*PNRA Flash Call Today @11am EST

Takeaway: We’re hosting a flash call today at 11am EST to run through the activist playbook on PNRA.

The Activist Playbook

We believe changes Panera’s business model will significantly enhance the margins, returns, and overall earnings power of the company.  We put the baseline earnings power of the company between $8-10 per share and the implied stock price between $240-300.


Call Details:

  • US Toll-Free:
  • US Toll:
  • Confirmation Number: 39514730
  • Materials: CLICK HERE


*PNRA Flash Call Today @11am EST - 1


Wednesday night, Panera announced in a press release that its Board of Directors approved an increase to the company’s share repurchase program to $750 million. The company expects to repurchase $500 million over the next twelve months.  The release also highlighted the progress that Panera is making in its previously announced refranchising initiative.  The company has entered letters of intent to sell 73 cafes and is expected to reach its refranchising goal by year end (50-150 cafes).  This initiative, which is expected to be accretive to earnings, was reflected in management’s 2015 EPS guidance.


On March 3, 2015 we penned an open letter to CEO Ron Shaich detailing our activist playbook on the company:




In this letter, we recommended five steps he should consider taking in order to unlock significant shareholder value:

  1. Sell-off non-core assets
  2. Slowdown the rollout of Panera 2.0 and begin molding a concept of the future
  3. Slow unit growth and cut capital spending
  4. Cut excessive SG&A spending
  5. Aggressively refranchise stores


We look forward to further articulating these recommendations on the call today.


The Kinder Conundrum

“Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes impossible to be listed without omission.” – Gerald Loeb, The Battle for Investment Survival




After rolling up its MLPs in December 2014, Kinder Morgan Inc. (KMI) is now the third-largest energy company in the S&P 500 by enterprise value ($137 billion) and fourth-largest by market cap ($95 billion).  It’s also one of the more polarizing names out there – you either love it or you hate it.


KMI kicked off the earnings season for the energy sector on Wednesday, and with KMI being a relatively new and large name in many portfolio managers’ benchmarks, we figured that the generalists that subscribe to the Early Look would be interested in, and benefit from, our latest thoughts on KMI – the company and the stock.  Regarding the former, the commentary below was sent to our Energy sector subscribers yesterday:


The Kinder Conundrum - kmi


“In its 1Q15 report … Kinder Morgan Inc. (KMI) declared a quarterly dividend of $0.48/share, reiterated its 2015 dividend target of $2.00/share, and emphatically reiterated its long-term dividend growth guidance of 10% p.a. through 2020.  KMI bulls need not read any further.


The quarter was soft overall as the more-commodity-sensitive segments of CO2 and Natural Gas Pipelines posted a combined 5% YoY decline in segment cash flow.  Adjusted EBITDA came in at $1,743MM, down 1% YoY and missed the consensus estimate of $1,861MM by 6%.  EBIT was $1,193MM, down 5% YoY.  Pre-tax earnings were $679MM ($0.31/share), down 16% YoY.  (All metrics are "before Certain Items.")  


KMI incurred ~$935MM of CapEx in the quarter, $104MM (11%) of which was classified as sustaining / maintenance.  It spent ~$3.2B on acquisitions, ~$3,060MM on Hiland and ~$160MM on the Vopak terminals.  The Hiland acquisition closed on February 13th, so it was a significant contributor to the 1Q15 numbers.


Free Cash Flow (defined here as EBITDA – net interest expense – CapEx) was ~$295MM or $0.14/share.


Rich Kinder remarked on the call, “…our enormous footprint and our diversified set of mostly fee-based assets can produce very good results, even in times of tumultuous market conditions.”


Very good results?


EBITDA and EBIT were down YoY in 1Q15 despite $9.4B of capital invested since the start of 2014 ($5.0B of CapEx – ~$1.0B per quarter – and $4.4B of acquisitions).  That’s mediocre, at best.


What is exceptional about KMI is 1) its valuation at 20x EV/EBITDA, 29x EV/EBIT, 35x P/E (pre-tax!), and a 1.3% FCF yield (all metrics are 1Q15 annualized); 2) its leverage at 6x debt/EBITDA and 9x debt/EBIT; and, of course, 3) its dividend payout ratios at +230% of net income and +150% of pre-tax income.”     




Here’s our opinion of KMI – the company – in as succinct of a form as possible, a 140 character #tweet:


MegaCap energy conglom. Capital intensive, cyclical, competitive. Avg ROIC. Super-levered. Low organic growth. Roll up. Ponzi divi.


And all of that really isn’t that hard to see.  Which of those points could you convincingly argue the other side of? 


The debate and difficulty lies in what to do with KMI the stock here. 


Our current view, one that is, of course, subject to change, is that it’s just one to watch from the sidelines.  We apologize to the bulls for not joining the rest of the sell-side in the Rich Kinder booster club, and to the bears for not betting on the imminent collapse of the evil empire, but the risk / reward set-up does not warrant action at this time and price. 


The challenge on the short side is that the higher KMI’s valuation, particularly relative to its peer group, the more “accretive” each acquisition will be.  Say what you want about this growth strategy (and we suggest you re-read Buffett’s thoughts on it on pages 29 and 30 of the latest BRK letter!), but the market has bought into it and it’s going to work until it doesn’t. 


Reflexivity is clearly at work; we’d consider a short position in KMI on the way down.  But for now, we’re interested in playing KMI’s well-advertised acquisition ambitions via second derivatives.  More on that to come…


We’ll leave it there on this battleground stock.  If you own KMI, we hope that you at least know what you own!


Enjoy the weekend,


Kevin Kaiser

Managing Director

The Kinder Conundrum - 04.17.15 chart

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VIDEO | Why We Like $ZOES

We added Zoe's Kitchen (ZOES) to Investing Ideas on Tuesday April 14, 2015. We are unlocking this excerpt from Restaurant Sector Head Howard Penney's conference call with institutional investors where he outlines his bullish thesis EXCLUSIVELY for Investing Ideas subscribers. 


EWG: Adding German Equities to Investing Ideas

Takeaway: Adding German Equities to Investing Ideas

We are adding German Equities (EWG) to Investing Ideas today. Please see the note below from Hedgeye CEO Keith McCullough and watch a special video excerpt featuring Europe Analyst Matt Hedrick from a call held earlier this week below.



Our Europe Analyst, Matt Hedrick (German American dude) hosted a bullish Institutional Research call on Germany earlier this week and the highlights were as follows:

  • QE is only just beginning; the Euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation (the German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP)
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong negative correlation that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)




Early Look

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