$0.02 EPS).  The street is currently modeling China restaurant level margins at 15.3%, which would be the worst 1Q number in recent memory (down ~800 bps YoY).  Given the bump the business is likely to see from a revamped menu ahead of the Chinese New Year, it’s tough to imagine this number surprising to the downside – unless comps are disaster, in which case our argument for structural change will strengthen.  The rest of the business (Taco Bell, KFC, and to a lesser extent Pizza Hut) is on the right track. 

 

We continue to see fair value in the low-to-mid 90’s based on our sum-of-the parts analysis.  Importantly, management has the potential levers in place (increase leverage, accelerate refranchising, cut SG&A, spinoff China) to push the stock much higher than that.  Management guided FY15 EPS growth of at least +10% (consensus is at +12%), but this will depend largely on the pace of recovery in China.

 

Latest Note: WEN Leveraged Recap Puts Pressure On YUM

Video: YUM: A Lot Of Ways To Win


1Q15 Investment Ideas Earnings Preview - 10000

 

 

WEN: The Wendy’s Company

Consensus Outlook: The street is looking for 1Q15 EPS of $0.05 (-25% YoY) on sales of $475 million (-9% YoY).  The system-wide comp outlook (+2.6%) is driven by strong company comps (+3.3%), mostly mitigated by lower franchise comps (+2.6%). 

 

Hedgeye Outlook: We think there is upside to comps in the quarter, given an easy comparison, strong industry sales, and Wendy’s positioning as a likely beneficiary of these trends.  In addition, the company has limited exposure to the Northeast (~4%) which took on the majority of unfavorable weather in 1Q.  The bigger story here, however, continues to be Wendy’s transformation of its business model to a leaner, more efficient machine.  Beef continues to pressure cost of sales, but we expect significant restaurant level margin and operating margin expansion to be realized in 2015, as management effectively leverages labor and other operating expenses.  There’s also a feasible opportunity to cut G&A, but we’d be surprised is this happened in the near future.

 

In February, Wendy’s announced plans to reduce its company-owned mix, by refranchising ~500 company restaurants by mid-2016, and to recap to 5-6x net leverage.  Wendy’s stock is essentially flat since this announcement, despite the market’s predisposition to award higher multiples to highly franchised, levered up QSRs.  We believe the pending leveraged recap is not fully reflected in estimates, which could provide a few cents of upside to earnings over the next couple of years.  With only 26% buy ratings, WEN remains unloved.

 

Latest Note: WEN: Middling Q, But That’s Not The Story Here

1Q15 Investment Ideas Earnings Preview - 2

 

 

CMG: Chipotle Mexican Grill, Inc.

Consensus Outlook: The street is looking for 1Q15 EPS of $3.65 (+38.1% YoY) on sales of $1,104 billion (+22% YoY).  The comp outlook (+11.8%) is being driven by a combination of price (+6.3%), traffic (+4.3), and mix (+1.3%) growth.

 

Hedgeye Outlook: CMG has underperformed its QSR peers over the past three months (down -1% vs the group ex. NDLS up +7%) despite boasting industry leading same-store sales, new unit productivity, and unit economics.  The stock now trades at a discount to its average three-year P/E, due to lingering concerns around decelerating comps and food inflation – both of which are, in our view, overblown.  Food inflation may be approaching peak and comps should re-accelerate in 2H15.  At the end of 2015, we’re looking at TTM restaurant level margins of 27.7% and operating margins of 18.2% largely driven by continued labor leverage.  These are numbers you simply can’t find in the restaurant space, particularly among concepts with 1,500+ units.  We think it’s a $750 stock by year end.

 

Latest Note: CMG: Look Past The Near Term Noise


1Q15 Investment Ideas Earnings Preview - 3

 

 

ZOES: Zoe’s Kitchen, Inc.

Consensus Outlook: The street is looking for 1Q15 EPS of $-0.01 on sales of $61.3 million.  The comp outlook (+5.6%) suggests a flattening in the two-year average. 

 

Hedgeye Outlook: ZOES is likely to trade on same-store sales results over the immediate to intermediate-term and we think it is poised to continue its momentum.  The stock has taken a breather over the past three months (-2%) due to its large presence in Texas, but we don’t foresee recent oil price declines having a major negative impact on the quick service industry.  In fact, one could argue it’d be a net benefit.  Regardless, we’re not interested in playing the quarter-to-quarter game with this name.  ZOES is a unique fast casual restaurant with strong positioning, AUVs, and early unit level profitability that we believe will scale quite well.  It’s proven in diverse markets and management’s hub-and-spoke approach to geographic expansion should help avoid any major blowups (NDLS, CHUY, PBPB, etc.).  Valuation is a concern, but we think the street lets this one grow into it.  Ultimately, we think ZOES sees at least 40% upside over the next three years with the potential to double.

 

Black Book: ZOES: Standing Out From The Crowd

Video: REPLAY | ZOES: Standing Out From The Crowd


1Q15 Investment Ideas Earnings Preview - 4

 

 

DFRG: Del Frisco’s Restaurant Group, Inc.

Consensus Outlook: The street is looking for 1Q15 EPS of $0.21 (+7.3% YoY) on sales of $88 million (+17% YoY).  The comp outlook (+1.3%) suggests a 40 bps sequential deceleration in the two-year average, reflecting difficult weather in the Northeast.

 

Hedgeye Outlook: 2014 was a disastrous year for the stock and we’d be surprised if 2015 were much different.  The numbers continue to be too high for DFRG – any way you slice it.  After delivering -5.7% EPS growth on 11% sales growth in 2014, the street is expecting 15.4% EPS growth on 16% sales growth.  We simply can’t get there.  DFRG’s earnings per share have decreased 15% over the past two years, from $0.94 in 2012 to $0.82 in 2014.  Incidentally, units have increased 35% from 34 in 2012 to 46 in 2014 led by the rapid rollout of the Grille concept.  This tells us something is wrong here.  We don’t believe DFRG has a legitimate growth vehicle and, for a company that touts itself as “one of the growth leaders in [the] industry,” this is a serious issue.  After two years of significant restaurant level margin deterioration, the street is modeling a slight expansion in 2015.  With 6 new Grilles on tap this year, this is very unlikely.  DFRG trades at 21.1x an inflated 2015 earnings number.

 

Latest Note: DFRG: Thesis Confirmed Despite The Pop


1Q15 Investment Ideas Earnings Preview - 6

 

 

CHUY: Chuy’s Holdings, Inc.

Consensus Outlook: The street is looking for 1Q15 EPS of $0.16 (-1.9% YoY) on sales of $67 million (+19.8% YoY).  The comp outlook (+2.7%) assumes a 10 bps sequential acceleration in the two-year average.

 

Hedgeye Outlook: Chuy’s is another concept that has struggled mightily over the past couple of years, due primarily to a nonsensical and flawed growth strategy which we highlighted in our recent ZOES black book.  Management’s 2013 development strategy consisted of nine new units, in eight new markets, located within six new states – no wonder they have a brand awareness problem!  Prior to expansion, Chuy’s was not a well-traveled concept outside of Texas.  As a result of this, CHUY’s delivered 0% EPS growth on 20% sales growth in 2014.  In 2015, the street expects the tide to turn, calling for 10% EPS on 18% sales growth.  Given Chuy’s ongoing issues and significant labor pressure, we expect restaurant level margins to continue to deteriorate in 2015.  2H15 estimates continue to be far too aggressive, which makes a guide down at some point very likely.  With CHUY trading at 32x an inflated 2015 earnings number, we see more downside ahead.

 

Latest Note: Staying Short


1Q15 Investment Ideas Earnings Preview - 7

 

 

NDLS: Noodles & Company

Consensus Outlook: The street is looking for 1Q15 EPS of $0.05 (+2.9% YoY) on sales of $108.7 million (+21.4% YoY).  The comp outlook (+1.5%) implies a 270 bps sequential deceleration in the two-year average.

 

Hedgeye Outlook: The issue with NDLS is not limited to its growth strategy, but also its inability to retain customer interest.  The high carb menu is not particularly appealing to today’s consumer and the brand lacks a feature menu item that people crave.  NDLS launched Buff Bowls in early April to help satisfy those seeking leaner, protein-centric dishes but with scaled back marketing, it’s difficult to gauge the effectiveness of such a rollout.  Either way, any impact wouldn’t hit until 2Q.  After reporting -5% EPS growth on 15.1% sales growth in 2014, management made the conscious decision to skew new unit development more toward new and developing markets in 2015.  This gives us very little confidence in the 20% EPS guidance they provided on the 4Q14 earnings call.  This could get cut in half – and the stock could follow suit.  NDLS is trading at 41.3x an inflated 2015 earnings number.

 

Latest Note: Wet Noodles


1Q15 Investment Ideas Earnings Preview - 8

Source: Consensus Metrix Estimates

 

 

SHAK: Shake Shack, Inc.

Consensus Outlook: The street is looking for 1Q15 EPS of $-0.03 on sales of $34 million.  The comp outlook (+4.9%) is mostly driven by a combination of price (+6%) and mix (-0.8%).

 

Hedgeye Outlook: Not the most actionable call on our Investment Ideas just yet, but we continue to believe SHAK is wildly overvalued.  The burger chain, whose expansion strategy consists of growing at lower margins and returns, is trading at 1,115x 2015 EPS, 153x 2015 EBITDA, 13.2x 2015 sales, and $33 million per restaurant.  We thought the 4Q14 earnings call was uninspiring, at best, and expect much more of the same moving forward.  The recent run in the stock is likely due to a supply/demand issue given the limited float.  The lockup expiration in four months (July 29th) may be the first legitimate catalyst on the calendar.  We encourage you to read our latest note for more details on our bearish bias.

 

Latest Note: SHAK: NYC Is Not the Center of the Universe


1Q15 Investment Ideas Earnings Preview - 5


GALAXY Q1 2015 CONFERENCE CALL NOTES

Takeaway: 1Q 2015 EBITDA missed our estimate slightly. Mgmt sees some stabilization in mass.

CONF CALL

  • 1Q 2015 had toughest comp
  • Seeing signs of gradual stabilization in the market but need more time to verify that
  • Galaxy Macau: Mass revenue grew 3% sequentially which is a good sign for Phase 2
  • StarWorld:  have reallocated tables to better use
  • 1Q capex: total $2.1 billion ; $340m (Broadway capex); completed Grand Waldo acquisition in 1Q.  Have hired 6,200 workers (have doubled staff). 
  • Increase in Debt to $2bn: due solely to a treasury management exercise where interest income on cash holdings exceeds corresponding borrowing cost

Q & A

  • Possibility of full smoking ban: GEG supports what Macau govt has done with smoking control act. Imposing additional restrictions through full smoking on a tough Macau environment would hurt.
  • Conflicting reports from media on visitation cap
  • Luck-adjusted EBITDA: $20m of bad luck in 1Q (Galaxy Macau: played unlucky in higher margin premium direct business -$65m; Starworld: benefited $45m)
  • Construction materials:  4Q is traditionally strongest in year. 1Q weakest.  Mainland China lagged lagged behind but HK did well.
  • Sees volume stabilization particularly in the mass segment (premium and core)
  • Pre-opening spend in 1Q: $185m; $400-425m YTD. Will hit that $19.6 bn target.
  • Lower hotel occupancy QoQ:  optimal yield doesn't necessarily mean 100% occupancy but April occupancy is running at full occupancy.
  • Chief Executive address: positive on growth of Macau 


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11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See

We take our work very seriously here at Hedgeye. But we try not to take ourselves too seriously. So, in addition to providing some of the best, non-consensus research to many of the world's leading institutional investors on everything from global macro and MLPs to companies like Restoration Hardware and Yelp, we also produce damn good cartoons.

 

In this spirit, we offer you a handful of some of Bob Rich's (our cartoonist-in-chief) finest handiwork. Apologies to Mario and his central planning minions.


11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi cartoon 01.20.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi 09.04.2014
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi balloon cartoon 01.23.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi car cartoon 03.06.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi cartoon 01.08.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi cartoon 02.09.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi cartoon 03.05.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi cartoon 03.31.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Draghi inferno cartoon 04.10.2015
11 of the Best Cartoons Lampooning Mario Draghi and the ECB You'll Ever See - Euro cartoon 03.10.2015


Risk-Managing the Short Squeeze in Energy

Takeaway: Ahead of a dovish FOMC statement, crude oil is appropriately testing its TREND line of resistance. Longer-term, however, we remain bearish.

Q: "Was curious if you have a theory on why seems to be strong while the DXY has held in there pretty well.  Has the set up changed where you might get more bullish on oil?"

 

A: The setup hasn’t changed from our perspective. We definitely think a lot of this rally in oil is a function of what has quickly become a semi-consensus narrative on the buy-side – i.e. the Druckenmiller “dollar decoupling” view. He’s been right thus far in the YTD, as the inverse correlation has essentially dissipated:

 

Risk-Managing the Short Squeeze in Energy - DXY vs. WTI 

 

Oil is still broken quantitatively, but our intermediate-term TREND line of resistance of $57.54 is definitely within striking distance:

 

Risk-Managing the Short Squeeze in Energy - 1

 

To the extent this squeeze overcomes that level and decides to test the next probable mean reversion zone, there’s a lot of risk to manage between last price ($55.95) and our long-term TAIL line of resistance of $72.12 – 29% that is!

 

While crude oil would still be broken from a long-term perspective on any price below $72, it’s hard for any investor to be short for a move like that, which is probably why short positions in the futures and options markets dropped -10.6% WoW in the most recent reporting period. Anyone who shorted crude around its YTD lows is likely being forced to cover on any semblance of a developing bullish narrative.

 

To that tune, our recent discussions with investors suggest there is a sizeable contingent of investors who believe the eventual [negative] supply response will prove to be sustainably bullish for crude prices, but we do not buy that narrative. We actually think domestic production growth will actually start to re-accelerate then, given how sharply it decelerated in recent months. E&Ps are in the business of producing crude oil; they can’t sit on the sidelines in perpetuity.

 

Risk-Managing the Short Squeeze in Energy - 2

 

When does the pain trade on crude end? We continue to view the 4/29 FOMC statement as a catalyst for immediate-term dollar debasement and reflation plays like energy and emerging market assets are definitely front-running what we think will be a dovish statement, on the margin, in light of the recent trend of disappointing economic data.

 

Risk-Managing the Short Squeeze in Energy - U.S. Econ Surprise Index

 

 

From there, we think the DXY trades higher into the summer months as our policy divergence theme carries on. Neither Draghi nor Kuroda will allow the USD to sustain a series of lower-highs vs. the EUR and JPY, respectively.

 

Long live the currency war,

 

DD

 

Darius Dale

Associate


[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds

Takeaway: 1Q15 domestic equity flows came in lower than 1Q07, 1Q10, 1Q11, 1Q13, and 1Q14. This is a bad sign.

This note was originally published April 09, 2015 at 08:21 in Financials. For more information on our services and how you can subscribe click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The total year-to-date outflow from domestic equity funds increased by nearly two thirds to -$8.8 billion as of April 1st from -$5.4 billion as of March 25th.  This asset class is doing especially poorly this year.  From 2007 through 2014, excluding 2008, domestic equity funds lost -$68.6 billion per year on average. However, even with those outflows, average first-quarter domestic equity flows were neutral.  On the other hand, as we show in the chart below, this year's Q1 flow sits -$8.8 billion below the ex-2008 average of +$26 million.  Post-2006, the only years that had worse domestic equity outflows in the first quarter were 2008 at -$41.0 billion, 2009 at -$27.3 billion, and 2012 at -$19.2 billion.  By the end of those years, investors had pulled -$157.0, -$40.6, and -$167.9 billion, respectively, from domestic equity funds.  Given the asset class' year-to-date outflows in what is usually the best quarter of the year, things do not look so rosy for domestic active managers.  Our most actionable ideas in the asset management group continue to be to avoid or short the equity asset managers Janus Capital and T Rowe Price and also to begin legging into defensive money fund manager Federated Investors (see our deep dive Black Book here).   

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 12

 

Other fund flows during the week were also defensive with equity ETFs putting up outflows of -$5.8 billion, including -$10.5 billion in withdrawals from the SPY.  We are still cautious on the domestic equity fund managers especially T. Rowe Price and Janus Capital as these stocks are on our Best Ideas list as Short/Avoid.  Alternatively our recommended Long exposure stands with alternative asset manager Och Ziff (see our OZM research here), a stock which trades without an incentive multiple currently, defensive money fund manager Federated Investors (see our FII research), and defined contribution retirement plan advisor Financial Engines (see our deep dive FNGN Black Book).

 

Also of note, investors redeemed -$47 billion from money market funds last week, which seems to have been because of seasonal tax payments.

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 1

 

In the most recent 5 day period ending April 1st, total equity mutual funds put up net outflows of -$1.6 billion according to the Investment Company Institute, trailing the year-to-date weekly average inflow of +$1.3 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$1.8 billion and domestic stock fund withdrawals of -$3.3 billion.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 13 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up outflows of -$1.3 billion, trailing their year-to-date weekly average inflow of +$2.4 billion and their 2014 average inflow of +$929 million. The outflow was composed of +$96 million of contributions to tax-free or municipal bond funds and -$1.4 billion of withdrawals from taxable bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.

 

Equity ETFs experienced redemptions of -$5.8 billion, trailing the year-to-date weekly average inflow of +$1.3 billion and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$1.7 billion, outpacing the year-to-date weekly average inflow of +$1.5 billion and the 2014 weekly average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 2

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 3

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 4

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 5

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 7

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the SPY experienced a significant -$10.5 billion or -5% withdrawal.  Additionally, the consumer staples XLP continued to bleed funds, giving up -$785 million or -9% in redemptions last week.

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 9

 

 

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$7.7 billion spread for the week (-$7.3 billion of total equity outflow net of the +$418 million inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.2 billion (more positive money flow to equities), with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week).

  

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 10

 

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] ICI Fund Flow Survey | Trending Not Mending - Ugly Start to '15 for Domestic Equity Funds - ICI 11 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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