MCD is on the Hedgeye Restaurants Best Ideas list as a LONG.

A widely popular McDonald’s survey released last week, articulated how dissatisfied McDonald’s franchisees are with the current environment in which they operate.  We don’t disagree with the conclusions of that survey; in fact, the survey sheds light on some alarming concerns that we highlighted in our recent Black Book.


Our thesis on McDonald’s is that the company is broken and is in the process of being fixed and there are other issues to consider when analyzing the health of the McDonald’s franchise system.  In addition, most of the broader opinions in that survey are backward looking.


Taking the other side of this debate and looking at it from a different perspective, there are two critical metrics to consider: 

  1. Franchisee profitability
  2. Franchisee EBITDA valuations

MCD is far from fixed and there are problems within the franchise system that still need to be addressed, but the company and franchisees are healthy.  From the franchisee perspective, the MCD concept is one of the best quick service restaurants to own and we remain confident McDonald’s management is taking the right steps towards returning the business to prosperity.


In fact, the same survey that says the company is broken makes the same point we are.  As one operator in the survey said:


“…We have the best cash flow in the industry driven by our higher sales and guest counts…Operators will need to evaluate the lifestyle they currently live and determine if five or less stores will generate enough cash to support their habits and complete investments necessary to keep the brand strong.”


Below is a chart that looks at McDonald’s Franchise system sales and margin performance.  This chart makes the point above that the McDonald’s concept has the best cash flow in the industry. 




According to our data, Franchisee EBITDAR margins peaked in 2010 at 25.3%.  We would note that this is the same year MCD made its big push into beverages and launched the “cold” side of its McCafe strategy.  With the big push into beverages and expanding the afternoon day-part, average unit volumes peaked two years later in 2012 at $2.6 million. 


Since their respective peaks, by 2014 margins had fallen 260bps and average unit volumes had fallen by $62K.  It’s also important to note that in 2014 MCD EBITDAR margins although down remained strong at 22.7%.


After 3-4 years of declining margins its only normal for franchisee anxiety to be at peak levels and it also makes for great press as MCD is an easy target.

What is even more challenging is taking the other side (being LONG) and convincing people that there are plans in place that are going to help franchisees and shareholders be better off.


Clearly, some of the concerns and negativity from franchisees are warranted, but management is working hard on improving the business and alleviating these concerns.  Change will not happen overnight. 


Another issue the company faces is that there are a significant number of McDonald’s franchisees, and management is not going to make everyone happy.  The largest MCD franchisee owns 60 stores, with the top ten largest franchisees owning a total of 409 stores in the U.S., representing 2.9% of the system. The implications are that there are thousands of franchisees that all have an opinion on how things should be run!


Another important metric to consider is franchisee valuation trends.  Looking at the data from Restaurant Research, the data on valuation trends also point to a very healthy system.


The chart below displays the unit level EBITDA multiple valuation trend for MCD, which peaked in 2014 at 5.75x, +16% higher than the segment average. 




The demand for MCD restaurants among new and existing franchisees remains very healthy, despite the issues the company faces. 


McCullough: Being Long Gold is a Disaster

With The Open Championship wrapping up in Scotland (and the HedgeyeCares Charity Golf Event tomorrow), Keith had no shortage of golf metaphors on The Macro Show to explain falling gold prices.  


Subscribe to The Macro Show today for access to this and all other episodes. 


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LEISURE LETTER (07/20/2015) - LVS/1928.HK, 01680.HK, 678.HK, Airbnb

TICKERS: LVS/1928.HK, 0618.HK, 678.HK, Airbnb


July 23 8:30am: Macau Legend 2Q CC: ; PW: 3270523# 

July 23 9am:  PENN 2Q CC

July 23 5pm: BYD 2Q CC ; pw: 1397357

July 24 11am-2pm:  PENN Plainridge tour and investor day

July 28 8:30am: WYN 2Q CC ; pw: WYNDHAM

July 29 10:00am: HLT 2Q CC ; pw: 74328196

July 30 9:00am: HST 2Q CC

July 30 10:00am: MAR 2Q CC ; pw: 66506287

July 30 1:00pm: HOT 2Q CC ; pw: 69941686

August 1

  • Wild Rose Jefferson opens
  • St Regis Macau opens

August 4: 11:00am: MGM 2Q CC ; pw: 0575269

August 4: 5:00pm: AWAY 2Q CC

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)


LVS, 1928.HK - The Labor Affairs Bureau is investigating the death of an imported worker in a Sands China construction site in Cotai. For now, they have stopped works. A 50-year old imported worker from the Mainland was helping with crane works in a construction site at the Venetian.


According to a preliminary investigation, the metal frame came loose and the metal belt used to tie the framework broke, causing around three tons of frameworks to fall on the man. The man lost consciousness on the scene and was pronounced dead after emergency treatment at the hospital.


The bureau says they ordered the contractor to terminate the relevant crane works, as well as requested the submission of a report on the accident. Further investigations are underway


Takeaway: Unfortunate incident could further delay Parisian opening.


01680.HK - Macau Legend Development has announced that it expects to report a loss for 1H 2015.  Last year, Macau Legend generated a first-half profit.   The company told the Hong Kong Stock Exchange that the loss it expected was due mainly to less revenue from gaming and greater costs, particularly staff costs.

Macau Legend is also reportedly building an integrated resort on Cape Verde islands, an archipelagic nation off the northwest coast of Africa.  The gaming and entertainment complex, which is expected to need US$200 million in investment, will include high-end hotels, casinos, conference centers and yacht piers, among other facilities, the Hong Kong Economic Journal reported on Monday, citing unnamed sources.



Takeaway: Not surprising given tough demand environment and high cost structure.


Genting HK - said on Friday it expects net profit for the six months to June 30 “of not less than” US$2.1 billion, compared to US$142.2 million for the prior-year period.

  • The numbers contained in its most recent update did not include the contribution from Travellers International Hotel Group Inc – a venture with a Philippines partner that operates and is expanding the Resorts World Manila casino resort – and from Norwegian Cruise Line Holdings Ltd (NCLH), Genting Hong Kong said.
  • The firm said the expected increase in net profit is mainly attributable to, among other factors, a gain of US$599.6 million “from the disposal of certain stakes in NCLH” and a one-off accounting gain of US$1.57 billion “recognized upon completion of a secondary offering of NCLH’s ordinary shares”.
  • Genting Hong Kong’s interest in NCLH decreased from about 22.0% to approximately 17.7%, the company said, adding that it now accounts for its share of results and net assets of NCLH as an “available-for-sale investment”.


Takeaway: Further Genting/Apollo sales have already been a headwind for NCLH investors but NCLH is setting up to have a great year.

Airbnb - NYC is spending $2.8 million to shut down illegal Airbnb rentals. 

  • The city is doubling down on its efforts to regulate illegal home conversions, according to the New York Post. And for its crackdown, the Mayor’s Office of Special Enforcement — which is tasked with fighting illegal subletting, among other things — now has a $2.8 million budget to work with.
  • The office will expand to a staff of 29 from 12, turning the division into an active investigative unit, according to the newspaper. 
  • “OSE will no longer be a reactive group but one that will go out and shut down the illegal hotels,” said Upper West Side Council member Helen Rosenthal. 


Takeaway: A small positive for NYC lodging. "Illegal" rentals, for now, simply mean a sublet which lasts longer than 30 days. NYC continues to be one of the most difficult cities for Airbnb to work with as regulators refuse to strike a productive deal.


Travelodge - The owners of Travelodge are preparing to check out of the hotel business after appointing Deutsche Bank to advise them on a £1bn IPO.   An initial public offering is believed to be less likely than a sale, and there is speculation that Travelodge could draw the attention of an Asian suitor. 

  • Travelodge currently has 521 hotels, including 12 in Ireland and five in Spain, although the business has identified about 250 locations in Britain where it would like open a site in the future, the chief executive added.
  • Travelodge, like other companies across the hospitality, retail, leisure and social care industries, is expected to suffer higher costs as a result of the plan for a new national living wage for workers aged 25 or over, which was unveiled by Chancellor George Osborne earlier this month. The minimum wage is currently £6.50, but will rise to £7.20 next April and reach £9 by 2020. 



Crystal Cruises/Genting HK-  will turn the two-ship, luxury ocean cruise line into a luxury “one call” — using the Crystal brand to add new ships, new yachts, new river cruise ships and a new airline.

  • Three new luxury ships are going to be built. They are large (100,000 tonnes) but will only carry 1,000 passengers with one-to-one service from the 1,000 crew members. 
  • The ships will be the most luxurious afloat with suites twice as large as any of the luxury brands and they’ll feel even bigger with higher than normal ceilings. 
  • In a unique move, President and CEO Edie Rodriquez told USA Today there will be 48 residences offered as second homes on the top deck. Your own restaurant, reception and facilities go with your new home at sea.
  • The first of these super luxury ships will be sailing by 2018. The Crystal River Cruise ships will be sailing by 2017 with two custom-built vessels with the same luxury appointments and service you will find on the ocean liners.


Takeaway: Who says the luxury cruising market isn't getting crowded as well. 


Avalon Waterways - Low water levels on European rivers are forcing many river cruise companies to evaluate their upcoming sailings.  Avalon Waterways has canceled the departure of its "Highlights of Germany" river cruise on Avalon Affinity, due to low water on a stretch of the Danube River. The cruise was due to begin on July 19, sailing from Passau to Basel.  

  • The company has offered affected customers the option of another European river cruise on a similar departure date or a full refund with a future cruise credit allowance.

  • "As of today, all our cruise programs are operating as per schedule; however, the water levels are low on the Rhine, Main and Danube so we are monitoring the situation closely," the line said in a statement.



Vladivostok, Russia - Hundreds of new staff being trained for next month's landmark casino opening in Vladivostok. 

  • The first casino resort in the the Primorye Entertainment Zone is due to open next month by Macau magnate Lawrence Ho' gambling investment firm Summit Ascent Holdings.
  • The $500 million complex will boast 121 rooms alongside a luxury casino suite and gaming floor.  It is due to open on 28 August after completing construction and undertaking final government inspections. 
  • Initially, styled as Tigre de Cristal this will comprise five VIP gaming tables, 42 mass market gaming tables, and 759 slot machines in a $172 million first phase.
  • Some 700 staff have been trained for the opening as croupiers, dealers, floor managers and the like, a number that will increase to over 1,000 when the complex is operating at full capacity.


Takeaway: With close proximity to China, Japan, and Korea, Vladivostok certainly has potential.  


Australia - Australia’s Echo Entertainment Group Ltd has been chosen by the Queensland government to develop a multibillion-dollar casino resort in the Queen’s Wharf area of the state capital Brisbane, local media reported on Monday.  Echo’s bid beat a proposal from market rival Crown Resorts Ltd, led by James Packer.

  • Ms Palaszczuk, the Queensland Premier, stated the Echo bid was the standout one because of its better proposals for the use of public space and because the company was in a position to start construction soon.
  • Construction is due to begin by late 2016 and is likely to be completed by 2022, according to media reports.
  • The project will have luxury hotels: including one under the Ritz-Carlton brand and one under the Rosewood brand; residential apartment towers; luxury shopping; and public spaces along the Queen’s Wharf’s dock.




North Dakota - Lottery ticket sales increased slightly in North Dakota over the last fiscal year despite fewer multi-million dollar jackpots, the state's lottery director said.  North Dakota gamblers wagered just more than $27 million on lottery games for the fiscal year that ended June 30, or about $100,000 more than fiscal 2014, lottery director Randy Miller said.  



Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.71%

P: Thoughts into the Print (2Q15)

Takeaway: We expect a light 3Q guide, but 2015 is irrelevant. Web IV is all that matters now, and we expect P to lose the one debate that it can't.


  1. 2Q15 UNINSPIRING, BUT 2015 IS IRRELEVANT: We’re having a hard time getting to 2H15 consensus Advertising Revenue estimates, which essentially call for accelerating growth in its conflicting growth drivers (see table below).  In turn, we’re expecting 3Q revenue guidance to disappoint.  Further, we suspect P’s y/y user growth could slow to the point where it prints another sequential decline in users, which will likely take the street by surprise.  But even if we’re wrong on all the above, we don’t see P catching a bid this close the potential fallout from Web IV.
  2. WHAT WE’RE KEYING IN ON: Listener Hours. Web IV is all that really matters now, and we expect P will lose the one debate that it can’t on royalty rates (different rates for ad-supported vs. subscription music).  Given the potentially significant increase in rates, the more hours P enter 2016 with, the more bearish we become.  The situation would be far too sensitive to just apply a simple listener cap, and hope it would suffice (see table below).  P would need to take more drastic steps to reign in content costs.  We’ll be in Washington for final arguments tomorrow; we’ll report back what we learn.


Let us know if you have any questions, or would like to discuss in more detail.  For Web IV supporting analysis, see links below. 


Hesham Shaaban, CFA




P: Thoughts into the Print (2Q15) - P   2H15 Ad rev scen v2 




P: Losing the Critical Debate?

04/08/15 08:53 AM EDT

[click here]


P: Worst-Case Scenario? (Web IV)

03/23/15 09:30 AM EDT

[click here]


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]



Two negatives emerging from the recent weekly numbers: The Galaxy Phase 2 ramp is not growing the market nor are changes to the transit visas.  Sequentially, gaming volumes still appear to be in decline.  Base Mass remains a particular concern of ours and we think the Street is implicitly underestimating the deterioration in that high margin segment.  Hedgeye EBITDA estimates still fall 5-10% below the Street for 2015 and ~15% below for 2016.


We remain negative on the Macau stocks, particularly LVS and Sands China as their exposure to Base Mass and acute vulnerability to the new supply growth put them at a higher risk over the next 2 years.


Please see our detailed note:

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week

Takeaway: Europe shrinks from the risk spotlight while China remains a concern. Earnings have commandeered the short-term high frequency news flow.

Key Takeaway:

The confluence of the Greek bailout and generally better than expected earnings thus far (81% of Financials have beaten bottom line estimates through Friday) have caused risk measures to recede in the latest week. Our primary focus remains on China, where we watch for signs of further deterioration. 


Current Ideas:

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM19


Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM15


1. U.S. Financial CDS -  Swaps tightened for 20 out of 27 domestic financial institutions given positive earnings results and the Greek bailout deal. As of July 17, 81% of financials companies reported earnings above estimates for the second quarter.


Tightened the most WoW: PRU, AIG, MTG

Widened the most/ tightened the least WoW: MMC, SLM, SLM

Tightened the most WoW: CB, HIG, RDN

Widened the most MoM: MMC, MBI, AGO


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM1


2. European Financial CDS - Swaps tightened sharply in Europe last week, largely driven by the development of the Greek bailout deal. Greek CDS tightened for the first time in weeks, although they remain wider on a month-over-month basis.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM2


3. Asian Financial CDS - CDS of Chinese and Japanese banks tightened last week while widening between 4 bps and 7 bps for Indian banks.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM17


4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -34 bps to 161, followed by Italian swaps which tightened by -19 bps to 104.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM18


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM3


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week. Brazilian sovereign swaps widened the most, by 8 bps to 264. Meanwhile, Russian swaps tightened the most, by -16 bps to 312.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM16


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM20


6. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.68%.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM5


7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1894.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM6


8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 27 bps this week versus last week’s print of 28 bps.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM7


9. CRB Commodity Price Index – The CRB index fell -0.3%, ending the week at 215 versus 215 the prior week. As compared with the prior month, commodity prices have decreased -3.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM8


10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 11 bps.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM9


11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 7 basis points last week, ending the week at 1.28% versus last week’s print of 1.21%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM10


12. Chinese Steel – Steel prices in China rose 0.1% last week, or 2 yuan/ton, to 2112 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM12


13. 2-10 Spread – Last week the 2-10 spread tightened to 168 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM13


14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 2.4% downside to TRADE support.


Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM14


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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