“We have a lot of rookies in the lineup. More than anybody, I would say. It’s going to be something new for them. They have to understand that it’s totally different hockey in the playoffs. Starting with the fans, the intensity of the game, every mistake counts.”
Last night the pursuit of Lord Stanley’s Cup began in earnest with the first series of games in the NHL Playoffs. Certainly, the team at Hedgeye is over indexed to the love of the great game of hockey. But whatever your athletic passion, it’s hard to deny that playoffs are an exciting time of year.
For those of you who don’t follow hockey closely, the quote at the outset is from one of the true iron men of the NHL. At 43 years of age, Jagr was the oldest player to play in the NHL last season. His first season was 1990 and with the exception of a few seasons in Russia, Jagr has been playing in the NHL ever since. In fact, he is the only player in the history of the NHL to play in the playoffs as both a teenager and a 40-year old.
Being the wily vet that he is, Jagr’s aforementioned quote is spot on. Whether in sport or business, you need to let the rookies play, but as their GM or boss you also need to realize that their experience is limited and when the intensity picks up during crunch time they need to know that every mistake does matter. And if they don’t, the experience will teach them that very quickly.
Before we get into the macro grind today, I’ll give you my pick to win the holy grail of hockey. Since the team Keith and I own with some friends, the Arizona Coyotes, is out of the running, I’m going with the New York Rangers over the Chicago Blackhawks with New York winning at home in game 5.
Who is your pick to win the Cup?
Back to the Global Macro Grind…
It seems that our friends at the IMF weren’t settled into their chairs watching playoffs last night. The Financial Times is reporting this morning that the IMF is warning that the Fed’s first rate hike could lead to a so-called “Taper Tantrum”. In effect, the IMF is concerned that volatility in U.S. rates will spike dramatically in conjunction with the first rate hike.
In the Chart of the Day we look at the U.S. 10-year yield versus U.S. unemployment going back as far as the data was available. In stating the obvious, as the chart shows, we are certainly in an unprecedented period of monetary policy. Will we get a massive spike in interest rate “vol” when the first hike happens? It’s tough to say without a crystal ball. But what IS already happening is a spike in opinions on when and how to raise rates.
On that front, the esteemed Bernank (aka former Fed Chair Ben Bernanke) weighed in this morning on when and how to guide rates higher. Not surprisingly part of the Bernank’s plan is to keep the balance sheet larger for longer and also focus on the repo rate and other short-term money market rates. Some of his views probably have credibility, but whatever happened to central bankers focusing on the data?!
Speaking of extremes, the Energy Information Administration (EIA) yesterday reported that crude inventories rose less than expected by a mere 1.3 million barrels on the week to 483 million barrels in total. According to EIA records dating back to 1920, this is the most inventory the U.S. has had on hand since the 1930s (that was back when the NHL only had six teams for crying out loud!).
In conjunction with that, a Federal Reserve index showed that crude production rose 1.3% in March. This increase took it to the highest level since 1973, which was before I was born and I’m no spring chicken. If that isn’t enough, Iraq crude exports hit a record of 3.0 million barrels in March and the Saudi’s did exactly what they said they would do and took production up to 10.3 million barrels per day.
Earlier in the week we used a quote from Templeton about waiting to buy when there is blood in the street. Certainly there is truth to that if we look at investing history. When it comes to getting long of oil, due to the lack of storage, we may literally get a chance to buy it when it is in the streets!
In Europe, Greek’s clock is running down. Yesterday, it was leaked that the Greeks approached the IMF about a rescheduling of repayments and were told categorically that no rescheduling of debt is possible. As a result, yields on 2-year Greek notes spiked by more than 180 basis points to 25.7% and 10-year yields were up 100 basis points to 12.65%. If the IMF wants interest rate volatility, they got it.
As for Greek catalysts, there are a couple to focus on:
- The Eurogroup meeting next week on April 24th; and
- The next payment to the IMF due on May 12th of 747 million euro.
Overtime for the Greek debt market is here! Let’s hope they have a good goaltender in PM Alexis Tsipras.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.86-1.96%
Oil (WTI) 48.19-56.69
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on April 02, 2015 for Hedgeye subscribers.
“I find my life is a lot easier the lower I keep everyone’s expectations.”
For those of you who aren’t into Hedgeye-style Fed and Global #Deflation cartoons, may I suggest some ole school Calvin & Hobbes? Bill Watterson syndicated that uniquely American comic strip during some of the best of US economic times, then stopped.
“Watterson stopped drawing Calvin and Hobbes at the end of 1995 with a short statement to newspaper editors and his readers that he felt he had achieved all he could in the medium.” (Wikipedia)
What if US bond yields break to all-time lows, and I just stop? This is not the 1990s. As you can see in our Chart of The Day, the world is getting older at its fastest rate. As Global #GrowthSlowing gets priced into bond yields, your market life gets easier accepting that.
Back to the Global Macro Grind…
As we roll into our Q2 Global Macro Themes call (April 7th) and I look back on the most thought provoking slides of our Q1 deck, this chart we are showing you again today is a critical one to consider from a long-term global demographic perspective.
What we are showing you here is the world’s 65+ year-olds as a percentage of 25-54 year-olds, in rate of change terms. And the investment implications associated with this demographic reality are quite simple:
The number of aging baby boomers who are inclined to allocate retirement assets to Fixed Income instead of Alibaba (BABA) or Go Daddy (GDDY) stock is accelerating! So I’ll reiterate our uber bullish call on the Long Bond (TLT) again this morning.
Lower-rates-for-longer? Yep. Here’s what drove the outperformance of bonds vs. US stocks (again) yesterday:
- In rate of change terms, the ADP employment report slowed (again), sequentially in March
- USA’s ISM slowed to 51.5 in March vs. 52.9 in February
- The “employment” component of the ISM slowed to 50.0 MAR vs. 51.4 FEB
In other words, anything that walks or quacks like a slowing US jobs picture is not a duck. To the bond market, it’s a dove. And, my newest bff Janet, is the Mother of All Doves!
In terms of risk management levels for the US 10yr Bond Yield:
- The immediate-term TRADE range is now 1.82-1.93%
- Long-term TAIL risk resistance remains up at 2.39%
- And there’s no intermediate-term TREND support to the all-time closing lows
Since all-time remains a very long time, we’re thinking that Americans who are predisposed to get themselves levered up with cheap credit are going to absolutely love the idea of a 3% 30yr mortgage rate.
Put another way, the more right we are on Global #Deflation and slower-for-longer Global GDP growth rates, the more bullish we’ll probably get on Housing (ITB) as all of the “folks” who are paying peak US rents, will see the affordability equation on buying improve.
Getting back to why the Tizzle (TLT) shot up to +5.1% YTD yesterday (+1.3% on the day vs. SP500 -0.4% to 0.0% for 2015), what could Mr. Macro Market possibly be front-running now? How about the 1st slowing NFP (non-farm payroll) number in the last 7 months?
My man Hatzius @Goldman wrote a nice piece of rate of change research on this NFP matter last week that our most recent Employment Cycle conference call pointed to in the week prior to that – the probability of payroll gains slowing, is rising.
And, at the end of the day, with:
A) #StrongDollar +
B) Global #Deflation
Already messing with Janet’s former June rate hike expectations… what do you think she is going to do next if C) is a deteriorating series of US employment data?
Ah, lower-for-longer, eh! I find my life easier still thinking this way.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND views in brackets):
UST 10yr Yield 1.82-1.93% (bearish)
SPX 2037-2076 (neutral)
RUT 1239-1276 (bullish)
Nikkei 19002-19484 (bullish)
VIX 13.13-16.67 (bullish)
USD 96.93-99.11 (bullish)
EUR/USD 1.06-1.10 (bearish)
YEN 118.71-120.95 (bearish)
Oil (WTI) 45.81-50.99 (bearish)
Gold 1166-1208 (bearish)
Best of luck out there today and enjoy your long weekend,
Keith R. McCullough
Chief Executive Officer
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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
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
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
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
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
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
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
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
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