Today, we find it prudent to reiterate our shorts and remind people why we have zero casual dining names on our current Investment Ideas list.
While seeing BWLD and PNRA whiff on earnings has really dampened the sentiment around restaurants in the early innings of 1Q15 earnings season, we believe signs of trouble have been brewing for quite some time. This is particularly true in the casual dining industry, which despite being in the midst of a secular decline, currently trades close to a five-year peak multiple.
Casual Dining Index: EV/EBITDA (NTM)
Given the recent increase in gasoline prices, decrease in consumer confidence, labor cost pressures, and softening industry sales, we believe there is more downside on tap for restaurants stocks.
Regular Gas Price
Barring an exception, which we will call out if/when it is appropriate, we would not be comfortable owning any casual dining names. CHUY and DFRG continue to be two of our favorite shorts, but the majority of names could be due for a continued correction. See our short bench for more ideas.
Latest Relevant Note: 1Q15 Investment Ideas Earnings Preview
Takeaway: We reiterate our intermediate-to-long term bullish bias on Japanese equities and view any near-term weakness as a buying opportunity.
Watch the brief 2min summary of our latest thoughts on Japan in light of the disappointing BoJ statement today.
- Today in Japan, the lack of QQE expansion in spite of the BoJ lowering its forecasts for both growth (FY15: down -10bps to +2%) and inflation (FY15: down -20bps to +0.8%) resulted in the Nikkei 225 selling off -2.7%.
- In conjunction w/ Kuroda’s still-sanguine guidance and our positive outlook for Japanese GDP growth over the next two quarters, marginal easing has now been officially punted well into 2H15.
- Consensus expects a move in October and we currently have no reason to argue for one month sooner or later than that; we just know two catalysts need to materialize before the BoJ can justify expanding the pace of its asset purchases:
- The YoY RoC in the USD/JPY cross needs to converge towards zero.
- Survey based inflation measures (namely Tankan) need to trend lower – which they are likely to do if our forecast of continued and material disinflation in Japan proves prescient.
- All told, we remain bullish on Japanese equities and continue to expect foreign inflows to support the market in light of the “win-win-win” thesis we outlined in a presentation last week (CLICK HERE to access the video replay).
Feel free to ping us with any follow-up questions.
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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
During this week’s Fed Day Live show, Hedgeye CEO Keith McCullough offered real-time analysis on the FOMC statement and answered subscriber questions. In this segment, Keith discusses the value of considering Frequentist factors as well as Bayesian inference and highlights the importance of flexibility and being willing to change the game plan.
Editor's Note: Our Internet & Media analyst Hesham Shaaban has been a bear on a tear. His contrarian calls on Twitter and Yelp are just two of many non-consensus calls he's made which have served investors very well. Here's a quick recap of why it pays to listen to what he's saying.
Related tickers: YELP, TWTR, BABA, P, WTW, EHTH
* * * * * * *
Just over a year ago, Hesham explained on HedgeyeTV why he's bearish on YELP for the long term. Shares are down over -30% since.
he echoed his concerns again to Charlie Gasparino on Fox business last month. the stock is down -10% since his appearance.
Here's a cartoon. We like cartoons (and our cartoonist). A lot.
Here's a bonus piece of unlocked research Hesham wrote on YELP articulating his BEARISH CASE. He's written a lot more. We just wanted to give you a little taste. CLICK THE WAD OF CASH TO READ IT.
On a related note...
here's a screen grab of a report he sent to our customers earlier this week ... ahead of Twitter's bomb. You can click the image to enlarge. (We'd show you the whole thing, but our customers wouldn't like that and we have families to feed.)
Here's another cartoon. Did we mention we really like cartoons?
And last (but certainly not least)
Here's an abridged excerpt from yesterday’s Morning Newsletter written by CEO Keith McCullough discussing Hesham's myriad non-consensus calls. It's definitely worth the read. (While we're at it, it probably makes sense to shell out the dollar a day it takes to subscribe to our Morning Newsletter too.)
Excerpt from Keith McCullough's Morning Newsletter:
During yesterday’s meeting, circa 3:15PM, one of our analysts slammed his laptop and left the room in a frenzy…one of our Hesham Shaaban’s Best Short Ideas, Twitter (TWTR) was blowing up!
Fat finger on the pre-market close release. Stock down 18% in a New York minute. Halted. #Boom!
And the Hedgeyes smiled.
There’s something about building an independent think tank that prides itself in SELL ideas that gets me up in the morning. As most of you know, building a repeatable #process on the short side is not an easy thing to do. That’s why we’re doing it…
…While you can criticize Shaaban for literally never having presented a Best Long Idea (yet), he’s nailed the following names to the proverbial NHL playoff boards in the last 18 months (i.e. since we let him start publishing on his own names):
- Weight Watchers (WTW)
- eHealth (EHTH)
- Pandora (P)
- Yelp! (YELP)
- Alibaba (BABA)
In other words, what he really needs next is to get run-over in one of these things. Because no analyst I have ever worked with stays this good (on the short side) for this long, in an up market!
I obviously don’t want the man to get crushed. But reality is that everyone gets tagged in this business, eventually – and that’s how we all learn. But if you listen to Shaaban talk through his ideas, he’s constantly talking about not only what he doesn’t know… but what the management teams he follows don’t know either.
*****To learn more about how you can access Hesham's research ping email@example.com.
Takeaway: Absent corporate activity (see HOT), it appears that lodging stocks will only go up on guidance hikes
- India economic growth in 2015 could exceed China
- On pace to grow global system by ~8% in 2015, including 10k Delta rooms. Net of deletions, system size should grow 7%
- Worldwide basis: MAR has 4.5% room count share
- 100 largest markets: has 6.4% room count share
- In largest most valuable markets, share of rooms under construction is ~16%
- Premium RevPAR yield premium fees
- Signed deals with nearly 17,000 rooms in 1Q. Expect these new managed
franchise rooms worldwide will deliver over $38 million of annual
fee revenue in their third year of operation.
- Estimate existing contracts have an average of 17 years remaining. The length of MAR's newest contracts average 20 to 25 years.
- Across the U.S. financing availability continues to ease, particularly for their limited service products.
- 1Q EPS beat: 1 cent (owned/leased line largely due to strong results in Tokyo) 2 cents of outperformance came from favorable SG&A largely timing
related. Results partially offset by roughly $0.03 of impairment recorded on depreciation.
- Better-than-expected incentive fees
- In North America systemwide transient RevPAR grew 7.0% with
room rates up 5%. Successfully reduced the volume of special
corporate business in favor of the greater volume of higher rated
- Group RevPAR at full-service hotels in North America rose more
than 5.0% including 4.0% from higher ADR. Demand from smaller
groups was particularly strong.
- Systemwide RevPAR at limited service hotels in North America
increased more than 8.0%; strength in both transient and small
- Expect continued strong group and transient for North America
- Full-service hotel group booking pace for the remainder of 2015
is up roughly 4.0%. (tough 3Q comp)
- International systemwide REVPAR well ahead of expectations
- Caribbean/Latin America: expect RevPAR will increase at a
mid-single-digit rate with the tough comparison to last year's World
Cup in Brazil.
- In Asia-Pacific region, REVPAR: +6.0% with particular strength in Japan and
India and easy comps in Thailand.
- Systemwide RevPAR in greater China increased modestly reflecting strong results in Shanghai; lower RevPAR in Hong Kong. Believe these Asia-Pacific trends will continue yielding full-year RevPAR growth at a mid-single-digit rate.
- Europe well ahead of expectations due to strong attendance at group
events in Germany and higher leisure business in London and
- Room nights from U.S. travel to our European hotels increased 9.0%
in the quarter
- Despite the strong 1Q, expect mid-single-digit growth rate for the full-year.
- economies of France and Russia are week and central Europe comparisons get more difficult late in the year.
- MEA: expect mid-to high single digit constant dollar RevPAR growth. Outsized gains in 3Q.
- Incentive fees: +25% with better-than-expected results at
Ritz-Carlton and Marriott resorts in Florida and the Caribbean. In
addition, roughly $3 million of the higher incentive fees were
related to the timing of incentive fee recognition at one resort and
$2 million was related to a very strong performance and North
America limited service hotel.
- Worldwide 48% of MAR's managed hotels paid incentive fees in the
quarter compared to 35% in the year ago quarter. In North America 35% of managed hotels paid incentive fees compared to 21% in
the year ago quarter.
- Franchise fees: +25% due to higher royalty payments associated with unit growth
- REVPAR also helped by higher relicensing fees associated with hotel transactions. With a robust hotel resale market, MAR relicensed over 250 franchised hotels during the quarter. Typically the new agreements reflect higher royalty rates than previously and frequently include a commitment to make property improvements.
- Owned/lease: $5m from Protea, favorable $3m impact from expired leases
- G&A: declined due to favorable litigation resolutions partially offset by higher guarantee reserves.
- FX impact for 2015: expect reduction in pretax income $20-25m
- Repurchased 5.5 million shares during the quarter for approximately $431 million
- 2Q incentive fees likely flat YoY. Continue to expect strong incentive fees limited service hotels in the quarter there likely to be offset by the impact of full-service hotel renovations and a shift in timing of fee recognition at one resort which benefited 1Q
- FY 2015: Expect incentive fees will grow in the midteens rate
- Owned leased and other revenue net of direct expenses should
increase slightly year over year reflecting higher credit card branding fees offset by lower termination fees.
Q & A
- MAR's acquisitions: essentially flat in 1st year and accretive in future years.
- Won't talk about HOT's strategic review
- Profound differences in MAR's and HOT's recent deals
- Courtyard on a roll and drove the incentive fee beat
- NYC supply growth: ~5% in last 4-5 yrs
- Blended royalty rate: 5.8%
- More and more limited service hotels earnings incentive fees
- Peak on limited service incentive fees: $80m (trough: $5m). Last year, they did $20m. Could see $30-35m in 2015.
- Group bookings in 1Q 2015 for next 12 mth, rates up 6%. For the following 12 months, rates up 5.5% (room night growth of 3.5%)
- Inbound travel to US: +1% YoY, European visitors flattish, more business travel than leisure in Q1
- Including HK, China REVPAR up 1.5%. Exclude HK, up 4.5%
- 2015: Reiterate mid-single digit REVPAR growth for China. F&B ahead of that target. Will sign fewer deals in China this year. Remain pretty bullish.
- Will not see much full-service development in Europe
- Double-digit index gains for Autograph brand
- MOXY rate higher than Fairfield -smaller room, lifestyle brand
- Have been aggressive in calling out contract business from our full-service hotels e.g. airline crews. Contract business can often be at a significant discount to the average rate in the full-service hotel because of the way occupancy is moving. Could see that business gets replaced by rack business and will be pretty powerful in driving performance.
- FY Delta fees of $12m
- DC: Downtown modestly negative in Q1 . Suburban modestly positive. Q2 may be better by a couple of % points. 2016 group bookings doing well. Some growth in govt business but only 1.5% of group.
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