prev

MACRO INSIGHT: Stay Out Of Europe's Way?

Editor’s Note: This is a special, complimentary excerpt from today’s morning strategy note written by Hedgeye CEO Keith McCullough. If you're interested in raising your Macro IQ and staying a step or two ahead of consensus, you may want to consider becoming a subscriber.

*  *  *  *  *  *  *

MACRO INSIGHT: Stay Out Of Europe's Way? - z italy

Are European Equities undergoing what we call a Bullish-to-Bearish TREND Phase Transition?

 

Since:

 

A) We have slower-for-longer estimates for real European GDP growth than consensus for 2H of 2015

 

and

 

B) My risk management signal says this recent 3-month breakdown (TREND duration signals) is real – for now my answer is yes.

 

To review some key European Equity market TREND levels that have broken:

 

1. German DAX = 11,375

2. French CAC = 4,780

3. Spanish IBEX = 11,199

 

MACRO INSIGHT: Stay Out Of Europe's Way? - zz 06.29.15 chart 

 

Implied by those signals (since I have price, volume, and volatility calculated within each) is RISING VOLUME (on down days) and RISING VOLATILITY in terms of how I measure it within my immediate-term risk range #process.

 

The other obvious thing the manic-financial-media tends to miss when its pundits navel gaze at equity indices being “off the lows” is cross-asset-class risk management correlations and signals.

 

Look at this morning’s move in Global Bond Yields, for example…

 

Click here to begin your subscription.


ITB: Removing Housing from Investing Ideas

Takeaway: We are removing Housing from Investing Ideas.

Please be advised that we are removing Housing (ITB) from Investing Ideas today.

 

According to Hedgeye CEO Keith McCullough:

 

After a run of very strong housing data, I want to start selling on the news until we get through both the summer and this European macro mess.

 

ITB: Removing Housing from Investing Ideas - z itb


BOJA – ADDING TO THE BEST IDEAS AS A SHORT

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 1 BOJA 

 

The question everyone needs to ask is why is a highly levered 38 year old regional QSR chicken chain trading at 17.8x EV/NTM EBITDA? 

 

Only one reason - market insanity!

 

Currently Bojangles’ (BOJA) shares are trading at approximately 17.8x EV/NTM EBITDA, or an approximately 27.7% premium to the mean of three other regional chicken companies (LOCO, FRGI, and PLKI).  That being said, it’s also not hard to make the case that LOCO and FRGI are overvalued too, making BOJA even more ridiculously overvalued.      

 

What this extreme valuation does not account for is:

  1. It’s a hybrid asset light business model
  2. Bojangles’ operates in highly competitive segment with many well-established and well run peers companies, especially Chick-fil-a
  3. Decelerating SSS growth
  4. Decelerating traffic trends
  5. Declining margins due to persistent commodity pressures (specifically, chicken)
  6. Poor unit economics outside the core markets.

 

KEY TAKEAWAYS

BULL CASE IS UNLIKELY - The bull case for BOJA is grounded on BOJA’s strong fundamental momentum will continuing for years.  If this scenario holds true, the current estimates could prove conservative in coming quarters and years, making the stock a LONG.  This seems like a scenario that is grounded on aggressive assumptions that may prove unsustainable.  My read on the fundamentals suggest that there is little leverage in the business model or upside to the current estimates, making the stock severely overvalued. 

 

The concept would need to generate high-single digit same-store sales to provide enough upside to justify the numbers.  The street has modeled 4.2% system SSS in 2015E (4.3% company; 4.2% franchised), driven by the combination of: (1) 3%+ menu pricing (significantly above pricing taken in recent years); (2) continued market-share gains; and (3) growing brand awareness in non-core markets.

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 2 BOJA 

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 3 BOJA 

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 4 BOJA 

 

NEW UNIT ECONOMICS DON’T ADD UP - Consistent with our other calls on overvalued small cap restaurant stocks, centers around unit economics and the company’s ability to grow successfully.  On the surface the numbers don’t add up for Bojangles’. 

A new Bojangles’ restaurant has an average total investment cost of slightly more than $2.1 million, which includes the building, site development costs, soft costs (environmental costs, legal, etc.), furniture, fixtures, and equipment and land.  The average unit volume of a Bojangles’ is $1.7MM and $1.5MM for new units in non-core markets.  This puts the concepts sales to investment ratio (including real estate/rent) at .76, one of the lowest in the industry and suggests you should not be allocating capital to that investment.

 

Unless you are using someone else’s capital!

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 5 BOJA 

 

Does that make the Bojangles’ 20-year-plus history of using build-to-suit financing to fund its company-owned development the right strategy?  I suspect there is significant limitation to this strategy and part of the reason why the company is only a regional chain after being in business for nearly 40 years. 

 

While the financing strategy allows the company to control all aspects of site selection and construction for a very low net cash investment (up-front cost to open a restaurant go from $2.2 million to $145,000 per location), it puts significant limitations on site selection and geographic expansion.  The company’s unique “build-to-suit” financing is available only for freestanding locations where the underlying land is available to purchase.  In-line development options are not option for this strategy. 

 

The developers who are putting up the capital, front the cost of everything but the equipment.  This implies that the company pays a high-single-digit to low-double-digit occupancy costs as a percentage of sales over a fixed 15-year lease term. 

 

On the franchise side, Bojangles’ delivers a high-teens fully capitalized return for franchise restaurant development when accounting for a 4% franchise royalty, which is in line with the unit-level economics performance seen by the quick-service peer group.  The average ROI characteristic, its build-to-suits strategy suggests that BOJA has limited regional opportunities further supporting why BOJA is overvalued.    

 

In preparation for its IPO, Bojangles’ system-wide unit growth has accelerated over the last three years, increasing from 5.9% in 2012 to 7.2% in 2013 and 7.8% in 2014. Consensus estimates have unit growth to remain in the 7% to 8% range annually.  New store development is largely focused on increasing the concept’s penetration within its existing geographic region of the southeast.

 

As a result, we expect adjacent market openings to represent 60% to 70% of new locations in 2015 and more than 75% over the next five years.  By 2020, 47% of concepts total locations will be in adjacent markets 34% in 2014.  New stores in adjacent markets have lower margins dragging down the company margins.

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 6 BOJA 

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 7 BOJA 

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 8 BOJA 

 

SAME STORE SALES - In the recent past BOJA has used price as the primary driver of same-store sales.  Going forward, guidance is for low-single-digit same-store sales primarily driven by 2%-3% pricing and flattish to traffic. In 2015, we expect the price benefit to be above average at roughly 3.5%, reflecting 1% of incremental price taken in March and another 1% planned for July to offset higher chicken costs.

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 9 BOJA 

 

COMMODITY COSTS - Chicken represents Bojangles’ largest single commodity exposure at approximately 38% of cost of goods sold, and will likely drive the majority of the mid-single-digit commodity basket inflation expected in 2015. After chicken, the next largest components of Bojangles’ food basket are wheat/grain at 14%, vegetables at 12%, and pork at 10%. Again, why is a chain that uses price to protect margins, with no traffic growth trading a premium valuation?

 

LOW AND DECLINING MARGINS - Restaurant level margins are trending downward, expected to decline ~154 basis points from 15.46% in FY14, to 13.92% in full year FY15, primarily driven by higher cost of sales as planned price increases will not fully offset the impact of higher chicken prices. While we project some moderation in commodity costs beginning in 2016, we expect restaurant-level margin to remain in the mid to low 14% range, given an increased skew toward lower margin adjacent markets.

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 10 BOJA 

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 11 BOJA Replace 

 

IN CLOSING – BOJA appears to be a company with decent growth, but we must harp back on the fact that it is a 38 year old regional chicken chain. We strongly doubt that they are going to experience the same success they do in their core market in new markets as they expand. Additionally, same-store sales are being led by price increases as they try to compensate for rising commodity costs. This company is not deserving of its current valuation ― as margins decline to their final resting place and same-store sales are recognized for their inflation due to pricing, the company will be seen for what it truly is, a 38 year old regional chicken chain.  

 

BOJA – ADDING TO THE BEST IDEAS AS A SHORT - Chart 12 BOJA

 

 

 


Early Look

daily macro intelligence

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.

SPECIAL FLASH CALL at 10:30am ET w/ Daniel Lacalle - Apocalypse Now (Or Not) In Greece?

Special contributor Daniel Lacalle will join Hedgeye’s European analyst Matt Hedrick and CEO Keith McCullough LIVE at 10:30am ET TODAY for a 15 minute flash call (plus Q&A) to discuss Greece’s ongoing ‘crisis.’

 

Lacalle is a renowned European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University.

 

KEY TOPICS ON THE CALL WILL INCLUDE 

  • Market implications of the closure of Greece’s banks and its markets
  • How far off is a Greek proposal with its creditors?  What concessions will be made? 
  • What’s the outcome of the Eurozone’s kick-the-can-down-the-road stance with Greece?
  • Will Greek fallout impact other member states?
  • Where does the EUR/USD go from here?

 

CALL DETAILS

Ping for more information.

 

SPECIAL FLASH CALL at 10:30am ET w/ Daniel Lacalle - Apocalypse Now (Or Not) In Greece? - 1. SOS


The Macro Show Replay | June 29, 2015

 


Macro's Visceral Edge

This note was originally published at 8am on June 15, 2015 for Hedgeye subscribers.

“Power’s flow and ebb can have a visceral edge.”

-Moises Naim

 

Macro markets tend to make you feel something. The people who are at wit’s end trying to bend and smooth economic gravity have feelings too. This weekend I found the perfect book for some of their central-planning-power lost. Ironically, it’s called The End of Power.

 

Now that the world has seen almost 600 rate cuts (since Lehman collapsed) and we’re in the midst of a #LateCycle slowdown, is this the beginning of that end? Or is it just my cyclical confirmation bias that Moises Naim tapped into?

 

“Long established, big players are increasingly being challenged by newer and smaller ones… what they are fighting so desperately to get and keep – is slipping away. Power is decaying.” –Naim (pg 1)

 

Macro's Visceral Edge - campfire cartoon 10.31.2014

 

Back to the Global Macro Grind

 

Isn’t that a nice way to start your week? After doing California last week, I’m in London today. I’m looking forward to seeing whether or not European investors have a visceral response to both the US cycle and secular demographic data #slowing.

 

#NoWorries, mates.

 

The way this macro show in the US goes is pretty straightforward. Just read the Barron’s Roundtable for a consensus on that. Yep, growth slowed due to “one offs… weather… etc.” but it will “bounce back” – so back end load those growth and earnings forecasts in 2015.

 

As you can see in the Chart of the Day, after the Old Wall and its media got blindsided by the Q1 earnings season (smoked in January) it proceeded to cut earnings estimates for the 1st half of 2015. In the 2nd half (and 2016) it’s right back to rainbows and puppy dogs.

 

Notwithstanding that you’d have to see things like producer prices (commodities, etc.) ramp big (from here) while:

 

A) the Dollar is rising due to

B) consensus expectations of a “rate hike”,

 

we’re still calling for both a cyclical and secular (demographic) slowdown.

 

Newsflash: to get things like Oil prices and PPI (producer prices) up year-over-year, what the Fed actually needs to do is devalue the Dollar and start talking up no-rate-hike. In other words, the bull case for stocks, commodities, and bonds is #SlowerForLonger.

 

Don’t buy that narrative? Or does it just make you feel something that just ain’t right? Macro markets don’t feel anything – they just tick. Last week’s catalyst for the Dow Jones Industrial Index (DIA) to be up for the 1st week in the last 4 was a DOWN DOLLAR:

 

  1. US Dollar Index  was down -1.4% last week (down -4.5% in the last 3 months)
  2. Dow, SP500, and Russell 2000 +0.3%, +0.1%, and +0.3% on the week, respectively
  3. Commodities (CRB Index) = +0.4% week-over-week (+4.1% in the last 3 months)
  4. Oil (WTI) = +1.4% week-over-week (+14.7% in the last 3 months)
  5. Gold = +1.0% week-over-week (+2.2% in the last 3 months)

 

Oh yeah, baby – how do you feel about that? And how, by the way, would you feel if the Fed does precisely what the Fed has been doing since that ugly March employment data point (released at the beginning of April, arresting the USD at epic 10 month highs)?

 

Need #MoarrrEasing? If you are in the business of never seeing a US asset price depression/recession again, I think the answer to that question is yes.

 

I think they called it The Great Recession. In reality it was the last time the US cycle slowed, but the 1st time that its core consumer spending cohort (35-54 Year old #Boomers) saw the year-over-year % change in population growth go negative.

 

(hint: 35-54 yr-old population growth is still negative and will be until the year 2020 – so I’m all in on a 2020 rate-hike)

 

Oh, and the meeting of that cyclical and secular slowdown (2007-2009) resulted in a “36.3% drop in the incomes of the top 1% of earners in the Unites States, compared to an 11.6% drop for the remaining 99%” (The End of Power, pg 6).

 

I’m not a boomer. So don’t blame me. Don’t blame my Mom & Dad just because they are Canadian either, eh. Instead, if the Fed hikes “just because it’s time”, you can congratulate Yellen for closing the “inequality gap” – because the pace of asset #deflation will be visceral.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.50%

SPX 2072-2104
Nikkei 20061-20767
VIX 12.61-15.65
USD 94.01-95.98
YEN 122.61-125.46
Oil (WTI) 57.78-61.80

Gold 1167-1198

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro's Visceral Edge - Chart of the Day


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next