Stock Report: McDonald's (MCD)

Takeaway: We added McDonald's to Investing Ideas on Tuesday, August 11th.

Stock Report: McDonald's (MCD) - chart 1 HE MCD table 8 12 15


MCD's business performance has been in decline since 2012. Earlier this year, they began drifting away from their value messaging, taking the small fries off the Dollar Menu in 2H 2012, followed by the McDouble in 2013. The final straw was when they stopped nationally advertising the value message in the beginning of 2015. All of that is now behind us. MCD has new leaders in place.


In addition to new leadership, MCD has reorganized the way it operates. For the first time in its history, the company is aligned by like markets versus geography. This has had the greatest impact on Doug Goare, President of International Lead Markets (he used to be the President of Europe in which he ran 40 markets and managed roughly 100 people.) Goare now oversees five key markets and has about three to four people supporting him. This is a big change to the business model. Goare is no longer distracted by less important markets. His time is freed up to focus on what is critical to the company.


We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. This ship is in gear and headed north. 2015 will be the last time this stock is below $100.



INTERMEDIATE TERM (TREND) (the next 3 months or more)

Management has brought back the value message with the $2.50 Double Cheese Burger and Fries deal. Although off to a soft start, they have corrected mistakes. This deal is not the final solution; management is still working with franchisees on a more permanent national solution for value.


With all the improvements being made to the food and environment within the MCD restaurants, we continue to believe the inflection point for this stock with be the third quarter of 2015. We expect management to tell investors they see the light at the end of the tunnel and are nearing growth in the U.S. business. Additionally, there is an analyst meeting in November (after the 3Q earnings comes out) where we expect to learn more about cost savings initiatives, receive further updates about the turnaround and management’s guidance for 2016.



LONG TERM (TAIL) (the next 3 years or less)

We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.


Things like All Day Breakfast, responsibly sourced ingredients, and bringing back the value proposition will lead to increased sales and customer satisfaction. While this company is too big to be completely fixed overnight, management has the right plans in place. We are confident in where they are headed.


Stock Report: McDonald's (MCD) - chart 2 HE MCD chart 8 12 15

BABA: Language Barrier (F1Q16)

Takeaway: Mgmt is having difficultly communicating with the street; something it can't afford given the fundamental headwinds across its business


  1. F1Q16 = LANGUAGE BARRIER: Mgmt failed to properly flag the financial impact of the suspension of its lottery business and the transfer of its SME business to Ant Financial.  Collectively, these headwinds hampered total revenue growth by 8 percentage points, leading to F1Q16 revenue growth of 28% vs. consensus expectations of 33%.  Note that we were also taken by surprise (covered Short) since we didn't understand the financial impact of the suspended lottery business either.  These lapses in communication could become a recurring issue since BABA is a foreign company (less stringent reporting requirements) that doesn't provide financial guidance.
  2. FUNDAMENTALS STILL SOFT REGARDLESS: China Retail revenue growth still decelerated to 29% (ex lottery); below street expectations of 31% that we thought were light heading into the print.  That compares to 32% and 39% in F3Q15 and F4Q15, respectively.  GMV continued to slow, growing 36% y/y (ex lottery) vs. 40% and 49% in in F3Q15 and F4Q15, respectively.  Take-rates also inflected lower on a y/y basis, with desktop take-rates declining at its sharpest y/y rate in BABA's reported history.  
  3. MOBILE OR DESKTOP, NOT BOTH: We're referring to the mobile debate.  The bull case is that mobile take-rates will ascend to desktop levels.  Our bear case is that one grows at the expense of the other, and the two will most likely converge rather than meet up top since we believe that traffic mix is predominant driver of each (see note below for detail).  We suspect mobile take-rates may start topping out with mobile traffic mix already at or above 85% (our estimate).


BABA: Language Barrier (F1Q16) - BABA   Ad take rates

BABA: Language Barrier (F1Q16) - BABA   Mobile Mix



Let us know If you have any questions or would like to discuss in more detail.


Hesham Shaaban, CFA




BABA: Tactical Cover

07/16/15 08:46 AM EDT

[click here]



BABA: The Mobile Debate

03/04/15 10:34 AM EST

[click here]


Devaluation Nation: Thoughts on China’s Currency Move

Editor’s Note: Below is a transcript of Hedgeye CEO Keith McCullough’s remarks on The Macro Show yesterday morning following the big news out of Beijing. If you would like to subscribe to our live, interactive show where we take subscriber questions click here.

*  *  *  *  *

Devaluation Nation: Thoughts on China’s Currency Move - z china


Today’s top three things:


  1. China
  2. China
  3. China


You wake up to these non-linear, central-planning surprises, but you also wake up to something that is proactively predictable within the non-linearity. What do I mean by that? It’s non-linear because it’s a surprise. This of course is the biggest move in 20 years by the Chinese. But it’s a 2% move, so some will say, “Oh ho-hum. It’s not that much on an absolute basis.” But again, history will tell you that when a country starts to move down the slippery slope of an ideological path which is the proactively predictable point, it’s the first of many.


It’s the first of many.


So the Chinese have done effectively, they’ve tried almost everything that America has taught them… and Japan has taught them… and Europe has taught them… But now they are going to go to the wood and going to start to devalue their currency.


Every country in modern human history has tried this. You’ll note that it hasn’t worked. Maybe they don’t have to be beholden to that reality because they are a communist country? But again, it is what it is this morning.


The Chinese stock market—get this—is down one basis point on the news. One basis point on the news. So they’re centrally puppeteering this whole thing at this point.


It’s also telling you that the GDP number that they had allegedly in the second quarter (which they reported within a week of the second quarter ending, which was just magnificent) is not a 7.0. The 7.0 is just not a 7.0. With exports down -9%, what they’re doing now is panicking. They’re panicking. They’re making moves that they didn’t think they’d have to make this quickly. Again, trying to centrally plan a stock market and at this point devalue the currency should sound very familiar to countries that have panicked in the past.


It is what it is.


Devaluation Nation: Thoughts on China’s Currency Move - China cartoon 08.11.2015


The regional fallout on that—Thailand, Taiwan, Indonesia, Singapore—big, big places, at least in terms of what has mattered historically to Asian asset allocation, Asian foreign currency asset allocations, equity markets. These markets are down 4-6% in the last month. If you didn’t know why, now you know.


The Chinese are going to start to compete with not only their customers, but with their people. With their people, they lose purchasing power. When you devalue a currency of a person, you can try it at home. You can take a Canadian loonie and just cut it in half, and you will say, “Wow that is worth less than what it was worth yesterday.” It used to be illegal in the US to do that, its called clipping coins.


So again, this is what it is. This is going to have much more unintended consequences than any of us could possibly think of right here. 

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

How Many Market Generals Get Shot Before the Army Crumbles?


During this recent edition of RTA Live, Hedgeye CEO Keith McCullough pulls no punches as he walks though the rising risks in the market with macro analyst Darius Dale.



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LEISURE LETTER (08/12/2015) - MPEL, 880.HK, CCL, NCLH





August 28: 10:00am: PENN - Meeting with Management at Plainridge Park  


MPEL - Studio City International Holdings Ltd, a joint venture in which Melco Crown Entertainment Ltd owns a 60 percent interest, said on Tuesday it is preparing  a “contingency plan” ahead of any gaming table allocation decision by the Macau government for its Studio City casino resort.  “Because of the possibility that the table allocation for Studio City’s gaming area may be lower than anticipated, Studio City International Holdings Ltd has engaged Kirkland and Ellis LLP as its counsel and Moelis and Co LLC as its investment banker to assist it with contingency planning ahead of any table allocation decision for Studio City,” the Melco Crown majority-owned unit said in its Tuesday press release. 


Takeaway: It's pretty clear Studio City will not get 400 tables - 150-200 is more likely.  


1680.HK - Construction of casino operator Macau Legend Development Ltd’s Legendale Hotel in Macau Fisherman’s Wharf may be hindered by controversy over the height of the building, according to company executive vice-president Frederick Yip Wing Fat. “We may possibly see a delay. But definitely we’re building it,” Mr Yip told reporters.



CCL - Seabourn has revealed design renderings of the luxurious all-suite, all-veranda accommodations on Seabourn Encore, the line's newest ship set to launch late 2016.  Seabourn Encore will feature 300 spacious, well-appointed suites, all of which include a private veranda. The majority of the ship's suites range from nearly 300 square feet for the standard veranda suite, plus a veranda that is up to 74 square feet, to upwards of 1,300 square feet for the Wintergarden suites, which also feature verandas of nearly 200 square feet. 



NCHL - Port of Seattle and NCLH sign 15 year deal. Norwegian Cruise Line Holdings will continue operating out of Pier 66 until at least 2030 and split with the Port of Seattle an estimated $30 million in facility upgrades. 



Japan Gaming- Japan’s ruling Liberal Democratic Party has given up efforts to push through a bill to legalize casinos in the current extended session of the parliament, the Shingetsu News Agency reports.  Passage of the integrated resort bill in the current session had been looking increasingly unlikely in recent weeks, as the political power of some of the main backers of legalizing casinos in Japan waned, including that of Prime Minister Shinzo Abe.



Shanghai Cruise Port -  Shanghai, the destination of this year’s 10th China Cruise Shipping event, plans to expand its Shanghai Wusongkou International Cruise Terminal (SWICT) to accommodate increasing demand. It is building another two berths, which will mean fourth berths total. Two  spaces will be for Oasis-class vessels, while the remaining two berths can handle megaships up to 150,000 tons, according to the port.



River Cruises - A stranded cargo vessel has added further itinerary changes and cancellations to the list of delays and cancellations caused by low water levels on the Danube in recent weeks. 


Takeaway: It has been a tough summer for River Cruise operators. 


Nepal Gaming - The development of Nepal’s casino gaming industry potentially offers investors access to gaming assets that are not dependent on Chinese players, says a new report from Union Gaming Securities Asia Ltd.  

  • The institution added that the key target market for Nepal’s casinos is middle class Indians – many of whom are already familiar with a number of forms of gambling, and are significantly under served domestically in terms of casino venues. Union Gaming estimates India today generates as much as US$10 billion per year in gross gaming revenue (GGR). This includes legal and non-legal types of gambling, and casino and non-casino gambling, it added.
  • “We would highlight that there are more than 300 million persons living in the three Indian states immediately adjacent to Nepal and approximately 400 million when including the state of West Bengal…Granted, like most of India the majority are too poor to be considered target customers, but this still leaves many millions of individuals who are, indeed, potential casino customers,” stated the Union Gaming analyst.



Regional Gaming Revenues


Iowa - July GGR (SSS): +1.7% YoY 

Detroit - July GGR (SSS): +3.1% YoY 


China - PBoC followed up on yesterday's 1.9% yuan devaluation with a 1.6% devaluation today. 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,

Takeaway: Purchase Apps slide to start August. Retreat in Rates builds as an emergent tailwind. July Permits data (next tues) set for steep decline

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.


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Compendium 081215


The last few weeks of high frequency purchase data have been largely uneventful with activity oscillating above and below the 200-level on the index. 


Demand Retreat:  Purchase demand retraced last week’s gain, declining -3.5% WoW while decelerating -300bps sequentially to +19.8% year-over-year.   On a quarter-over-quarter basis, 3Q is currently tracking down -1.1%.   As we highlighted last week, the rate-of-change setup for purchase demand is showing a marginal shift. 

Both sequential and year-over-year acceleration in purchase activity characterized the first half of the year, but now, with the data cresting on an absolute basis, sequential growth in 3Q is tracking negative while year-over-year growth is accelerating against trough 4Q comps.  


Rate Retreat:  Rates, which remain the lead ST swing factor, held flat at 4.13% in the latest week but should see downward pressure on a lag to the step function retreat in treasury yields over the past week.      


Lower rates, stemming mostly from OUS turmoil can provide transient benefit. 


Global Macro tumult is insidious, but usually manifests on a lag domestically so, in the nearer term, ↓rates =  ↑ affordability = ↑ room for prices to rise = ↑ housing.  It wasn’t particularly surprising to see Housing green yesterday alongside the decline in rates.


Boringness Retreat:  In contrast to the stagnant purchase demand trend, next week’s Starts and Permits data may be more interesting. 


To Review:  The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  Indeed, after rising a resounding +385% YoY in May, permits in NY state went vertical to +632% YoY in June.   A reversal of that pull forward sets the stage for a retreat in the reported July data reported next tuesday.  For context, a decline back to the TTM average in permits in the Northeast implies a -12-13% sequential decline, taking the total back below 1.2 MM from the post-crisis high of 1.34 MM recorded last month. 


We’ve highlighted this potentiality for the last month and consensus has recently ratcheted down Permit expectations to 1217K so that idiosyncratic dynamic has seen some discounting.  The risk may still to the downside but, in any case, it will be the first steep decline in housing data we’ve seen in some time.  


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - NY Permits


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - NE Permits


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase 2013v14v15


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase YoY


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase Index   YoY Qtrly


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase   Refi YoY


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase LT


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - 30Y FRM



About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake