Cycles, Macro and Multiples

Client Talking Points


This is probably our most contrarian theme that isn’t being bandied about yet – post the Greek clown show, in rate of change terms, European econ data continues to slow; German PMI 51.5 (new year-to-date lows) this morning and France back < 50 at 49.6 JUL vs 50.7 JUN. 


Nasty week for anything linked to this uber-macro risk; don’t forget this is a credit risk signal inasmuch as it is a draw-down one for commodity linked currencies/countries. Russian stocks are down -1.3% this morning (-8.2% in the last month); Brazil -2.1% yesterday (-6.6% month-over-month).


Getting lots of questions on this exposure as the Russell 2000 is now -3% month-over-month (bearish TREND signal) but the “Russell Value” (IWN) is underperforming Russell Growth by 1100 basis points (its widest margin since 2011) – we liked IWM in Q1, but definitely not here.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.


According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.


After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road


TREASURIES: good wk for $TLT bulls, 2.28% 10yr as both global growth and inflation slow



Living at risk is jumping off the cliff and building your wings on the way down.

Ray Bradbury


0.3% of solar energy from the Sahara is enough to power the whole of Europe.

MCD | Right on Track


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


McDonald’s (MCD) reported 2Q15 earnings result yesterday, performing more or less in-line with our expectations. Global same-restaurant sales (SRS) decreased 60 basis points YoY to -0.7%, versus consensus of -0.4%, reflecting negative guest traffic in all major segments. Although negative, it is a marked sequential improvement versus the -2.3% seen in 1Q15. We will break down the numbers by segment later in the note. Company-operated restaurant revenue of $4.26B outperformed consensus estimates of $4.16B, yet still down roughly 11% YoY. Franchise operated revenue came in right on target matching consensus at $2.24B down roughly 6.5% YoY. 2Q15 EPS was $1.26 beating consensus of $1.23 by $0.03, but declining 10% YoY. 


Management highlighted that 80% of the decline in operating profits came from two countries, U.S. and Japan.  Highlighting that MCD is strong company with just a few regions of the world causing the company’s growth related issues. 


U.S. 2Q15 SRS decreased -2.0% versus consensus expectation of -1.5%, sequentially seeing a minor 60 basis point improvement. These results reflect negative guest traffic, as new products and LTO’s did not achieve the lift expected. All-day breakfast tests have been going well, and we are optimistic on the effect its rollout would have on the performance.


MCD | Right on Track  - CHART 1


Europe 2Q15 SRS sales increased +1.2%, just shy of consensus estimates of 1.5%, a notable improvement sequentially, coming off four consecutive quarters of negative comps.  Results are being affected by continued economic challenges in key markets, and charges as part of the global business turnaround plan.


MCD | Right on Track  - CHART 2


APMEA 2Q15 SRS decreased -4.5% versus consensus of -3.4%, again showing improved trends sequentially, as the effects of the supplier issue continue to dissipate in Asia.


MCD | Right on Track  - CHART 3


After listening to the call there are obviously still issues to figure out, especially domestically in the U.S., as turnaround efforts have not performed well to date. But we are very encouraged by positive performance across the International Lead Markets segment, in which management stated quarter to date performance is positive and showing strength.


Notable comments during the call:

  • Financial results remain disappointing but they are seeing early signs of momentum, expecting to see positive growth globally in Q3, led by International Lead Markets and High Growth Markets.
  • International Lead Markets segment is moving in the right direction, Australia, Canada and UK are seeing strong performance, France is gaining share and Germany is turning the corner.
  • UK, 37 consecutive quarters of positive comps.
  • Canada focusing on convenience, rollout of dual lane drive-thrus, strong breakfast growth, free coffee promotion earlier this year and new salads on the core menu.
  • Germany, 1st quarter since 2Q12 of positive comps.
  • Developmental license agreement for 100 new sites along the Autobahn in Germany.
  • China as a whole had a -3% comp in 2Q15, the top five cities which represent 50% of sales are flat quarter to date. While lower tier cities are being effected by macro-economic factors and not recovering as quickly.
  • U.S. remains disappointing, low price structure implemented this year was an important first step. Northwest region was top performing, having positive results in the first month of Q3.
  • Launching mobile app in Q3, designed to streamline customer service experience. Initially will have limited capabilities, but will be updated over time to include mobile ordering.
  • Expanding all day breakfast into a limited number of new markets to learn more.


We at Hedgeye believe Q3 will be the inflection point to this turnaround, as a lot of the little things management has implemented will have ample time in the market to take full effect.


July 24, 2015

July 24, 2015 - Slide1

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Takeaway: A big beat was in the offing but this was pretty impressive, particularly with the flow through



Conf Call 

  • Consumers growing more confident 
  • LV Locals:  all 4 major Local properties achieved EBITDA and non-gaming gains. Expect roadwork (impacting Suncoast/Sam's Town) to be completed by Labor Day. On a combined basis, the Orleans and Gold Coast generated revenue growth of more than 6% and EBITDA growth of more than 20%. This was the best second quarter EBITDA performance for these properties since 2008.  The release in Gold Coast our growth throughout the business with increases in gaming revenue, non-gaming revenue and cash ADR.
  • Downturn LV:  gaming and non-gaming revs up YoY.  Increase in table games and slot volumes.  2015 visitation has been strong.
  • Midwest/South:  11 out of 12 properties grew EBITDA. IP rev grew $3m and $4m in EBITDA.  IP has delivered 3 straight quarters of double digit EBITDA growth. Treasure Chest- good performance among casual players.
  • Delta Downs:  hit record EBITDA in April.  Flooding in May/June resulted in slightly lower EBITDA in 2Q.
  • Blue Chip:  continue to increase market share
  • Kansas Star:  record 2Q EBITDA (+10% YoY); improved operating margins by 130bps 
  • Atlantic City:  Borgata posted 5th consecutive quarter of EBITDA growth.  Borgata sold 5k additional room nights in 2Q and F&B was up. 
  • Non-gaming grew across the portfolio in 2Q
  • Delta Downs doesn't have enough hotel rooms to meet demand; will be adding 167 hotel rooms/suites
  • Paid down $45m in debt in 2Q. YTD, debt reduction has been $125m
  • 2Q Capex:  $39m ($5m at Peninsula). YTD invested $58m.
  • Delta Downs $45m project:  expect to spend $10m in 2015 and remainder in 2016.
  • 2Q Borgata Capex: $10m
  • FY 2015 GUIDANCE: 2H Wholly-owned net revs same as 1H.  65-75% EBITDA flowthrough.  Expect LV Locals EBITDA to grow 5-5.5% for FY 2015.  Downtown EBITDA to grow 14% in FY 2015. Expect Midwest/South to grow EBITDA to 7-8% YoY. Expect $170m in EBITDA (BYD receives 50%) and increased property taxes for Borgata.
  • Borgata leverage at end of 2Q was 4x
  • Will save $12m in interest expense savings when they do decide to retire Borgata's 9 7/8% notes in the next 12 months

Q & A

  • Nice Cash ADR growth in LV Locals
  • July trending similar to Q2 across all properties
  • Continue to have conversations about acquiring assets
  • Revenue growth in-line with expectations. Strong flowthrough 
  • Consumer is getting stronger
  • Customer spend is up, including unrated play and casual play
  • Buy MGM's part of Borgata? Happy with partnership. Would want the right price to buy their share.
  • No comment on PNK/GLPI deal
  • AC promo environment: normal
  • LV Locals margin opportunity:  still sees more opportunity. Current margins are sustainable.
  • Delta Downs $45m project:  expect to attract younger demographic
  • NOL: just under $982m
  • Maintenance capex for slots:  will stay as is
  • M&A:  Hope to do something at least leverage neutral
  • Downtown charters:  today, they run 4 charters a week (used to run 7/wk). Lower because commercial airlines have increased their lift from Hawaii.  
  • Rated play from Hawaii is up
  • No timing on when they will receive $88m tax refund


There will be a time Del Frisco’s Restaurant Group (DFRG) is a LONG, but for now we want to keep it on our bench as we wait for further evidence that management will make better capital allocation decisions.


At DFRG’s current market value, the Del Frisco Double Eagle segment accounts for ~74% of the market value.  The implications are that The Grille and Sullivan’s are destroying shareholder value.  Therefore, to create shareholder value from these levels significant changes must be made in the future capital deployment plans in those concepts.  Management hinted on today’s earnings call that changes might be coming, but the stock reflects zero confidence that management will make the right decisions.


There things management can do to regain investor confidence:

  1. Stop new unit growth of “The Grille” in 2016
  2. Close all underperforming stores
  3. Demonstrate confidence in the trajectory of “The Grille’s” average unit volumes


Hoping that management will see the need to make these changes is not reason enough to go LONG DFRG.


DFRG reported 2Q15 earnings this morning and it was overall a disappointing performance. Consolidated revenues increased 9.5% to $73.8 million but fell short of consensus estimates of $75.4 million. Comparable same-store sales (SSS) also missed across the board, Del Frisco’s Double Eagle reported +1.0% SSS versus consensus of +2.3%, showing a sequential slowdown over the last four quarters. Sullivan’s Steakhouse SSS decreased -3.0% versus a consensus estimate of +1.4%. And finally, Del Frisco’s Grille decreased -6.3% versus consensus estimates of -2.3%. Reported EPS was $0.16 versus consensus estimates of $0.19, further showing the current weakness across the business.


Del Frisco's Double Eagle 2-year trends are concerning, as they have decreased sequentially three quarters in a row.




Management’s reasons for poor performance were mostly blamed on external factors; weather affecting patio sales, Father’s Day shift, construction at NYC Double Eagle and conventions switching locations, among a few others. The Grille concept continues to struggle and we were hoping with the exit of Jeff Carcara, they would lessen their focus on the concept. For now their voiceover is the opposite, as they continue to sink capital into the Grille and Sullivan’s.


Recent restaurant development remains focused on the Del Frisco’s Grille concept, which just posted a  -6.3% comps. At the end of the second quarter DFRG opened a Del Frisco's Grille in The Woodlands, Texas. In the third quarter, they have already opened a Del Frisco's Grille in Plano, Texas and will be opening a Del Frisco's Grille in Stamford, Connecticut and a Del Frisco's Double Eagle Steak House in Orlando, Florida. The remaining three Del Frisco's Grille locations in Little Rock, Arkansas; Hoboken, New Jersey; and Cherry Creek, Colorado will open in the fourth quarter. Management also closed the Sullivan's Steakhouse in Denver, Colorado during the second quarter upon its lease expiration.


Management adjusted the outlook for the remainder of 2015 down, annual comparable same-store sales are now expected to be 0.5% to 1.5% down from previous estimates of 2% to 3%. Annual adjusted EPS growth between 5% and 9% versus previously projected 15% to 18%.


We remain hopefully in the underlying business and the strength of the Double Eagle concept. Management needs to get smarter about capital spending, deploying it where the best return for shareholders is created. Until we hear something along these lines we are not comfortable jumping in on the long side.


The stock market reaction to the earnings is overwhelmingly negative as it is currently trading down ~16%. We will continue to monitor the name from the sidelines as we wait for the right entry point.



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