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April 16, 2015

April 16, 2015 - HE DTR 4 16 15


EVENT: Internet Best Ideas Call (TODAY)

Takeaway: Join us for our call TODAY at 1:00pm EDT as we run through our Best Ideas (YELP, P, BABA) and touch upon TWTR

We will be hosting a call reviewing the major themes and incremental developments to our Best Idea Short theses on YELP, P, & BABA.  The emphasis of this call will be to highlight our view over various durations, as well as the upcoming catalyst calendar; identifying the major risks and catalysts to each position over the near-to-intermediate term.  In addition, we will touch upon our Short thesis on TWTR, addressing the same topics.

 

Join us for our call Today, at 1:00pm EDT.  

 

KEY TOPICS WILL INCLUDE

  • Review of the major themes and incremental developments to each our Best Ideas Shorts (YELP, P, & BABA)
  • Highlighting our view over various durations as well as the upcoming catalyst calendar: Risks & Catalysts to each position over the NTM
  • We will also discuss our Short thesis on TWTR, covering the same topics above.

 

Hesham Shaaban, CFA

@HedgeyeInternet 

 


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


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 80.28%
  • SHORT SIGNALS 78.51%

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 


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


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