After Buffalo Wild Wings (BWLD) earnings call last night we want to cover the short call here and move it to the short bench.
Our underlying thesis for the BWLD short was that 2015 earnings estimates were too aggressive. While that turned out to be correct, the better than feared “miss and cut” is reason enough for the stock to rally. We would note that management will be raising prices excessively to compensate for increasing costs, an issue that may haunt them in the future. For the time being, consumers don’t seem to be bothered by the aggressive pricing the company has taken over the past three years.
As we said, last night BWLD announced 2Q15 earnings, reporting EPS of $1.12 versus consensus estimate of $1.27. Restaurant sales came in under estimates at $401.9 million versus consensus of $404.4 million, a ~17% increase YoY including some newly acquired restaurants. BWLD did beat the comps; Company owned stores reported SSS of +4.2% versus consensus of +3.8%, while Franchise locations reported an increase of +2.5% versus consensus of +2.1%. The comps are largely built up by 3.8% pricing at company owned stores (franchisees price at their own discretion). Margins have been under pressure as wing prices are up 26% YoY, and wage rates have been increasing significantly in certain markets.
Margins across the board are worse sequentially. BWLD Cost of Sales increased 3.9% to 29.3%, although slightly below consensus estimates of 29.5%. Restaurant level margins are down 7.4% YoY to 18.8% versus estimates of 19.1% as labor and food costs weigh on the P&L.
Bottom line, management cannot expect to be able to raise prices at these rates to cover the accelerating costs. Furthermore, it is still unclear whether the addition of the guest experience captain is adding value and making up for the extra expense. We expect the football season may keep this stock afloat in the near term but these rising prices will take its affect in the long run, and we will revisit the short at that time.
The “reflation-trade,” “global growth is back” crowd is getting smoked again as everything levered to inflation expectations underperforms.
The Energy (XLE), Materials (XLB), and Industrials (XLI) sectors are down -9%, -8%, and -3% in July vs. a flat S&P 500 as widening risk ranges and heightened volatility premiums manifest in commodities markets. These markets may look oversold, but given the awful Q1 Q/Q SAAR GDP print, Q2 may look like a notable acceleration on Thursday for the Q/Q SAAR navel-gazers.
If rate hike expectations are pulled forward, strap your seatbelts and look out below (again) in the short-term for commodities and their related sectors.
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Kinder Morgan, Inc. (KMI) published its 2Q15 10-Q on 7/24. We didn't find anything earth-shattering in the filing, and a boring 10-Q is a good 10-Q... That said, there were some interesting segment / asset-level data points that deserve mention.
Detail on Shell Acquisition......“On July 15, 2015, we purchased from Shell US Gas & Power LLC (Shell) for $200 million its 49% interest in a joint venture, ELC, that was formed to develop liquefaction facilities at Elba Island, Georgia. The purchase gives us full ownership and control of ELC. Shell continues to subscribe to 100% of the liquefaction capacity.”
Hiland EBDA Contribution Disclosed......KMI disclosed that the Hiland G&P assets contributed $36MM of EBDA to Natural Gas Pipelines and the Hiland Double-H crude pipeline contributed $12MM of EBDA to Products Pipelines in 2Q. Assuming $20MM of annual G&A, that puts the acquisition multiple at 18x current EBITDA.
G&P Weakness Hits Natural Gas Pipelines......Natural Gas Pipelines EBDA was down YoY on an organic basis (ex. Hiland), with the commodity-sensitive G&P assets weighing on the segment:
CO2 S&T EBDA Down 32% YoY......In our view, the market under-appreciates KMI's oil price exposure in its CO2 S&T business. In 2Q15, S&T EBDA was down 32% to an implied $79MM (~$320MM annualized):
Weak Bulk Terminals Volumes Bodes Poorly for Future EBDA......Bulk transload volumes were down 22% YoY, while Gulf Bulk EBDA was actually up $6MM (+32%) due to "increased shortfall revenue from take-or-pay coal contracts.” MVCs for KMI's major coal export customers, BTU and ACI, likely expire around 2020 - 2021 (see KMI's 2012 10-K), though with those coal companies' unsecured bonds currently trading ~10 - 30 cents on the dollar, those contracts could be at risk of default / renegotiation. See this presentation for more on KMI's coal exposure.
Commodity Hedges......KMI's commodity derivatives disclosure is poor, though it looks as though the significant QoQ change was a ~30MMbbls increase in NGL fixed price swaps. KMI also added some natural gas basis swaps. As of 6/30/15, KMI's commodity derivatives were marked on the balance sheet at $317MM, net.
YTD Equity Issuance......"During the six months ended June 30, 2015, we issued and sold 62,079,878 shares of our Class P common stock pursuant to the equity distribution agreement, and issued an additional 968,900 shares after June 30, 2015 to settle sales made on or before June 30, 2015, resulting in net proceeds of $2,599 million."
2015 CapEx Guidance Revised Slightly Lower......"Sustaining" CapEx: $603MM, down from $614MM prior; "discretionary" CapEx: $4,098MM, down from $4,179MM prior.
Link to 7/16 Note: KMI 2Q15 Recap & Valuation Update
Link to Updated Valuation Sheet: KMI Valuation Tear Sheet (Excel)
From Hedgeye research this morning:
Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.
Takeaway: HVS Household formation trends mark their third consecutive quarter of bullish breakout. Case-Shiller HPI trends, meanwhile, remain subdued.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today’s Focus: 2Q15 Homeownership and Vacancy Survey & May Case-Shiller HPI
Homeownership and Vacancy Survey: 2Q15
The Census Bureau released the Homeownership and Vacancy Survey (HVS) for 2Q15 this morning.
First, the caveats. The HVS survey is timely and widely cited, but it’s volatile and doesn’t always comport cleanly with the more comprehensive annual Census/CPS housing surveys or a common sense reading of reality.
We take the data with a grain of salt and, while we view the magnitude of change as a distorted reflection of the underlying reality, we view directional changes in the data as a largely accurate depiction of the underlying trend.
Household Formation: Household formation in 4Q of last year saw a big step function move higher with the yearly net change in households jumping to 1.6 MM – the largest increase in a decade. Those gains saw follow through strength in the 1st quarter of 2015 with household formation up approximately 1.5 MM year-over-year. The update for 2Q shows net HH formation up +2.16 MM YoY (+1.05 MM QoQ) – with the gains, again, singularly a result of rising rental demand as the rental vacancy rate declined to a new multi-decade low of 6.8%, pushing excess for-rent inventory further into deficit.
Homeownership: The National Homeownership rate dropped to 63.4% in 2Q from 63.7% prior, marking a new 48-year low. Homeownership rates declined across age groups with the notable exception of 18-34 year-olds where the rate improved to 34.8% from 34.6% prior.
In light of the marked improvement in household formation in recent quarters it's worth re-remembering the fundamental short-comings of the Homeownership Rate.
Households can either be Renters or Owners and the Homeownership Rate represents Owners/(Owners + Renters). Thus, if the number of households is increasing but the number or renters is rising faster than the number of owners (as is the case currently), then the Homeownership Rate will decline.
It’s hard to characterize strong household formation growth – regardless of type - as a fundamentally negative development for the housing market, particularly with the propensity for strong rental market demand and rising rental prices to serve as a conduit to rising single-family purchase demand.
Bottom Line: The magnitude of increase in HH formation reported by the Census Bureau is likely overstated but the trend towards improving formation rates is probably correct. The maturation of the employment recovery broadly and accelerating employment growth across the 25-34 YOA group specifically (where positive employment growth is just now reaching the 2.5yr mark) supports the trend in the HH formation data and the reported rise in homeownership rates among young buyers. We expect headship rates, which = households/population and represents a more comprehensive measure of participation, to improve alongside labor/income fundamentals. We’ll get the official data for 2014 from the Census bureau in September.
Case-Shiller HPI (May)
The Case-Shiller 20-City HPI for May released this morning – which represents average price data over the March-May period – showed home prices declining -0.2% MoM and decelerating to +4.9% year-over-year (vs +5.0% prior).
On an NSA basis, all 20 cities reported sequential increases in May while on an SA basis, 10-cities reported declines. Notably, Index heavyweights New York, Boston, Chicago, San Francisco and D.C, which collectively carry a 45% weight in the 20-city index, all showed sequential declines. Moreover, Los Angeles, which alone carries a 15% weighting managed just a 0.1% gain on the month. Performance by City is illustrated in the scatterplots below.
In contrast to the 20-city series, the National HPI which covers all U.S. Census divisions showed a modest +10bps acceleration sequentially to +4.4% YoY.
The deceleration in the 20-city series also stands in contrast to both the CoreLogic HPI and FHFA HPI series for May which showed a marked acceleration in price growth. As it stands, we remain inclined to side with the CoreLogic data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.
Price growth can’t sustainably accelerate at a premium to income growth in a flat rate environment and select markets like San Francisco are certainly over-stretched from an affordability perspective but, in the aggregate, affordability remains good, sitting perched right between the bottom and second-from-bottom quartile of the last ~30 years.
On the HPI front, the more important release will be next week’s CoreLogic data for June along with the short-term projection for July.
About Case Shiller:
The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.
Frequency and Release Date:
The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.
Joshua Steiner, CFA
Christian B. Drake
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