Our Internet & Media analyst Hesham Shaaban remains the bear on Twitter.
Fed Day Cometh… and the US Dollar Index is trading down around -1% intraday.
- EUR/USD – trading higher within our intermediate-term TREND bearish outlook. We shorted the cross (via FXE) today as the price collided with our immediate-term TRADE line of resistance ($1.10)
- EUR/USD – the Fed’s FOMC statement proves the Bank has a more moderate assessment of economic conditions/momentum, which could lead to further expectations of a delay in a rate hike, weakening the US Dollar from here.
- German Equities – weak in the face of a stronger EUR/USD (the DAX fell -3.2% today and is +20.3% YTD); we remain bullish on an intermediate-term TREND duration as Draghi’s foot remains on the QE pedal.
- German Equities – while not necessarily “trading” on fundamentals, recent data is mixed, with German CPI jumping 10bps to 0.3% in APR Y/Y while last week’s release of German PMI Manufacturing and Services figures fell for the first time this year (APR reading).
TRADE: Today Keith recommended shorting the EUR/USD (via the etf FXE) at $109.13. He wrote: “There are plenty of macro positions pushing to the top/bottom ends of their immediate-term ranges right now. My strategy during these counter-TREND moves is to wait/watch for the bullish/bearish TRADE to tap the top/bottom end of the range - sometimes it takes time.
I've been waiting for the Euro (vs. USD) to do that for a few weeks now, and this is my 1st SELL signal. There's no immediate-term TRADE support in the EUR/USD cross to $1.06.”
Additionally, we believe the US Dollar has been pushed to 2 month lows as investors expect the Federal Reserve’s more moderate assessment of economic conditions/momentum will push the dots (again) on a rate hike. A worse than expected US Q1 GDP and inflation report could drag the USD lower over the immediate term.
TREND/TAIL: Longer-term bearish: we continue to think a whole host of reasons will drag the common currency lower, including:
- ECB President Mario Draghi’s willingness to do “whatever it takes”, including a QE package that may win him the ‘Currency Wars’ over the USD
- There’s no end in sight for an exit of the Eurozone’s weaker countries, and in particular Greece’s debt hang will play out in multiples of years, not months
- A monetary policy across uneven economies will be highly conflicting
- Cultural differences that will limit cross-border labor movement
- Bearish demographics
Bullish German Equities
The German equity market (DAX) had a significant -3.2% pullback today. We continue with the stance that the Eurozone’s equity markets do not like a strong euro.
The DAX is up 20.3% YTD, and we continue to think that over the TREND/TAIL it will pay to obey the commands of the central planners, in particular by being long of German equities.
To reiterate our TREND thesis:
- 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 inverse relationship 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)
If you missed our call titled “Germany: Still Bullish” on 4/14, CLICK HERE for a 30 minute video replay that walks through 40 slides of supporting material.
While German Equities are not necessarily “trading” on fundamentals, recent data is mixed. A couple notable call-outs include:
- German CPI jumping 10bps to 0.3% in APR Y/Y
- German PMI Manufacturing and Services figures fell for the first time this year (APR reading), in-line with the Eurozone average
From a quantitative perspective, the DAX recently broke its immediate-term TRADE line of support (to become resistance), but remains firmly above its intermediate-term TREND and long-term TAIL levels, a bullish signal.
Takeaway: Strategic alternatives exploration overshadows a strong Q1
- Opened 20 hotels in 1Q (double 1Q 2014); 8 of 20 were conversions (high priority for HOT)
- Signed deals for 33 more hotels (highest # of deals signed in Q1 since Q1 2008)
- Q1 North American signings are up 70% YoY
- Independent 3rd party interviewed owners including HOT and competitors:
- Results are in. HOT can be more communicative and speeding up HOT decision making.
- Tribute brand: 4-star independent hotel brand
- Expect to get to 100 Tribute hotels in next 4-5 years
- Sheraton: represents 40% of global room footprint
- On track to open more select-service hotels in 2015 than in any other year since 2009.
- Transaction market remain strong
- Will make transactions evenly throughout 2015 rather than back end loaded
- $25m SG&A savings in 2016
- Will save $50-60m in centralized services
- Canceled the lease on Starwood corporate aircraft
- Constant dollar core fees was up 5%
- Southeast Asia and Macau were weak
- Owned hotels: up 8.4% in REVPAR, well above expectations
- Aloft NA and international REVPAR: 24% and 13%, respectively
- Vacation ownership/residential: strong resort performance, made adjustment to loan loss reserve. Expect to file Form 10 in next couple of months. Still expect spinoff in 4Q 2015.
- Expect to incur additional expenses during the year as HOT restructures to become more efficient ($30-35m over next several quarters, ending in mid-2016)
- Double digit REVPAR growth in the West esp. San Francisco/Phoenix
- South: REVPAR grew 8% (solid in Atlanta, Ft Lauderdale)
- Hawaii remained weak due to lower inbound travel from Japan
- North: REVPAR only up 4.6% (NYC declines)
- REVPAR at owned: flat
- Compared to REVPAR index, up 550bps. Owned/managed grew 800bps
- Double digit REVPAR increases in Boston/Chicago
- Overall did not see material decrease in inbound travel to US due to strong dollar however, ADR in NY was affected
- Group revenue in 1Q was +6% at owned/managed
- Corporate group up ~10%
- Revenue in the Q for the Q up double digits
- Looking ahead, group revenue production into all years also up double digits
- Expect group revenue on the bookings for 2015 up mid single digits. That's an increase from lower single digit pace in 4Q 2014.
- Transient up 4%, driven mostly by increases in rate
- Latin America: Mexico REVPAR up 20%, Brazil REVPAR down as a result of continued weak economic situation. Argentina performance has stabilized. Expect similar trends in future
- Europe: ahead of expectations. Spain/Austria strong. Looking ahead, expect system-wide Europe REVPAR SS to be slightly softer against stronger prior year base. Southern Europe strong; weaker trends elsewhere.
- Double digit growth in demand for US and Middle Eastern travel into Europe and an increase of roughly 30% in Chinese travel into their European hotels which they attribute to the weaker Euro.
- Middle East/Africa REVPAR: +0.8%: strong Abu Dhabi offset by Dubai hotels. Expect MEA to remain soft in 2Q
- China: weak demand from HK and impact from Macau anticorruption campaign. Mainland China REVPAR: +3.2%. Expect current trends to continue in Macau/HK. In Mainland China, expect REVPAR improve modestly in 2Q. Strong REVPAR in Australia and Thailand
- 2Q 2015: SG&A will be up 3-5% due to Tribute launch and incremental Aloft investment
- Have fully offset FX headwinds they experienced since last conf call
- Leverage ratio: 2.5x (S&P), 2.8x (Moody's)
- Made 60 page presentation to Board of Directors diagnosing Sheraton underperformance - fixing Sheraton has been tried many, many times over the years
- Maintaining current leverage levels of 2.5-3x
- Midscale brands: sticking with Aloft/Element/Four Points. Will not say if they will pursue another brand.
- Search for new CEO proceeding as planned.
- Capital Markets are good
- Committed to asset light
- Mainland China improvement in 2Q: Feb REVPAR down due to CNY comp, but March REVPAR improved sequentially. Sees better trends.
- Aloft: grew in NA but grew even more substantially in Asia, EUrope, Africa, Middle East.
- Element: increasing marketing spend in 2Q to accelerate growth
- 2015 guidance: increase FY guidance by $10m largely due to vacation ownership success in 1Q and better SG&A, offset by FX headwinds.
- NA performed in-line with expectations. Outlook hasn't really changed since beginning of year.
- REIT structure? HOT suffers from a lack of critical mass that could fit well into a REIT structure. Several assets in Europe/South America that can't benefit from REIT spend. But not taking anything off the table.
- Increase ownership by using balance sheet? A possible option too.
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Panera delivered a sub-par print after the close yesterday and held a mediocre earnings call this morning. Management commentary wasn’t quite what we were looking for, but that’s okay. If anything, this strengthens the case for further change within the company. We continue to recommend buying the stock on down days.
Soft Headline Numbers
System-wide, company, and franchise same-store sales of +0.7%, +1.5%, and -0.1% fell well short of consensus estimates of +2.4%, +2.6%, and +2.0%, respectively. The lack of flow through was significant, as operating margin declined 180 bps (exclusive of the one-time refranchising charge). Labor was the most significant driver of the decline, as structurally higher wage rates and the investment of additional labor hours associated with the startup of Panera 2.0 across select locations weighed down margins. Food and paper inflation added notable pressure in the quarter as well. As a result, 1Q15 EPS of $1.41 fell short of the $1.43 consensus estimate. Despite the miss, management maintained full-year EPS guidance of flat to down mid-to-high single digits versus the prior year.
Management Could’ve Done More
We believe management could have said more on the call to convince investors that the strategic initiatives they are taking are the right ones. The general tone of the call was rather unconvincing as management delivered a trust us story as opposed to laying out a clear, concise strategic roadmap. While we do believe the investments the company is making will benefit the brand over the longer-term, we question to what extent they are prudently allocating their capital. We also believe there are a number of initiatives that management can undertake in order to create shareholder value. To review, Panera could:
- Sell off non-core assets
- Slowdown the rollout of Panera 2.0 and begin molding a concept of the future
- Slow unit growth and cut capital spending
- Cut excessive G&A spending
- Aggressively refranchise stores
Management offered up very little on these fronts, but we are in the early innings of the story here. So while they could’ve said more on the call, it is plausible to consider that they are just beginning to vet these potential value enhancing initiatives.
Asymmetric Risk/Reward Setup
We continue to believe PNRA represents an asymmetric risk/reward setup, with our conservative base case scenario calling for 18% upside over the next 1-2 years. To contrast, our bear case calls for -8% downside. On a relative basis, the stock is among the cheapest in the quick service/fast casual category trading at 12.2x EV/EBITDA. With only 37% buy ratings, the sell-side is not sold on the name which makes this one of our favorite contrarian plays in the entire restaurant space.
During this segment of today’s Macro Show, Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan goes deep on what’s going on inside the gaming industry around the globe, with special attention paid to Steve Wynn’s comments following Wynn Resorts latest earnings call (which was a bit of a disaster).
Takeaway: Another Q beat and raised FY guidance despite FX headwinds. Solid demand from both group and transient. Dividend policy could happen in 2H.
- Occupancy growth was strong
- Strong demand from small groups and company meetings
- Transient demand: strong corporate and rack-rate business
- Group: expect strength will continue into seasonally strong Q2. Continue to track up in mid-single-digits in 2015.
- F&B grew in mid-single-digits in 1Q. Japanese F&B outlets drove majority of gains.
- Announced sale of Hilton Sydney - AUD$442 (15x EBITDA multiple). Will use proceeds to pay down debt.
- Hilton has > 20% room share globally
- Fundamentals of cycle remain strong.
- Outlook: US - maintain mid-to-high single digit REVPAR forecast
- NY: strong demand tempered by supply
- Mid-single-digit REVPAR growth, Mexico offset by Brazil and Argentina.
- Europe: positive Germany, geopolitical concerns weighing on France and Eastern Europe
- Egypt: mid-single digit growth
- Asia-Pacific: high-single digit REVPAR growth; Japan robust, Beijing/Shanghai positive; soft in HK and Singapore
- China 2015 REVPAR outlook: +6-8% REVPAR growth
- $15m beat in 1Q due to normal calendar timing
- Incentive growth: high teens forecast
- Timeshare EBITDA decline: accelerated sales that were booked in 2014 was offset by timing of sales efficiency. 78% of intervals sold by 3rd parties. Supply: 5 yrs of intervals at current pace. 80% capital light.
- Corporate/other segment: in-line with their expectations
- US REVPAR grew 6.5% (gateway cities (Chicago/San Francisco strong)
- Bad weather: overall impacted US REVPAR by 1%; 50bps in January, 300bps in February
- Europe REVPAR: +5.5%
- London - lower than expected group business and soft demand
- 3.9x - net debt/EBITDA
- Paid down additional $100m in debt post Q - YTD, paid down $325m
Q & A
- M&A possibilities: will not comment and will look at opportunities
- HOT's M&A rumor: not surprising
- They're seeing REVPAR acceleration
- Hard not to feel very good at this time. Nothing to suggest there is a problem.
- Talking about launching a new midscale entry-level franchise brand (where Hampton brand used to be)
- FX impact outlook: slightly worse but not by much
- Curio/Canopy: competitive world but faring well. Highest avg market share: 15-25% above previous market share
- Large conversions: Doubletree and Curio
- Corporate travel: HLT believes there is no cutback; instead, they are increasing volumes and paying higher rates
- NY down in REVPAR (5% of HLT's US exposure); outlook for 2015: feels good about April.
- Outbound visitation: Europe was declining from Germany/France. Spain was up. China meaningfully up.
- European visitation into US lower due to stronger $
- Early summer bookings show strength in Europe visitation
- Ex FX guidance: $25-35m FX-adjusted raise in EBITDA (at midpoint)
- Franchise rates: should move up over time (+10bps in 1Q, have gone from 4% to 4.7% over past couple of years)
- Cypress hotel will become a Curio
- Believe transient/group will both be in the 6-7% growth range
- Mid-scale segment: more supply there.
- Timeshare: consumer demand up. VPG up 20% in 1Q 2015 (opened a high-priced product in Hawaii). For 2015, expect VPG up 10% and high-single digit growth in tour.
- F&B: sees stabilization trends
- Internal vs external brand build: De minimus investment (millions of $, not tens of millions of $), infinite return (Curio: single million $)
- Why no recent Blackstone secondaries? Up to Blackstone. HLT believes pattern established last year will continue in 2015.
- Thinking about dividend policy program in 2H 2015 but also want to be investment-grade at same time.
- Flattish mgmt fees because of FX headwinds
- Not in peak of the cycle because of occupancy gains
- China Tier 1 cities: Shanghai/Beijing will have good year. Rate/occupancy pretty balanced for 2015.
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