• run with the bulls

    get your first month

    of hedgeye free



Cheaper than the peer group? Depends on which metric.  Don't forget about the JV debt.


Lodging stocks have been pounded over the last 2 weeks so the "discount valuation" thesis is not as compelling as it once was.  There is another issue with that thesis.  Whisper valuations around the Street pegged the EV/EBITDA multiple at 10-11x.  "You gotta include the JV EBITDA".  Fair enough - we do - but you also have to include the JV debt of $500 million, the amount of which is disclosed only in a footnote.


At the stated range of $23‐26, we estimate the EV multiple on 2010 EBITDA is 11.8x‐13.4x.  That doesn’t sound cheap unless you compare it to the lofty peer group multiples.  The midpoint of the Hyatt offering range is at a slight discount to the peer group average multiple of 13.2x.  The chart below details the valuation comparisons.


HYATT IPO VALUATION - hyatt valuation 2


A bull may argue that given Hyatt’s positive net cash position, it should be valued at a premium to HOT (4x leveraged) and MAR (3x leveraged).  On the other hand, Hyatt’s complicated and shareholder‐unfriendly voting structure should punish the valuation.  If you think your Class A shares (worth 1 vote per share versus 10 votes for a Class B share) will ever influence management I've got a bridge to sell you.  One only needs to look at Orient Express (OEH) for an example of investor disdain with complex voting structures.  


On a free cash flow basis, Hyatt’s valuation looks expensive with a 2010 yield of only 4%, as shown in the chart below.  However, Hyatt has the financial resources to make accretive acquisitions.  We estimate that for every $1 billion in acquisitions, Hyatt could generate 10-18% free cash flow per share accretion. 




If one is a lodging bull, the Hyatt deal could make sense, particularly at the low end of the range.  Hyatt will generate approximately 60% of its gross profit from hotel ownership, much larger than the HOT/MAR peer group, which gives the company higher operating leverage to a recovery.  Moreover, Hyatt's balance sheet can absorb a lot more debt to acquire assets and further lever the company to the recovery.  However, If you share our view that the duration of this downtown will be longer than expected, Hyatt is probably not the best stock play.


Two of the earlier reads on October trends were less than positive with MCD and SONC citing sequentially softer trends.  Since then, most of the comments about trends in early calendar Q4 pointed to sequentially improved YOY trends.


It is important to remember that comparisons are getting easier on a sequential basis and that outside of PNRA and BWLD, these sequentially better numbers point only to less bad trends as the numbers are still down on a YOY basis. 


Those easier comparisons are meaningless, however, in that they are not enough to yield positive growth in Q4.  To that end, the street’s Q4 expectation for restaurant revenue growth to improve significantly on a sequential basis (included in the chart below based on Bloomberg estimates) appears aggressive.  Same-store sales growth is likely to remain negative, albeit less negative, and seeing that industry development is so muted this year, unit growth will not be enough to offset that decline for FSR and make up the rest for QSR.


MCD:  “As we move through October, consolidated comparable sales remain positive with Europe and APMEA contributing strong results. In the U.S., despite continued gains in market share and advancement in our industry-leading position, we're expecting flat to slightly negative October comps.”


In September, MCD’s U.S. comparables sales growth was up 3.2% and the company is lapping a +5.3% number from October 2008.  A flat result in October 2009 would point to a sequential slowdown in 2-year average trends.


SONC: “We have seen a little more challenging weather as this fiscal year has gotten off to a start.”

In fiscal 4Q09 (ended August), SONC’s partner drive-in same-store sales declined 5.3% and franchise drive-ins fell 4.4%.


BKC:  Management did not comment on fiscal 2Q10 trends, but it did talk about its recent October 19 national launch of its $1 double cheeseburger.  Specifically, management stated that in markets where the $1 double cheeseburger was already launched with media support in fiscal Q1 (25% of U.S. markets) that the product was helping traffic and gross dollars, but hurting gross profit margins.


In fiscal 1Q10, U.S. and Canada total system same-store sales declined 4.6%.


TAST: “In terms of recent sales trends, Pollo Tropical was a little under 1% positive in October, Taco Cabana was down about 3.5%, while Burger King was around 5% negative. Now it’s been about two weeks since the Burger King $1 Quarter Pound Double Cheeseburger was launched, and while it's still pretty early, we believe that the improvement in sales trends so far indicate that Burger King same store sales should be positive for the balance of the quarter.”


PNRA:  “By period, on a calendar basis, last night we announced 6.9% comps for the first 27 days of the 28-day October period, and we're targeting 4 1/4% to 5 3/4% comps for both November and December.”


“We also believe that our comps received some additional lift in October with easy compare to the year-ago period given the Lehman and stock market meltdowns and the corresponding impact on consumer behavior in late September and October of 2008.”


“To be specific, company comps were up 3.3% in Q3. In fact, in each period in Q3, company comps grew sequentially stronger. In July, company comps were up 2.6%; in August, comps were up 3%; and in September, comps were up 4.4%.”


PFCB:  “As measured by average weekly sales, we remain hopeful that the third quarter was the low watermark for this cycle. Bistro average weekly sales declined about 9% in the third quarter. Trends have improved in the fourth, but average weekly sales are still down about 6.5% quarter-to-date.


Pei Wei, on the other hand, finished the quarter with a strong September, which is carried over into October. Overall, we expect average weekly sales to fall 6% for the bistro, but increase roughly 1% at Pei Wei in the fourth quarter.”


TXRH:  “On the sales side, we experienced sequential improvement each month during the third quarter, and this trend has continued into October.”


“On the negative mix, we actually did see it get a little bit better. I mean, it's only been one month, but as we've gotten into October, our negative mix for the quarter –for the third quarter was down about 1.4%. And as we got into October, we saw it'd be negative by about 0.8 as opposed to 1.4. And really half of our negative mix has been coming from alcoholic beverages and about half of it continues to be from entrée trade down.”


In 3Q09, TXRH reported -4.6% comparable sales growth at company-owned restaurants and -3.6% at franchise units.


Trends from last year:

“October was down 4.3%, November was down 3.4% and in December was down 5.9%.”


BWLD:  “The excitement of football season is here and we’re experiencing same-store sales increases of nearly 6% in company-owned locations and just under 4% in franchised locations in the first four weeks of this quarter “

This improvement is relative to +0.8% company same-store sales and +1.9% franchised growth in 3Q09. 

Trends from last year:

Well the October of last year we had highlighted had been like in the 3% range for company stores, and our quarter last year ended at 4.5%.”



Bombed Out Buck: Walking The Line

Although the US Dollar Index has backed off its intraday highs (and the SP500 has recovered from its intraday lows as a result), the New Reality is that we have a buck that has stopped burning, for now…


In the chart below, Matt Hedrick and I have outlined both the immediate term TRADE and intermediate term TREND lines:


1.       TRADE (dotted green line) = $76.20

2.       TREND (thick red line) = $77.69


Since bottoming at its YTD low on October 21st, the US Dollar has rallied a full +2%. There is no irony, therefore, that closing highs for the SP500 and the CRB Commodities Index came on October 19th (1097) and October 21st  (284), respectively. As the US Dollar has reflated, the deflation in the SP500 and CRB Index has been demonstrable.


Its critical to note that the US Dollar Index is now Walking The Line (see our Early Look note from 10/29) ahead of a major event – the FOMC decision at 215PM EST tomorrow.


We know what he should do, but we have no idea what Bernanke is going to do, and we don’t think the market does either – that’s why the Bombed Out Buck is trading right on the line that matters (its TRADE line).


What we do know:

  1. If Bernanke panders, the buck is going to burn again, breaking its TRADE line.
  2. If Bernanke signals a change in rate rhetoric, the US Dollar has room to run up to its TREND line.

That’s the best risk management setup we can give you for now.


Stay tuned.



Keith R. McCullough
Chief Executive Officer


Bombed Out Buck: Walking The Line - USDXA


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


TAST expects its Burger King comparable sales to be positive for the balance of the year.


Carroll’s Restaurant Group (TAST), which operates 314 Burger King franchise units in the U.S., along with 91 Pollo Tropicals  and 155 Taco Cabanas, reported 3Q09 results yesterday after the close.  On its earnings call, management commented that although Burger King comparable sales were running -5% in October, that same-store sales should turn positive for the balance of the quarter. 


Specifically, management stated, “Now been about two weeks since the Burger King $1 Quarter Pound Double Cheeseburger was launched, and while it's still pretty early, we believe that the improvement in sales trends so far indicate that Burger King same store sales should be positive for the balance of the quarter.” 


TAST provided Q4 same-store sales guidance for Burger King of flat to +0.5%.  Based on October trends, management is making a big bet on the $1 double cheeseburger as its guidance implies comparable sales trends will be up about 2.5% to 3.5% on average in November and December.  This sequential improvement, which would be driven primarily by traffic gains, would point to market share gains for Burger King.





Beat on costs but forward commentary not so rosy.  Oasis bookings seemed disappointing.





General commentary/Outlook

  • Folks are continuing to vacation and the value proposition of a cruise continues to resonate with customers
  • Unfortunately, they are also seeing more seasonality than before, and giving back the strength they saw in the 3Q09 in 4Q
  • Real key to their future is the leverage they will have from the cost cuts when things recover
  • Proactive in approach of managing fuel risk
  • Well positioned to ride out what's left of this cycle and take off when things begin to recover


3Q09 results

  • H1N1 cost them about 2% points of yield in the quarter, with the Caribbean the strongest and Alaska the weakest
  • Non-US guests made up 43% of customers
  • International market performed particularly well
  • Took a charge of 3 cents per share on the Pullmantur sale and the acceleration of dry docking expenses
  • Correction to the statutory tax rate related to the purchase of Pullmantur
  • Beat this quarter came from better close in bookings



  • Early signs of expansion in booking curve but still contracted in comparison to historical norms
  • Looking out to the summer of 2010 they are encouraged by peak season demand
  • Mexican Riviera demand is still disappointing
  • Pricing since the beginning of October is running ahead of last year.  However, the improvement is mostly driven by easier comparisons
  • 4Q09 is being hurt by Florida's weak economy and more discounted holiday pricing. 
  • Looking out to 1Q2010, bookings have outpaced the same time last year but cumulatively they are still behind last year. However, they expect to surpass that given the accelerated booking pace
  • 2010 rates compare favorably to 2008 but that is influenced by the fact that the newer boats have much more bookings for 2010 than the older boats, hence the comparison is not apples to apples
  • Believe that they will have better yields in 1Q2010 then 1Q09 due to mix shift towards newer boats and less dramatic discounting
  • FX will have a 1% benefit for net cruise yields in 4Q2009


Sourcing detail

  • Expect to source more than 40% of business outside the US in 2010
  • Australian product expected to be up y-o-y, other emerging market products unclear
  • Oasis of the Seas is more significantly booked for 2010 than any other ship and has a large price premium - Not discounting
  • Had healthy close in demand for cruises in Europe and booking volume through the fall have held up well
  • In Caribbean they are seeing a high number of bookings come from outside the US on longer sailings, in general Caribbean performed relatively well
  • Reaction of the UK market to the Eclipse has been exciting



  • Expect that both 1Q2010 and FY2010 will have positive yields
    • Yield accretion due exceptional performance of new ships and less dramatic discounting that they undertook during the Lehman collapse
    • Oasis will have double digit premiums versus the Freedom class
  • Color on legacy core fleet/cannibalization
    • Feel like they don't really have cannibalization its more that developmental markets that take some time to develop (because presumably they move old supply abroad)
  • Given the variability in short term bookings how are they so confident that yields will be positive?
    • Because the build in bookings have been consistently above 2008
    • They realize that the reason is because the further out bookings are weighted towards the "premuim" newer ships but as they get closer in, sales will be more weighted towards "legacy" products
  • Atlantic Sky (Sky Wonder?)  which was scheduled to go to Mexico got "laid up"
  • Given that yield guidance came down - surprised that EPS guidance isn't worse for next quarter
    • Costs are slightly better than before, and new bunker guidance is probably less then most people had modeled
  • Lower load factor in Dec than last year? Are you they holding back inventory to protect pricing?
    • Always had the intention of reducing capacity given how new the ship is and making sure they can smoothly handle the volume
    • However, they are also protecting pricing by being less aggressive in filling the ship
    • They think it's possible that load factor can be down this next quarter as a result
    • Don't want to sell out the Oasis - that would be "yield mismanagement" - want to maximize yields
    • Oasis should have above average fleet occupancy next year since many of the rooms are meant to room up to  4 per berth - family gearing
    • Management seemed surprised that the Oasis bookings weren't stronger.  Did they price too high in this environment?
  • Not seeing a lot of H1N1 incidences on their ships now 
  • Increase in fuel utilization wont be a big number next year
  • Taking down 4Q09 yields from -4.5% to -7 to -8%, how much of that is due to what they have seen to date vs fear of what they would see in Nov/Dec?
    • Pressure in the state of Florida was a surprise for them and there is a skew towards Florida in 4Q09
    • Surprised by additional discounting that they had to do on Christmas cruises. Apparently Christmas falling on Friday is a negative too - I guess people don't like to leave on Christmas
  • ROI on new ships?
    • Don't comment on individual ROI for ships but think that they will have "enormous" returns
  • What % repeat cruiser
    • A little more than one third of their customers are new cruisers, but the discounts have also incentivized repeat cruisers to come more often. So net net no real change in mix
  • Booking volumes being up 40% from 4Q08 when the world came to a halt shouldn't be surprising ... so its an odd comp.  Compared to 20087/8 they have slightly better booking pace but part of that is that they also have more supply
  • Curves in terms of bookings patterns should have less peaks and valleys than a year ago
  • What is the rational for going into "newer" markets if they are weak and taking longer to ramp
    • Lots of those newer markets are strategic
    • Also they need a place to move "legacy ships" otherwise there's that whole cannibalization issue
  • Also why is the Holiday period weak? Should it be peak?
    • Christmas pricing is higher just not to the historical standard, also the timing of Christmas doesn't help
  • Have seen an indication towards a 15-30 day expansion in the booking window (like CCL) but too early to say now
  • Had a pretty good quarter for onboard revenue. Saw healthy consumption of internet and phone and excursions, but gambling and art consumption still weak
    • Not really seeing an improving trend - pretty steady



Included below is interesting commentary on Diedrich’s 10-Q filing yesterday from Michelle Leder at footnoted.org:


Late yesterday, Peet’s Coffee & Tea (PEET), my personal favorite when it comes to caffeine delivery devices, announced that it was buying Diedrich’s Coffee (DDRX) for $213 million.


Coincidentally, Diedrich’s filed what’s likely to be its last 10-Q yesterday. But what’s surprising was the very first exhibit in the 10-Q: an agreement with CFO Sean McCarthy. Now, McCarthy was named CFO back in January 2006. But the agreement was dated May 1, 2008 and was filed yesterday — roughly 17 months after it went into affect.


We don’t mean to be sticklers here, but what was the hold up with getting this into a filing? By our count, Diedrich has filed 4 10-Qs and 2 10-Ks since May 2008. Even if we assume that it was a typo and May 1, 2008 was really May 1, 2009 — not that that makes sense, but we’re going hypothetical here — there was still a K and a Q that they agreement could have been included in. The agreement itself confirms “in writing” the terms of a change in control, so presumably McCarthy had been working for the past three years under some sort of informal — or at least, non-written — understanding.


Now maybe it’s just an odd coincidence that this agreement was included on the very day that the company announced it was being acquired. But that’s a bit hard to swallow — kind of like coffee that’s been sitting in the pot for too long.


Michelle Leder


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.