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CMG | Is a Friend to Investors not a Faux

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

 

Chipotle (CMG) delivered an impressive 2Q15 when you digest the numbers and get past the same-store sales comp miss. Reported revenue was $1.20B missing slightly versus consensus estimates of $1.22B.  Same-store sales (SSS) were +4.3% missing consensus estimates of +5.8% by 150 basis points. The build-up of the comp consisted of +4% price, traffic was slightly negative at -0.3% but offset by +0.6% mix driven by catering and kids meals. Diligent management of cost of sales enabled management to deliver a bottom line beat with reported EPS of $4.45 versus consensus estimates of $4.43.

 

CMG maintained its full-year 2015 guidance for:

  1. Comps of low-to-mid-single digits
  2. Unit development of 190 to 205

 

Given current trends and the outlook for the balance of 2015 the current consensus estimate for EPS of $17.34 appears to be conservative. 

 

A few things that impacted the quarter:

  • Poor management of the labor schedule as teams work to integrate the new software caused a $0.16 impact to EPS in Q2. This is expected to be resolved through Q3 and by Q4 management expects to make up some of this headwind.
  • Regulatory calls for higher wages, CMG already pays above minimum wage, but to continue to maintain the high quality workforce, they need to stay above it.
  • Absence of carnitas is obviously still an issue but with a new supplier online CMG expects to have all restaurants loaded with pork by early Q4. No bounce back from carnitas has been included in company guidance, providing possibility of further upside.
  • Commodity inflation, Avocados sourced from California and Beef system-wide will add pressure to the cost of sales line item, but management is adamant to try to pass some of the cost onto the customers.

 

Although traffic was negative for the quarter management stated that it has turned positive in the low-single digit range in July. We continue to be encouraged by Chipotle’s continued robust growth driven by strong employees and one of the most loyal fan bases. The opportunistic share buyback program will continue to support this stock, as management steers it towards growth for many years to come.

 

Below is a look at CMG’s performance versus a year ago and consensus estimates for this quarter. Please note that green is positive performance, while red is negative performance.

 

CMG | Is a Friend to Investors not a Faux   - CHART1

 

 


LVS: A NUANCED QUARTER

Takeaway: Q2 is a wildcard for the stock but 2H 2015 and 2016 headwinds are stiff and valuation is high

CALL TO ACTION

For the first time in many quarters, for any Macau operator, we’re actually in line with Street EBITDA estimates for a quarter.  That’s the good news.  Lucky play on the Macau VIP tables could be a $30m contributor to EBITDA (3%) and is probably the reason we’re in line.  Not exactly bullish but it may be good enough.  We’re actually not sure how the stock will react to Wednesday’s Q2 earnings release.  However, we believe estimates are ultimately headed materially lower owing to declining [high margin] base mass, falling market share (already happening in July), too optimistic non-gaming expectations and a full valuation.

Q2 EARNINGS

As you can see from the following chart, Hedgeye is very much in line with the Street for Q2 revenues and EBITDA.  It’s unclear whether high VIP hold in Macau is reflected in the Street estimates but it is in the Hedgeye projection.  Our projections are not much different than those laid out in our monthly Macau conference call on July 7th.

 

LVS: A NUANCED QUARTER - 1

 

We don’t have a specific call on the stock action immediately following the Q2 release but do believe the stock is ultimately headed lower. Here are the push and pulls for Wednesday night:

  • Dividend – The odds are pretty high and seem to be priced in that there will be no change in the dividend policy.  Any softening of management’s tone regarding protection of the dividend would be a huge negative for the stock.
  • High hold % – We know LVS held high at Sands Macau, Four Seasons, and Sands Cotai Central.  It’s unclear whether high hold is reflected in consensus.  In our model, we’re projecting a $30m positive contribution from good luck (3% of overall EBITDA).  Gaming stocks will sometimes trade up on a meet or beat even if it is related to luck, but that is usually short-lived.
  • Base Mass – Another significantly down quarter in this segment should force down 2015 and 2016 estimates given the high margins in this area.
  • Non-gaming - The Street pays little attention to non-gaming revenues as Macau is seen as a gaming market. However, RevPAR and other non-gaming revenues are headed materially lower, much of which will drop to the bottom line. At some point, the analysts' models will have to reflect that.
  • MBS – We’re slightly higher than the Street on EBITDA from the Singapore property but this property is always a difficult one to model.
  • Forward commentary  – While management may positively spin some of the government signals of late, the data suggest July is not a good month for the market, nor is it good for LVS.  How much of LVS’s 2%+ share loss vs trend is due to new competition from Galaxy Phase 2 and how much is hold related?  Phase 2 does seem to be ramping, at the expense of the market, and it is targeted at LVS’s core segments.

2015/2016 OUTLOOK

While our Q2 estimates are consistent with the Street, we remain well below for 2015 and 2016 as shown in the chart below.  Our primary concern remains the trend in Base Mass – the highest margin segment - that appears to be eroding faster than the Street expects.  Our analysis of average minimum table bet levels (see our most recent analysis, “MORE MACAU PRICE CUTTING” on July 10th) shows more elevated minimum bet cuts for Base Mass than even Premium Mass.

 

LVS: A NUANCED QUARTER - 2

 

The following chart shows the breakdown of Mass between Premium and Base for the last several quarters for Sands China.  Following a flattish Q4, Base Mass revenues began to fall YoY in Q1, 2 quarters behind the first Premium Mass decline.  We believe Base Mass will continue to decline, possibly throughout 2016 which will have significant margin and EBITDA ramifications.

 

LVS: A NUANCED QUARTER - 3

 

Moreover, we think LVS market share is at risk.  Following a few hold-aided months, market share appears to be headed south.  At 22.0%, LVS’s market share is tracking 220bps below recent trend during July month to date.  Galaxy Phase 2 has not grown the market and appears poised to continue to steal share, much of it from LVS.  Supply growth over the next 2 years will be aimed squarely at LVS’s Base Mass segment.  The hotel segment and other non-gaming should also be a drag on YoY profitability with room supply peaking at ~25% next year in an already declining rate environment.  LVS is the most exposed operator to rooms.

CONCLUSION

Stock action on Thursday could go either way but the intermediate trend in the stock price should be lower. There are just too many headwinds for the Macau market in general and LVS in particular to justify a 13-14x EV/EBITDA multiple, at the high end of the historical range.


FUNDAMENTAL WALK THROUGH | SBUX

FUNDAMENTAL WALK THROUGH | SBUX - CHART1

 

SBUX reports Q3 2015 earnings after the close on Thursday, July 23, followed by a conference call at 5pm ET.  The consensus is looking for revenues of $4.86 billion, up 17% and EPS of $0.41, up 21%.  We see little upside to current consensus estimates.  

 

We are adding SBUX to the SHORT bench of our Hedgeye Restaurants Best Ideas list.

 

SBUX obviously has significant growth potential, and has had industry leading innovation as of late. But we are growing increasingly concerned by the valuation of the stock, which trades at nearly 2 standard deviations above the five year average EV/NTM EBITDA of 12.9x.  The current valuation more than adequately reflects the company’s long-term growth potential.  That being said, we do have some reservations about the current growth strategy. 

 

Some of the issues on our radar screen are:

  1. We are closely watching the amount of items they are adding to their menu, as they may be overcomplicating it, which if history proves right again, would decrease performance of the stores.
  2. Is the latest round of mobile order and pay improving throughput?
  3. CAP region sales and margin trends.

 

PRICE PERFORMANCE

SBUX shares are up 35.75% year-to-date versus up 3.29% for the S&P 500. One turn on the EV/NTM EBITDA multiple suggest 5.9% upside/downside in the name. 

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART2

 

FINANCIALS

 

SAME-STORE SALES

Looking out to 3Q15, SBUX should achieve its 22nd consecutive quarter of same-store sales growth of 5% or greater, which is an impressive feat given their large store base.  Imbedded in the 3Q15 performance we are looking for management commentary about the Mobile Order & Pay as well as performance of food items across all day-parts.  Same-stores sales will slow sequentially in 3Q15, but traffic trends are estimated to accelerate globally. 

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART3

FUNDAMENTAL WALK THROUGH | SBUX - CHART4

FUNDAMENTAL WALK THROUGH | SBUX - CHART5

FUNDAMENTAL WALK THROUGH | SBUX - CHART6

 

AVERAGE CHECK

SBUX’s margins have benefited from a significantly higher average check.  The check has been rising at a steady 3%-5% for the past five quarters; consensus is expecting these increases to tail off to the 2.5%-3.5% range over the next four quarters.

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART7

 

TRAFFIC

Traffic growth has been historically low over the last five quarters coinciding with the historically high price increases. Management is banking on innovation and Mobile Order & Pay to get traffic back up. The acceleration in traffic is critical at this valuation, especially in the Americas.  Watch out below if traffic decelerates sequentially in 3Q15. 

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART8

 

MARGIN TRENDS

 

RESTAURANT LEVEL MARGINS

Globally, SBUX is expected to see Restaurant Level Margins accelerating, but at a slower rate than in 3Q14. Margins expected to increase 84 basis points YoY to 28.41%, compared to a 205 basis point increase in 3Q14.

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART9

FUNDAMENTAL WALK THROUGH | SBUX - CHART10

FUNDAMENTAL WALK THROUGH | SBUX - CHART11

FUNDAMENTAL WALK THROUGH | SBUX - CHART12

 

OPERATING MARGIN

Globally, SBUX should see operating margin expansion in every region except CAP.  On a consolidated basis, operating margins are expected to be 19.18% in 2Q15, up 68 bps year-over year.  The company should benefit from favorable coffee prices, and supply chain initiatives taking costs out of the system. 

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART13

FUNDAMENTAL WALK THROUGH | SBUX - CHART14

FUNDAMENTAL WALK THROUGH | SBUX - CHART15

FUNDAMENTAL WALK THROUGH | SBUX - CHART16

 

SENTIMENT AND VALUATION

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART17 

 

EV / NTM EBITDA

Trading at 16.9x EV/NTM EBITDA the stock is not cheap, and is due for a correction. Long-term we are bullish on SBUX, but we are growing skeptical of the current valuation and product line extensions. For example, if the stock were to drop down to 15x EV/NTM EBITDA, 1 standard deviation above the five year average, it would imply a ~12% decrease to todays price. This is a scenario we believe to be likely, but with the upcoming quarter and current excitement around Mobile Order & Pay we wouldn’t want to get in ahead of the print.

 

POTENTIAL DOWNSIDE

Realistically we see about ~20% downside in this name if our thought process plays out. Before being fully convicted on this idea we need to hear management’s commentary during the Q3 call. Post the call we will give you our higher conviction take on the outlook for the company.

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART18

 

SHORT INTEREST

SBUX’s short interest is low, hovering right around 1% of the float.  There is not a big bet against this company.      

 

SELL-SIDE SENTIMENT

With 79% of the analysts having a buy rating on the stock and zero sell ratings, there is a very strong positive bias to the name.  Given the financial performance of the company for the past two years, the bullish bias appears to be justified. But the future looks murky, as the over complication of the menu has the potential to spell serious trouble.

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART19

 

 

 

HEDGEYE RESTAURANTS IDEA LIST

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART20

 

 


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McCullough: Gold vs. Central Bankers?

In this brief excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough is in rare form, pulling no punches on what's currently going on with gold, central bankers and more. 

 

Subscribe to The Macro Show today.

 

 

 


GIS | Green Giant Divestiture is the Worst Kept Secret

General Mills is on the Hedgeye Consumer Staples Best Ideas list as a LONG.

 

The rumors keep rolling in on the expected divestiture of their Green Giant assets. With the latest rumors that Bonduelle is in discussions with Centerview to team up on a bid for Green Giant, reported by Reuters. Bonduelle is a France based company, but owns manufacturing facilities in Canada that co-pack for the Green Giant business.

 

This is further confirmation that GIS is still active in the deal process. After just closing out their fiscal year 2015 at the end of May, teams around the company are freed up to conduct a divestiture. Year-end tends to be a strenuous time at manufacturing companies as its all hand on deck from supply chain and sourcing planning volumes for next year, and finance preparing the numbers. It’s no surprise that the sale process probably got pushed till after the year closed.

 

General Mills needs to divest tired assets, and Green Giant is one of the worst performers in the portfolio and we at Hedgeye will be glad to see it go to someone else. Below is a chart from our GIS Black Book that outlines “the other 28%” of assets that management has labeled as non-core.

 

GIS | Green Giant Divestiture is the Worst Kept Secret - CHART1

 

We hope to see more divestitures come down the pipe, and an acquisition or two to tack some growth onto the portfolio. We predict FY2016 will be a busy portfolio shaping year.


Chasing Horses

“A horse never runs so fast as when he has other horse to catch up and outpace.”

-Ovid

 

That’s a great opening volley of a quote for the latest #behavioral book I’ve cracked open, Top DogThe Science of Winning and Losing, by Po Bronson & Ashley Merryman. For those of you with competitive fire, I highly recommend it.

 

In the “Foundations” part of the book, the authors introduce a term called #edgework (“a term borrowed from Hunter S. Thompson’s description of anarchic human experience”). “Edgework stems from the way skilled performance brings control to a situation most people would regard as uncontrollable.”

 

In other words, if you took the Greece, China, and the NYSE halt (amidst a 5-6 week Nasdaq decline) as an opportunity to get really long “new tech” and short everything reflation (Oil, Gold, Russia, Brazil, etc.), you have wicked edgework!

 

Chasing Horses - z 3 cc

 

Back to the Global Macro Grind

 

On the other hand, if you’re like me and you only got one half of that right (avoid #Deflation), you better start interviewing Google (GOOGL), Facebook (FB), and Apple (AAPL) analysts. Non-consensus longs they aren’t – but wow, bros, look at those charts!

 

Forget chasing charts (or horses) for a second and remind yourself what was the last part of the US stock market to stop going up at the 2007 peak. Remember the Cramer’s “Four Horseman” (hint: it included RIMM) in SEP 2007? I do.

 

As a cycle guy, it’s been fascinating (but not surprising) to observe that, at all 3 US economic cycle peaks (2000, 2007, and 2015), the cycle slowing perpetuated #bubble multiples in the growth that Wall Street had left to chase.

 

All the while, the market internals have looked scarier at each of those 3 market peaks. Here’s how yesterday’s looked:

 

  1. PRICE – SPY (SP500) +0.08% yesterday vs. RUT (Russell 2000) -0.52% = bearish divergence
  2. VOLUME – Total US Equity Market Volume (see Chart of The Day) -21% and -24% vs. its 1-mth and 1-yr averages
  3. VOLATILITY – front-month VIX not being able to close below 12 for the 3rd time in the last 3 months

 

I hear ya – using price, volume, and volatility is probably cherry picking data (or something like that). But if you back out the move in the XLK (Tech ETF heavily weighted to names like AAPL and GOOGL) which was +0.5% on the day (and is +5.5% for July-to-date!):

 

  1. Energy Stocks (XLE) deflated another -1.3% yesterday (down -4.9% for July-to-date!)
  2. Basic Material Stocks (XLB) down another -0.9% and is -2.3% to kick off Q3
  3. Russia and Brazil (their stock markets) are -7.4% and -3.3%, respectively, month-over-month

 

Seriously, if you can’t buy “Global Growth” (until they halt Chinese and European stocks) and you definitely can’t buy “reflation” and/or anything linked to commodity inflation expectations – do you blame people for bucking up for apps and ads?

 

I don’t. Those were damn good horses to be riding; especially if you:

 

A)     Sold AAPL at the 2007 #bubble top (and bought it back in 2011 < $35) and/or

B)      Bought the Googler sub $250 in 2011 (when global growth was slowing)

 

I’d ride those cost basis’ all night long!

 

Sadly, save some exceptions, this isn’t the way most people “invest” anymore. In 2011, the same guy who was shorting AAPL and GOOGL was probably buying Gold at $1900. It’s just chart (momentum) chasing. And it rarely ends well.

 

Back to the bearish divergence between the SP500 and the Russell 2000, I think one basic #behavioral factor associated with consensus shorting low and chasing high might explain part of it. Check out the recent move in non-commercial (CFTC) hedging:

 

  1. SP500 (Index + Emini) net SHORT position of -119,980 at the end of last week registered a -1.63x 1YR z-score
  2. Russell 2000 (mini) net SHORT position of -7,553 at the end of last week registered at +1.31x 1YR z-score

 

In other words, since a z-score is a measurement of an observation’s relationship to its sample mean (in this case signaling too bearish at -2 and too bullish at +2), Consensus Macro was too bearish on SPY and too bullish on IWM. So they did the opposite.

 

That tends to happen when people have to hedge out “High-Beta” (as a Style Factor) in their portfolio when big beta stocks are getting smoked (like they did in the 6 weeks prior to last week’s 4 Horsy Ramp). The Russell is “higher beta” than the SP500.

 

All the while though, “Low-Beta” (stay with it) continues to crush “High-Beta” on a 1-3 month duration. And, if beta chasers in Tech/Biotech see a mean reversion (pullback from the highs), I think they’ll ultimately have to chase low-beta this summer too.

 

Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 2.21-2.46% (bearish)

SPX 2093-2130 (bullish)
RUT 1 (neutral)
Nikkei 209 (bullish)

VIX 11.76-14.53 (bullish)
USD 97.06-98.49 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.01-125.63 (bearish)
Oil (WTI) 49.46-51.89 (bearish)

Nat Gas 2.65-2.94 (bearish)

Gold 1096-1144 (bearish)
Copper 2.45-2.56 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Chasing Horses - Volume CoDpng


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