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P: Thoughts into the Print (3Q15)

Takeaway: P will need to show more to move this stock after its recent run on 2Q results and the headfake from the Register. That won't be easy


  1. WHAT A RUN: P is up over 30% since it's 2Q15 release and the Register's decision on Merlin admissability; collectively two events that don't really mean much.  Remember that P was trading at a 2-yr low on bombed-out sentiment pre-release, then the stock ripped on a ~1% revenue beat on 2Q results and 3Q guidance.  Then the Register ruled that Merlin was admissable, which many viewed as a preliminary Web IV victory for P without actually considering the Register's stated rationale for allowing Merlin, or the second part of its decision regarding Pureplay admissability as evidence to test for statutory influence (see 3rd note below).
  2. NOW WHAT? We see an asymmetric setup to the downside following P's recent run, and suspect P will need to guide high for 4Q (organically) or it will gap down. That will be a challenge on expectations for accelerating ad revenue growth (scenario analysis below), and sub revenue growth that is not fully considering the aniversary of the Pandora One price increase.  Further, we continue to expect active listeners to decline y/y sometime in 2H, but we're not sure if P's recent promotions will buoy that metric in 3Q; particularly its ad-free listening day in September (P's reported users as those in the last month of the quarter).  But even if we're wrong here, we don't expect the street to chase the print this close to the Web IV decision (≤ Dec 15th).
  3. WHAT WE'RE KEYING IN ON: Listener Hours and clarity around any settlement regarding pre-1972 recordings; both related to Web IV.  Regardng Listener Hours, the more P enters 2016 with, the more drastic (disrputive) measures it must take to reign in costs if Web IV goes against it.  Regarding the settlement, if P is actually settling for $90M as the NY Post suggests (link), then it will have less than $150M in cash following the Ticketfly acquisition.  That is a dangerously low cushion prior to any clarity on Web IV, suggesting that the decision behind Ticketfly is either reckless confidence on the outcome, or P is preparing to blow up its model ahead of an expected defeat, and needs another story to pitch the street before the decision is released.  

P: Thoughts into the Print (3Q15) - P   4Q15 Ad Scen 2


Let us know if you have any questions, or would like to discuss further.  See notes below regarding Web IV developments and the Ticketfly acquisition.


Hesham Shaaban, CFA




P: Dumb or Defeated? (Ticketfly)
10/07/15 11:02 AM EDT

[click here]


P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]


P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]



Chipotle (CMG) is on the Hedgeye Restaurants Best Ideas SHORT bench.


Did things for CMG change overnight?  I think so!



Chipotle’s 3Q15 earnings results came in relatively close to expectations. Reported revenue was $1.22bn, which was in line with consensus expectations. Same-store sales (SSS) were 2.6% versus consensus estimates of 2.4%. Management spoke on the call about how July saw uncharacteristically high performance due to the BOGO coupon provided after participating in the Friend or Faux game (which ran for 6 weeks and accounted for 2mm transactions). Following that event August and September were slower in comparison, “…we’re kind of just holding our own. I don’t think we’re accelerating, but we’re not decelerating,” said CFO John Hartung during the call. CMG saw relief within its food costs, which were 33.0% in the quarter, down 134bps YoY, as they experienced deflation in avocados and dairy. Labor continues to affect the P&L, restaurant level margins decreased 49bps in the quarter to 28.3%, due to higher labor, marketing and promotion costs. Earnings per share is where CMG faltered this quarter, posting EPS of $4.59 versus consensus estimates of $4.62, missing by $0.03.

CMG | THE NEW WORLD ORDER - Performance versus expectations 


Going into this quarter we had some concerns about the business going forward, which we outlined in a note HERE.

  1. Quality real estate is getting harder and more expensive to get
  2. Are the 2015 supply chain issues a one off experience?
  3. Slowing sales trends might not end in 3Q15

The company essentially confirmed two of our three concerns.



John Hartung, Chief Financial Officer, Chipotle Mexican Grill, Inc. – “Our sales comps were highest in July when our Friend or Faux campaign was in full force, but were lower in August and September. We were happy with the customer response and engagement with Friend or Faux during July as our customers who played the game learned about our simple wholesome ingredients and were treated to a BOGO for playing.”


HEDGEYE – The use of BOGO’s is a sign of maturity and not a good one.  It's a favorable that consumers responded positively, but there was no follow through. 


Mark Crumpacker, Chief Creative and Development Officer, Chipotle Mexican Grill, Inc. – “Our mobile and online sales continued to grow for the seventh consecutive quarter and currently represent more than 5% of topline sales, up more than 40% over last year.”


HEDGEYE – Getting mobile technology right is part of the bull case, but CMG appears to be behind the curve.  We will be waiting and watching to see how this develops.  


John Hartung, Chief Financial Officer, Chipotle Mexican Grill, Inc. – “we just finished a three-year trend, and I've talked about this on some earlier calls. If you go back and look to 2013, we started a new trend where we started in low single-digit comps, and we kind of built our comps for the next several quarters. We had a price increase in 2014. But if you combine the last three years – and this is kind of the end of that trend – our three-year comps are up in the high 27%-28% range.  We now need to start a new trend because we started that momentum. And if you look quarter to quarter, you can see that the momentum builds for several quarters, then it levels off. It peaked last year at 19.8%, and then as you are comparing through multiple years, up double digit comps.”


HEDGEYE – We believe it to be unrealistic to anchor a bullish call on CMG based on 3 year cycles.  We don’t believe that phenomena truly exist. The only three year pattern we see in the company, is price increases every three years.  The increase in traffic is more cyclical or luck than it is reality.  At the end of 2012 and the beginning of the last "3-year cycle", CMG announced that it was going GMO-free.  Around this announcement, the company generated a significant amount of incremental new customers.  It’s unlikely that the company will be able to replicate this type of brand hype ever again.


We suspect that CMG will be experiencing low-single digit same-store sales for the next few years.

CMG | THE NEW WORLD ORDER - Same store sales 




We suggest that Chipotle has increased its guidance for the full year 2015 and 2016 new unit openings to a range of 215 to 225 new Chipotle restaurants in reaction to slowing same-store sales trends.  The accelerated unit growth rate will only increase costs and lower margins in a slowing sales environment.  In addition, as new unit growth becomes a bigger percentage of total growth it lowers the overall returns of the company. 


HEDGEYE – We keep hearing from our sources that finding quality real estate sites is becoming a bigger issue for a number of restaurant companies.  Part of the problem is the significant growth of the fast casual segment and the recent restaurant IPO boom that has put pressure on A rated locations.


CHIPOTLE – Monty Moran  - “what's even more encouraging is that we're able to complete these restaurants in what is arguably one of the most competitive real estate markets we've seen in recent years. Our teams have given us feedback that the competition for new site locations remains high and the demand for talented contractors, subcontractors, and crews is intense as many developers are taking advantage of the current low interest rate environment”


HEDGEYE – On the margins, ROI for CMG new stores are headed lower.  Yes they are coming down from industry leading returns.


CHIPOTLE - Monty Moran - “our real estate, design, and construction teams are finding favorable new restaurant sites and negotiating some of our best lease terms” 


HEDGEYE – Yet the 10Q filed yesterday says “occupancy costs as a percentage of revenue increased for the three months ended September 30, 2015 primarily due to increased costs for leases entered into during 2015.  They may be some of the “best lease terms” but they are getting more expensive in an increasingly competitive environment. 

CMG | THE NEW WORLD ORDER - new unit returns 



In a slowing sales environment CMG will experience a lower multiple on future profitability.  Add to that, accelerating expenses associated with new unit growth, international expansion, increased labor and the company will likely also experience margin pressure. 

CMG | THE NEW WORLD ORDER - valuation matrix 



CMG is not immune to macroeconomic pressures; in fact, they are more susceptible as consumer’s trade down to lower cost alternatives as their confidence wains. As we wrote in our CMG note this Monday adding it to our SHORT bench (NOTE HERE), jobs, consumption and consumer confidence are all slowing, coupled with industry sales slowing.






Management said nothing during their conference call to increase our confidence in their performance over the near term. On the heels of a “choppy” October, management is pegging its hopes on a recovery in sales on the return of carnitas (which is now in 90% of stores, expected to be in 100% by the end of November). We don’t see this as a prime traffic driver; it’s hard to believe that many people stopped going to Chipotle flat out because there were no carnitas.  The chart below shows the correlation between CPI for Pork YoY % change versus CMG SSS YoY %. CMG SSS continued this quarter to correlate very closely with this metric, which provides us a good intra-quarter barometer for performance, and was a contributor to our conviction on the SHORT.

CMG | THE NEW WORLD ORDER - CPI pork correlation 



For 2015, management increased their guidance to 215-225 new restaurant openings, up from the previously announced range of 190-205.

  • Low-to-mid single digit comparable restaurant sales increases
  • Effective full year tax rate of 38.7%


For 2016, management is expecting to open 220-235 new restaurants.

  • Low-single digit comparable restaurant sales increases
  • Effective full year tax rate of approximately 38.7%

Low-single digit SSS in 2016 is a concerning point and is a sign of management becoming increasingly concerned about the macro environment that we went through above.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw







When and Why We Make Big Contrarian Calls


On The Macro Show this morning, Hedgeye CEO Keith McCullough explains that he's not against consensus just for the sake of it. He discusses how our firm’s process is designed to front-run the biggest mistakes consensus makes to dodge eventual blowups.


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


Subscribe to Hedgeye on YouTube for all of our free video content.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Takeaway: Behavioral indicators suggest short-term capitulation risk is an important factor in managing long exposure.

Gold is the one commodity we would trade long-side right now against the dollar as we continue to believe growth and inflation expectations drive bigger currency/gold inflections. This trade continues to have legs.


An arrival at realistic expectations might end with QE4, but we have to get there first. Who would have thought QE4 would be in the discussion when “lift-off” was inevitable?


The difference for the upside in that trade between now and pre-August 19th minutes release is that the crowd has come closer to the Hedgeye Macro view.


Below we outline 5 behavioral reasons why any strong USD catalyst could provide short-term pain within a longer-term bullish set-up.


We outlined just how consensus rate hike expectations were in an Early Look on August 14th pre-consensus pivot:


Prepare For the Worst.html  

The gist of that note was that within our longer term deflationary view, a snapback reflation trade was a big risk when the world is positioned for deflation. It happened…. Quick.


Can this move be just as vicious into year-end now that policy is more of a baked-in expectation?


Below we give you a few charts to keep you cautious into the ECB meeting which precedes an important week of U.S. economic data next week with Q3 GDP:


1. CONTRACT POSITIONING: What is the actual positioning from the speculative crowd?


At the end of July, net non-commercial futures and options positioning was the shortest of the post-crisis era:

  • W/W into this week, net futures in options positioning moved 27% longer on a relative basis
  • The net-short positioning in gold is washed out if nothing else. On a z-score basis the market is now +0.5X and +0.3x on a TTM and 3-Year basis
  • Longest net contract positioning of 2015 was at the highs in gold with the shortest positioning near the end-of-July lows
  • Longest gold futures positioning since late July is right now, after the unexpected catalysts

Contract positioning chases price…


GOLD: BE CAUTIOUS OF THE HERD - chart 1CFTC Contract Positioning


GOLD: BE CAUTIOUS OF THE HERD - chart 2 futures positioning




  • Futures Aggregate Open Interest +~7% w/w into this week; +4.5% w/w from last Tuesday
  • Futures aggregate open interest +10.0% and +10.7% above 3/6 mth averages
  • Option open interest is spiking, and the divergence in Call vs. Put open interest is widest in at least 5 years as the market gets longer on a net basis. 

GOLD: BE CAUTIOUS OF THE HERD - chart 3 futures aggregate open interest


GOLD: BE CAUTIOUS OF THE HERD - chart4 option open Interest


3. VOLATILY SKEW: Like contract positioning, the volatility assumption embedded in options prices also usually chases price and poses as just another indicator of consensus sentiment

  • Calls most expensive to puts right now
  • Puts most expensive to calls at the 2015 lows in spot gold prices
  • Positive skew, like now, at $1,300 gold in January



GOLD: BE CAUTIOUS OF THE HERD - chart 6 gold chart


4. CORRELATIONS: Relative currency correlations in Gold are stronger (more negatively correlated) than they’ve been over the last 3 years vs. energy correlations which remain broken. The direction of the USD is very important here and the market is increasingly in the camp that the USD moves lower.


The positioning in the USD vs. the gold positioning mentioned above is tracking -1.43X on a 1-Yr z-score basis. The USD and EUR/USD remain neutral on a TREND duration in our model, so we’re waiting and watching for direction here with the upcoming catalysts both tomorrow and next week in the U.S.


The chart below shows relative correlations which are broken ex. Just a few: 


GOLD: BE CAUTIOUS OF THE HERD - Chart 7 USD relative correlations



The bid-yield of December Federal Funds Futures is pinned at its lowest point of the year at 17.5bps. While 5 bps above the current mid-point at 12.5bps, there is very little expectation of a December hike embeded in current prices. 




Again, gold remains on the long side in our Q4 macro deck as we expect growth slowing to continue to manifest with more dovish Fed expectations, but waiting on the right time to buy is key:


Our immediate-term level of support is down at $1,150


Talk of QE4 was a non-starter back when the whole world was positioned for “lift-off.” Consensus is now coming around to our view, and the behavioral set-up in gold markets posits a short-term capitulation risk within a longer term-Trend: Slower-and-Lower-For-Longer.


Feel free to ping us with comments or questions.



Ben Ryan



McCullough: Are We Entering An Earnings Recession? (And If So...)

In a recent note to subscribers, Hedgeye CEO Keith McCullough weighed in on whether the U.S. has entered an earnings recession and if that presages a full-blown economic recession.


"It’s early in [earnings season], but don’t get roped in by the bull-market storytelling. As we outlined in our Q4 macro deck, earnings recessions have preceded economic recessions in the last 3 cycles."   


Take a look at this chart.


McCullough: Are We Entering An Earnings Recession? (And If So...) - 10 19 2015 eps inflecting


It doesn't paint a pretty picture.


In addition, earlier this week on The Macro Show, Hedgeye macro analyst Darius Dale added that the odds of a recession — sometime over the next 12-months — are steadily rising.


"[The probability] is very high, certainly much higher than 50%, and much higher than the average investor believes.”


That's our view. So heads up. 


In related news...


McCullough: Are We Entering An Earnings Recession? (And If So...) - 10 20 2015 vader

WAB | RSI Orders, Not Sales


Takeaway:  Orders for both rail cars and locomotives are well below delivery rates in 3Q, a situation that we do not expect to improve given weak rail volumes.  2016 build rates look at risk to us, as customers may seek stretched deliveries and manufacturers would benefit from steadier production.





RSI reported rail car order, delivery and backlog data yesterday that provided further support to the view that rolling stock demand has entered a downcycle.  GE received only 3 locomotive orders last quarter, and the RSI data points to 7,374 rail car orders vs. a build rate over 20,000.  While it might seem reasonable to look at the large backlog and assume the 2016 is in the bag, many of the orders in backlog are scheduled for delivery more than 12 months forward – some into 2020.  The rail car backlog itself may be vulnerable to both delivery date push outs and cancellations from captive lessors. Cancellations of third-party orders can be costly for buyers, but can also occur.  At current order rates, we would expect a drop down in build rates by mid-2016, a potential negative for WAB shares.



Rail Car Demand Down

Orders…: Both rail volume growth and fleet age demographics point to a sustained period of weak rail car orders, as we see it, with the recent demand spike due to tank car regulations and the boom in fracking.  


WAB | RSI Orders, Not Sales - WAB Orders 10 21 15



…Not Deliveries:  While deliveries will tend to correspond to 3Q equipment sales for WAB, equity markets should focus on the forward looking order data.  Deliveries are peaking out, in our estimation, while orders have likely entered a sustained period of below replacement demand activity.


WAB | RSI Orders, Not Sales - WAB Deliveries 10 21 15



Backlog Not So Clear:  While it might be tempting to see the backlog as 6 quarters of demand, many of the orders are scheduled for delivery more than 12 months out.  For example, TRN disclosed that 45% of orders were longer than 12 months out at the start of the year.  Given the implementation date of tank car regulations, we would expect the backlog duration to be reasonably far out.  We also think that as much as 10% of the backlog may be ‘spec’ orders from lessors owned by rail car manufacturers.  We estimate that the current pace of orders and deliveries portend a potential step down in deliveries by mid-2016. 


WAB | RSI Orders, Not Sales - WAB Backlog 10 21 15



Timing A Bit Clearer:  Orders will need to improve, build rates will need to be pushed lower, or 2017 will be very messy, by our estimates.


WAB | RSI Orders, Not Sales - WAB Book to Bill 10 21 15


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