We would like to introduce a note that we will be releasing periodically called, Just Charts. The purpose of this will be to revisit our restaurant dashboard and analyze our Long and Short names as well as other notable names in the industry.
There won’t always be a definitive call made, but we will give you our perspective on current trends and expectations.
That being said, the first name we would like to revisit is Chipotle (CMG). CMG remains on the Hedgeye Restaurants ideas list as a LONG.
CMG has been under significant selling recently as we approach the 2H15, when the company will be up against very challenging comparisons. Despite these near-term challenges we like CMG for the tail duration. How to trade this stock going into the 2Q print is difficult to call. I suspect that a “better than bad” same-store sales print could cause some short covering.
CMG shares are down 9.6% year-to-date versus up 0.3% for the S&P 500. The short-term sales comparisons are a cyclical and not secular problem for the company. One turn on the EV/NTM EBITDA multiple suggest 5.7% upside/downside in the name.
CMG is facing some very difficult comparisons over the next three quarters and that has the street nervous. Will CMG post declining same-store sales over the next three quarters? The 2Q15 print will set the tone for the balance of the year. The consensus estimate of 6% for 2Q15 suggests only a slight slowdown in two-year trends from 11.9% in 1Q15 to 11.7% in 2Q15E. I suspect that 6% might be an aggressive estimate for 2Q15.
RESTAURANT LEVEL MARGINS
Restaurant level margins are expected to be 28.04% in 2Q15, up 74 bps year-over year. The company should benefit from lower food, labor and other costs in the quarter. The trend in margins supports our LONG thesis.
Operating margins will also improve nicely in 2Q15. G&A should come down by 88bps to help push operating margins up 18.8%, up 164bps year-over year. There continues to be significant leverage in the business model.
SENTIMENT AND VALUATION
EV / NTM EBITDA
Trading at 16.6x EV/NTM EBITDA the stock is not cheap, but it’s not aggressively overvalued given the opportunities for the company. Yes, CMG is trading at a premium to its peer set, but deservingly so, as we said previously, it will grow into the valuation.
CMG’s short interest is low hovering right around 4-4.5% of the float. While it has moved up in 2015, there is not a big negative bet against this company.
With 60% of the analysts having a buy on the stock and no sell ratings, there is also a positive bias to the name. Given the financial performance of the company for the past two years, the bullish bias appears to be justified.
HEDGEYE RESTAURANTS IDEA LIST
Our macro team has spent considerable time highlighting why staying < 300,000 won’t happen forever. Unless, of course, it’s different this time.
Employment is #LateCycle. Period.
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Well, that was certainly a well-timed, centrally-planned, market bounce by the Chinese! If you:
- Aren’t allowed to sell and/or
- Could go to jail for doing so, that’ll work
The Shanghai Composite Index bounced +5.8%, its biggest daily gain in six years. (It only needs another +37% to get back to 1-month breakeven.)
Meanwhile, the Veep of Public Security in China (Meng Qifeng) actually called the people who sold at 59X earnings “hostile short sellers.” Huh? We have a feeling the guys without high-school educations really aren’t that sophisticated.
My take is simple: China was a pump and dump. Period.
In other news, China's economic data? It still stinks. Producer prices -4.6% y/y in June.
On a final note, hats off to Allstate CEO Tom WIlson who appeared on Maria Bartiromo’s show with me this morning. Here’s what he had to say about Beijing:
"The problem with China is nobody believes the numbers. I think sometimes they just make it up."
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Takeaway: Auto furloughs and holidays make the usefulness of this morning's data debatable. That said, the June Challenger data on energy is notable.
Initial jobless claims rose by 15k to 297k in the latest week, though it appears to be due at least partly to the dual volatility of the July 4th holiday and summer auto furloughs, as unadjusted claims in Michigan more than doubled while those from Ohio were up 50%. We'll reserve judgement until we see the next few weeks of data.
The chart below shows that indexed claims in energy heavy states fell in the week ending June 27th while rising for the country as a whole. The spread between the two series tightened from 24 to 15.
Meanwhile, courtesy of our Macro team, the chart below shows the Challenger job cuts announced for June running at close to zero for the energy sector for the first time in 7 months. Meanwhile, the total ex-energy climbed slightly in June.
Prior to revision, initial jobless claims rose 16k to 297k from 281k WoW, as the prior week's number was revised up by 1k to 282k.
The headline (unrevised) number shows claims were higher by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 279.5k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -10.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.6%
The 2-10 spread fell -9 basis points WoW to 165 bps. 3Q15TD, the 2-10 spread is averaging 170 bps, which is higher by 12 bps relative to 2Q15.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: In the wake of Greek drama, investors pulled funds almost indiscriminately and parked cash in money market funds last week.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Investors reacted to Greek drama in the 5-day period ending July 1st by pulling funds from all asset classes except for international equity mutual funds and parking +$13 billion in money market funds. The withdrawals included -$5.5 billion of outflows from active domestic equity mandates, the 18th consecutive weekly outflow from the asset class. Active domestic equity has now lost -$61.3 billion in withdrawals in 2015, pushing 2015 year-to-date outflows lower than 2012. By this time in 2012, domestic equity funds had lost -$58.9 billion. This now makes 2015 the worst fund flow year for domestic equity from 2007 onward. We maintain our Short/Avoid recommendations on the most impacted domestic equity managers, T. Rowe Price (TROW) and Janus Capital (JNS).
In the most recent 5-day period ending July 1st, total equity mutual funds put up net outflows of -$3.4 billion, trailing the year-to-date weekly average inflow of +$369 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$2.1 billion and domestic stock fund withdrawals of -$5.5 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net outflows of -$2.4 billion, trailing the year-to-date weekly average inflow of +$2.2 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$861 million and taxable bond funds withdrawals of -$1.5 billion.
Equity ETFs had net redemptions of -$4.3 billion, trailing the year-to-date weekly average inflow of +$2.1 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$268 million, trailing the year-to-date weekly average inflow of +$867 million and the 2014 average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:
Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.
Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors defensively contributed +8% or +$365 million to the long treasury TLT ETF. Additionally, the industrial XLI ETF experienced withdrawals of -$334, -5% of its market cap.
Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.1 billion spread for the week (-$7.7 billion of total equity outflow net of the -$2.7 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.4 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.3 billion (negative numbers imply more positive money flow to bonds for the week.)
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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