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NOT BEARISH ENOUGH? NOT EVEN BEARISH

The Street's lodging estimates need to come down. The only questions in my mind are when (are they going to get it) and by how much. The analysts are still projecting positive EBITDA growth and flat EBITDA margins. Shall we take a look at some of the important factors affecting the lodging industry?
  • Labor Costs - up Commodity Costs - up Energy Costs - up Airfares - up Airline Capacity - down Leisure Travel - down Domestic Economic Growth - stagnant World Economic Growth - slowing With these unhealthy trends where is the Street math? Lodging Analysts' 2009 EBITDA projections - up Lodging Analysts' 2009 EBITDA margins - flat
  • What are you, on dope? Whatever these analysts are smoking should be banned. Sorry for the Fast Times at Ridgemont High reference but it was a good movie. The analysis from my posting last week showed that peak to trough EBITDA margins fell 850 bps during the last cycle. Sure we don't have 9/11 this time but most of the factors above were in much better shape back in 2002. I'm not suggesting we'll see that kind of drop next year but even a 3% drop in margins would be devastating to EBITDA and earnings.
  • Per Reuters, consensus EBITDA projections for HOT, MAR, HST, and OEH show 2009 EBITDA and EPS growing at an average of 9% and 17%, respectively. Despite the factors listed above, these analysts are essentially projecting flat EBITDA margins. In a more likely scenario of a 3% drop in EBITDA margin, EBITDA and EPS would decline an average of 10% and 30%, respectively. These are big deltas from consensus. Look for some new Street math in the coming months.

LEAPFROG: A HOP BACK IN ITS STEP

LF is about to make the turn, and come down the home stretch of its 3 year turnaround. Timing is everything, and now we are staring at a potential horse that's right in the sweet spot of our investment model. The plan was formulated, significant progress achieved, and strong new products are in place. Management is focused but execution remains the outstanding risk. So far, per our sources and channel checks, brand strength among mothers and teachers is unmatched. New product reviews have been encouraging, and purchase orders for over 50% of expected sales volume have already been received. What's left? The big race: commercial success. However, by the time this horse comes to the finish line, big hitters such as Larry Ellison and Mike Milken (43% ownership combined) will have won the Derby - we want to be at the winners circle alongside them.
  • The PlanIn mid-2006 new CEO Jeff Katz outlined his strategy for turning around this once powerful educational toy company. Mr. Katz was founding Chairman and CEO of Orbitz which was built from scratch and in four years generated $300m in revenues. Orbitz was sold to Cendant for $1.25bn. Not bad. Mr. Katz's plan for LF involved streamlining costs and SKU's and cleaning up inventories (phase 1) then implementing a comprehensive effort to develop new platforms and products while phasing out old product lines (phase 2).
  • The ProgressManagement's phase 1 and 2 strategy and execution is quite evident from the first chart. Gross margin began its upward move by 2006 end, only 2Qs following the beginning of Mr. Katz's tenure. SGA ratio, on the contrary, continued to move higher as the LF reinvested heavily in its brand and new products. Both metrics are now moving in the right direction but still allow for significant improvement potential as the second chart displays.
  • The ProductsLF reloaded with a significant arsenal of new products within its core competency of reading solutions, educational gaming and grade school products, and learning toys. The product output is impressive and initial feedback and reviews are positive. Some of products were introduced last year and performed well. Most, however, were released in June. Purchase orders representing 50% of expected new product revenue have already been received. While purchase orders are not necessarily an exact indicator of ultimate revenue, this is clearly a good start. New products could provide half of 2008 revenues.
  • The PotentialThe Potential

Wall Street's Estimates for Asian Growth Need To Come Down!

Suffice to say, the notion that all Asian growth will be linear between 08' and 09' (implying a modest growth slowdown altogether versus the peak 2007 level) is plain silly.

Two questions on these estimates:

1. How much higher than reality will these 08' estimates look 6 months from now?
2. How much lower are the 09' numbers going to be revised as a result?

Inflation is finally consensus. Global Stagflation is not, yet...
KM

(click on table to manify)

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Chart of the Day: US Bank Failures...

Suffice to say, it's rather odd that the only 2 years since the Great Depression that there have been zero US Banks fail were 2005 and 2006. This reality is the birthchild of the Greenspan/Bernanke easy money years.

Unfortunately, time on this strategy may be running out. Access to capital continues to tighten and Cost of Capital continues to increase.

This is the cycle, and its global this time, indeed.
KM

EYE ON COMMODITIES - Higher Chicken prices

High Corn Prices = Less Capacity = Higher Chicken Prices

Sanderson Farms (SAFM) is delaying construction of a North Carolina poultry complex due to escalating prices of corn and soybean meal.

Taking a political shot at the Washington crowd the company said A third of the United States corn crop is now expected to be used to produce ethanol, the poultry industry and other animal feeders are being challenged by increasingly tighter supplies of grain and historically high prices.

Vietnam's Inflation Rocket...

Just because facts are ignored, does not mean they cease to exist. Now Wall Street is faced with the realities of inflation being a global problem. Vietnam was foreshadowing this for some time now, and their stock market has been crushed as a result.

To say that "its global this time" but to ignore that there could be negative implications associated with that reality, is analytically irresponsible.

Vietnam's inflation rate for the month of June, which is one of the only June reports we have in hand other than India's, shot higher again to +26.8% year over year.

Particularly when it comes to basic consumption demand (oil, rice, corn, etc...), analysts have to agree that the global marketplace is as interconnected as it has ever been.
KM

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