After being bearish for the better part of two years, we have been hearing from the field more data points that are incrementally positive for Burger King. The industry issues remain, but the increased focus on value gets the brand back in the game.
ASCA misses consensus due to surprisingly higher promotional spend. After PENN, PNK, and BYD, expectations were pretty low
All the data points we monitor on the health of the consumer continue to flash RED.
HOUSING CONCERS CONTINUE - Today, the Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 8.2% to 608.3 from 562.3 last week; this was the first increase in a month on the back of lower mortgage rates. The refinancing gauge jumped 15%, while the index of purchases fell for the fourth consecutive week. The purchase Index includes all mortgages applications for the purchase of a single-family home. It covers the entire market, both conventional and government loans. The trends in the purchase index does not bode well for the next data point existing home sales.
CONSUMER SPENDING PATTERNS - The Research Edge Retail team pointed out that the current results out of MasterCard’s results does not support a rebound in underlying consumer discretionary spending patterns.
From our Retail post today – “While showing continued progress on a number of fronts this quarter, MasterCard’s US credit card volume continues to show no meaningful signs of turning around. In fact, credit card volumes for the last three quarters now, on a year over year basis, have been: -16.9%, -18.9% and -17.9%; not the kinds of numbers that signal a recovery. Granted, the volumes have stabilized and importantly they have arrested the decline that was in place from 2Q08 through 1Q09, but since then we have yet to see them move decisively back towards the positive column, which is what we’d expect to see amid the backdrop of a real (vs. perceived) recovery. For reference, credit card volumes are a better proxy than debit cards for the discretionary side of the US consumer’s wallet, as consumers tend to revolve discretionary items, whereas they put staples on debit cards which are paid in full at the time of purchase.”
A DECLINE IN NON-ESSENTIAL CONSUMER SPENDING – The following is from a post that the Gaming, Lodging and Leisure team did on the subject of consumer spending.
TODD JORDAN: GAMBLING ON THE CONSUMER
GDP = C + I + G + (EX – IM). While the G may be expanding, C probably won’t. Discretionary sectors are likely to see a smaller and smaller proportion of the consumer’s “wallet” over the next year or so. As shown in the table below, our macro forecasts and healthcare cost projections indicate that 2010 will bring an accelerating drop in non-essential consumer spending, culminating in a $124 billion year over year decline (-11.4%) in Q3 of 2010. Q3 2009 is looking more and more like an anomaly which makes it a very difficult comparison. Due to leisure spending, both lodging companies and the cruise lines reported better than expected Q3 revenues. For all of 2010 Research Edge projects a 5.2% decline.
Despite GDP growth and the market rally since March, unemployment continues to increase. As we have written about at length recently, gas prices are also going to negatively impact consumers’ spending power for the remainder of 2009 and into 2010. For consumer spending on casino gambling and hotels, in particular, our post, “WHAT GOES UP…” (09/10/2009), shows that gaming is in a mean reversion period in terms of a percentage of personal consumption expenditure. Gaming was strongly levered to the fifteen-year rip in housing-fueled PCE that ended in 2008. A one-two punch of a smaller allocation of a more frugal consumer’s wallet could meaningfully impact the gaming industry’s top line next year.
We remain short the XLY (Consumer Discretionary ETF) in the Virtual Portfolio.
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The Institute for Supply Management’s index of non-manufacturing businesses fell to 50.6 from 50.9 in September. A Bloomberg survey suggested an expansion to 51.5; clearly the result is a sign that joblessness is likely to restrain consumer spending. To date, the improvements in economic conditions in the US have been based on government assistance, which over the longer term is unsustainable. The implication here is that the recovery will likely lose momentum as stimulus fades.
OEH meets consensus expectations for the first time in while, which seems good enough... for now
OEH 3Q09 CONF CALL
Quarterly Review & Outlook
For the first time in recent memory OEH's results were in line with consensus estimates. However, outlook hasn't really changed and the story remains centered on asset value.
I suppose when the Street keeps lowering their numbers, companies will eventually meet them. Street revenues and EBITDA numbers came down 14% and 30% for 3Q09, respectively since last quarter. We still think the Street is too high for 2010, but again this story is all about asset value. OEH's outlook basically tells us nothing new:
"While the ongoing decline in demand that has characterized the last two quarters has slowed, I believe it is still too early to predict a return to growth... We will therefore continue with our prudent approach to cash management, including the tight control of costs and capital expenditure, and continue to expedite the sale of non-core assets and developed real estate. Our aim is to significantly deleverage the Company by the end of 2011, with a targeted ratio of debt to EBITDA on a stabilized basis, in the four to five times range."
OEH VERSUS OUR ESTIMATES:
Other things of interest from the release:
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