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McCullough: Draghi Is Gearing Up For More 'Cowbell'

Hedgeye Risk Management CEO Keith McCullough offers his take on what's going on in Europe, China and Greece with Fox Business anchor Maria Bartiromo and FBN’s Charles Payne and Cheryl Casone.



JUST CHARTS | CMG

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.      

 

JUST CHARTS | CMG - CHART 1

 

PRICE PERFORMANCE

 

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. 

 

JUST CHARTS | CMG - CHART 2

 

FINANCIALS

 

SAME-STORE SALES

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.     

 

JUST CHARTS | CMG - CHART 3

 

MARGIN TRENDS

 

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.

 

JUST CHARTS | CMG - CHART 4

 

EBIT MARGIN

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.

 

JUST CHARTS | CMG - CHART 5

 

SENTIMENT AND VALUATION

 

JUST CHARTS | CMG - Chart 6 replace 

 

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.

 

JUST CHARTS | CMG - CHART 7

 

JUST CHARTS | CMG - CHART 8

 

SHORT INTEREST

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.      

 

JUST CHARTS | CMG - CHART 9

 

SELL-SIDE SENTIMENT

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. 

 

JUST CHARTS | CMG - CHART 10

 

HEDGEYE RESTAURANTS IDEA LIST

 

JUST CHARTS | CMG - CHART 11

 

 


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MUST-SEE MACRO CHART: Why the Next Move > 300K Jobless Claims Is a (Huge) Problem

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.

 

Click to enlarge

MUST-SEE MACRO CHART: Why the Next Move > 300K Jobless Claims Is a (Huge) Problem - z mack

 

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The Epic Gong Show In China Soldiers On

The Epic Gong Show In China Soldiers On - Z CHIN chart

Well, that was certainly a well-timed, centrally-planned, market bounce by the Chinese! If you:

 

  1. Aren’t allowed to sell and/or
  2. 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."

 

#Agreed.

 

Upgrade your game. Subscribe to Hedgeye research.

 


INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK?

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.

 

 INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims4

 

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.  

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims18

 

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. 

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims20

 

The Data

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%

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims2

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims3

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims5

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims6

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims7

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims8

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims9

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims10

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims11

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims19

 

Yield Spreads

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.

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims15

 

INITIAL CLAIMS | IS ENERGY FINALLY GETTING ITS MOJO BACK? - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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