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Avian Flu Continues to Spread, Causing Major Food Manufacturers to Look Elsewhere

Takeaway: USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds.

AVIAN FLU UPDATE

As of the last detection period on 5/21/15, the USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds. Iowa, the largest egg producing state is also the hardest hit by the flu with roughly 27 million birds affected, 5.7 million at one farm alone. This amount of loss has started to affect egg prices, and manufacturers are starting to rethink their supply chain and ingredient sourcing.

 

The big question is, how long will this last? The U.S. EPA sets strict guidelines on the disposal of infected birds, and states that it will take roughly 3 months from disposal to cleaning the facility. Then the birds themselves take 4-5 months to get to size at which they begin to lay eggs.  So, some of this facilities won’t be able to get back in full production mode for at least 7 months.  I would say that is an optimistic timetable given it doesn’t take into account the risk of infection re-occurring.  

 

ALTERNATIVE INGREDIENTS

Hampton Creek a company that focuses on plant-based egg alternatives is supplying General Mills (GIS) and many other food suppliers with their powdered egg substitute. A product Josh Tetrick, CEO of Hampton Creek claims is cheaper, healthier and far better for the environment than traditional eggs. Josh was recently quoted in saying that about a dozen major companies have contacted him trying to get their hands on Hampton Creek products.

 

Archer Daniels Midland (ADM) has also received many inquires about its plant-based egg substitute.

 

This is not an easy switch for food manufacturers, as they switch ingredients it requires testing, recipe changes and label changes, all of which take time and cost money.

 

INTERNATIONAL SUPPLY

U.S. based companies have also started to look abroad to meet their egg needs. The strong dollar is making it possible for U.S. based manufacturers to look over to Europe to find alternatives. This has never been an option before given how efficient the U.S. is at making eggs.

 

WHAT ARE COMPANIES SAYING

One of the biggest winners in all of this is Hampton Creek, who's product line began with egg-free mayonnaise and has begun to branch out into egg free baked goods and various mixes. Josh Tetrick CEO stated, “We are prepared for this moment…and we are going to take advantage of it…this is a moment to make this dang food system better.”

 

As we previously reported, Post Holdings (POST) has stated, “…the ongoing AI outbreak constitutes a force majeure event in respect to its Michael Foods egg business…” The flu will be at least a $20 million impact to them, and we expect this number to rise as a large number of company owned hens were infected in Nebraska after this number was reported.

 

Spokesperson for IHOP a unit of DineEquity (DIN) stated, “At present, we have not had any issues regarding the availability of eggs for our restaurants, but like the rest of the industry, we continue to monitor this situation closely.”

 

McDonald’s (MCD) spokeswoman spoke of her company’s preparedness, “we proactively developed contingent supply plans, and we do not anticipate an impact in our ability to supply eggs to our restaurants and serve our customers.”

 

Dunkin’ Brands (DNKN) said it will let franchisees decide whether to swallow cost increases or pass them on to customers.

 



Dollars, Burning Yen and Commodity Correlation (Beware of GDP Bomb)

*  *  *  *  *  *  *

The big move overnight in Japan is taking something that hasn’t been part of the 2015 macro narrative right back into the flow. Yen down -1.1% testing fresh YTD lows vs. USD at 122.87.

 

The Nikkei? It absolutely loves that, closing at another YTD high of 20,437. It's up +18% YTD.

Dollars, Burning Yen and Commodity Correlation (Beware of GDP Bomb) - Yen cartoon 03.04.2015

On a related note, the U.S. Dollar… It was up +3.1% last week. That took the CRB Index down -2.5% as the 30-day correlation remains quite high at -0.90… A #StrongDollar morning here keeps the commodity correction in play, with Gold and Oil both pulling back to support levels that I would buy/cover ahead of Friday’s U.S. GDP bomb.

 

Dollars, Burning Yen and Commodity Correlation (Beware of GDP Bomb) - z c4

 

Editor's Note: This is an excerpt from Hedgeye morning research. Click here for more info on how you can begin harnessing our work for your gain.


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GIS: Adding General Mills to Investing Ideas

Takeaway: We are adding General Mills (GIS) to Investing Ideas today.

Please note we are adding General Mills (GIS) to Investing Ideas today. Below is a brief note from CEO Keith McCullough. Our analyst will provide an additional update this weekend.

 

GIS: Adding General Mills to Investing Ideas - z gen

 

I've been waiting, patiently, for a selloff to the low-end of my SP500 risk range - and today we have that...

 

Re-building the long book of ideas will also be a process. Today, in addition to PENN, I want to add one of Howard Penney's Best Long Ideas, General Mills (GIS).

 

The following is a summary of our 92-page Black Book on General Mills.  We believe there are multiple ways to win:

  1. The current management transforms into an Activist management team - 15% chance
  2. Fundamentally – Gluten Free Cheerios is  a home run – 20% chance
  3. Management sells the company – 15% chance
  4. An Activist shareholder takes a position  – 50% chance

Buy Red,

KM


PENN: Adding Penn National Gaming to Investing Ideas

Takeaway: We are adding Penn National Gaming (PENN) to Investing Ideas today.

Please note that we are adding PENN (Penn National Gaming) to Investing Ideas today. Below is a brief note from CEO Keith McCullough. Our Gaming, Lodging & Leisure team will provide an additional update in this weekend's edition.

PENN: Adding Penn National Gaming to Investing Ideas - z pen

 

In the spirit (read: #process) of buying on red days (and selling on green ones), I'm scanning my inventory of names our analysts like on the long side that are:

 

A) down more than the market and

B) down on light post long-weekend volume.

 

Penn Gaming is at the top of that list. Our analyst Todd Jordan is very constructive on the stock ahead of their new casino in Massachusetts.

 

KM 


LEISURE LETTER (05/26/2015)

TICKERS: 27.HK

EVENTS

  • May 28: MGM Annual General Meeting: Proxy "Fight"
  • June 4: CCL special press announcement in NYC

COMPANY NEWS  

Galaxy - operator Galaxy Entertainment Group Ltd will open its HKD19.6 billion (US$2.5 billion) Galaxy Macau Phase 2 property with over 200 gaming tables, said Richard Longhurst director of operations at Galaxy Macau. 

 

75% of the new 150 tables will be allocated to the mass market. “The 38 gaming tables that we borrowed during the renovation of Broadway Macau have been returned to the property, and they will be focused on the mass market,” Longhurst said. “The additional tables that we have are sufficient for the current market,” the executive said. 

 

According to Kevin Clayton, Galaxy’s Chief Marketing Officer, 95% of Galaxy's Ph2 investment has been non-gaming related. According to Clayton, percentage occupancy rates are “in the high 90s” and “the take up in the [new] hotels for the first few weeks of launch is already reaching a point where we’ve got demand that exceeds supply.” 

ARTICLE HERE

Takeaway: The 75/25 mass/vip breakout is confirmed. 


China Star - had “mutually irrevocably and unconditionally” agreed to terminate a deal to buy an equity interest in the profit stream from Macau junket operator Eight Elements Entertainment Ltd. China Star runs the casino at a hotel property called Lan Kwai Fong in downtown Macau, under a gaming licence from SJM Holdings Ltd.

 

Golden Group - VIP gaming promoter Macau Golden Group Ltd will cut labor costs by depriving its employees of their attendance bonuses, free ferry tickets and money meant to substitute for tips as of next month. An internal notice says this is meant to allow the company to keep operating effectively. Macau Golden Group has five VIP gaming rooms in the Hotel Lisboa and six in the Grand Lisboa Hotel.

ARTICLE HERE

ARTICLE HERE

Takeaway: These decisions were likely influenced by the tough VIP market conditions.

INDUSTRY NEWS 

Migrant worker visa - The Macau government will tighten its control over migrant construction workers’ visas and cut their visa period to a maximum one-month stay after their assigned public work is complete. The Secretary for Economy and Finance, Lionel Leong, revealed on Saturday that the authorities will shorten the workers’ permitted period of stay, three months prior to the construction’s projected completion; the workers will then be requested to leave Macau within one month upon the completion of their duties.

Takeaway: This change will help reduce congestion in Macau. Little impact on Macau gaming operators.

 

Unions against smoking lounges - Seven associations representing casino workers in Macau have shown their support to a full smoking ban inside casinos, including the removal of smoking lounges. The associations are also calling on the government to implement a trade union law and the right to collective bargaining, said legislator José Pereira Coutinho.

 

Meanwhile, an association of junkets says it collected over 12,500 responses in a survey taken last week, where 99% of respondents believed that a full smoking ban will affect casinos’ business and agreed to have smoking rooms inside VIP gambling zones.

ARTICLE HERE

ARTICLE HERE

Takeaway: Consensus is that there will inevitably be a full smoking ban

 

Taiwan - A mainland Chinese official has threatened severance of the mainland’s direct links with the Taiwan-controlled archipelago of Kinmen if gaming is introduced there. The media quote the director of the mainland’s Taiwan Affairs Office, Zhang Zhijun, as saying during a visit to Kinmen that direct aviation, shipping and postal services between the mainland and the archipelago would be cancelled.

 

Consideration has been given to putting a casino on Kinmen, which is less than 10 km from the mainland city of Xiamen.

ARTICLE HERE

Takeaway: The road to gaming in Taiwan is not an easy one.


Singapore visitation - saw a 7.4% YoY drop in visitor arrivals for March 2015. Indonesia visitation tumbled 14% in March - 8th straight monthly decline. Malaysian visitation fell 5% in March.  Mainland Chinese visitation fell 21% in March, reversing the +16% growth in February.

 

LEISURE LETTER (05/26/2015) - 5 26 2015 8 39 53 AM

Takeaway: This is disconcerting. The reversal in Chinese visitation trend isn't surprising for March but declining local visitation (Malaysia/Indonesia) raises the question of how much longer can flattish mass revenue trends be sustained this year. 

 

Australia cruising - 

  • According to Cruise Lines International Association (CLIA) Australasia, number of Australian passengers rose 20.4% YoY to 170k - thereby achieving the industry's long-held goal to hit one million cruisers by 2020 six years early.

  • The equivalent of 4.2% of Australians took a cruise last year, ahead of the second ranked North American market, which has a market penetration rate of 3.4%. 

  • Rising from its number-five position in 2013 by overtaking Italy, Australia is now the fourth largest source market for cruise passengers, accounting for 4.5% of world cruisers, behind North America (54.2 per cent), Germany (8%) and UK/Ireland (7.4%).

ARTICLE HERE

MACRO

Mainland China - will reduce tariffs on some imported consumer goods such as skincare products, Western-style clothes and disposable nappies, Reuters reports. The news agency quotes a written statement issued by the Ministry of Finance as saying import duties would be lowered by an average of over 50% on June 1.

 

ARTICLE HERE

Takeaway: Cheaper consumer goods coming to Macau

 

Singapore -

  • 1Q 2015 GDP growth of 2.6% beat Street estimates of 2.2%
  • April CPI fell 0.5% YoY, compared with the median expectation for a 0.1% decline based on a Dow Jones Newswires poll of five economists. In March, Singapore's CPI fell 0.3%.

ARTICLE HERE

ARTICLE HERE

 

Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


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