Cartoon of the Day: Monkey Business

Cartoon of the Day: Monkey Business - Long financials cartoon 10.21.2015


"But, if you “back out IBM” … and Industrials and Financials … and you don’t back out that Energy Stocks are the best performing S&P Sector Style to be long for Q4 (OCT) to-date at +11.2%, you should be making a ton of sense to your clients," jokes Hedgeye CEO Keith McCullough in today's Early Look.

BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time

In case you didn’t know, today is Back to the Future Day. That of course would be October 21, 2015, the fateful date to which Marty McFly and Doc Brown time-travel in 1989’s Back to the Future Part II to save Marty’s children.



On a related note, our hunch here at Hedgeye is combative hedge fund manager Bill Ackman wishes he could hop in Doc Brown's DeLorean and travel back in time to a date well before his hedge fund, Pershing Square Capital disclosed its mammoth 5.7% stake in Valeant Pharmaceuticals (VRX) which incidentally constitutes a whopping 19% of Pershing Square’s portfolio.


(Continue reading below for our Healthcare analyst Tom Tobin’s detailed report on VRX.)


The stock is getting absolutely hammered today — it’s down as much as 40% — after Citron Research released a note comparing the drug maker to Enron. Ackman has lost billions on his Valeant bet.




Now, we’re just speculating here... but we wager Ackman would also like to take back some words he let slip back in May at the Sohn Investment Conference . That’s where he called Valeant “a very early-stage Berkshire [Hathaway].”


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 ackman


How dare he insult Mr. Buffett’s legacy!


We’ve long been skeptical about the stock and had considered reshorting earlier in the year, but clearly missed that opportunity when the stock was trading closer to $300.  We issued our Valeant Black Book on July 22, 2014 laying out the short case and calling out what we considered to be an unsustainable business model.


That said, we’re proud our Healthcare analysts alerted subscribers to the many “underappreciated risks” we saw in the stock.


From the report:


“Valeant is operating what we believe is an unsustainable business model of serial acquisitions and underinvestment, fueled by debt, that will continue to lead to deterioration in the ongoing business.”


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 tobin 


Here's a brief update on our thinking from Hedgeye Healthcare analyst Andrew Freedman:


“It was only a matter of time before Valeant’s debt-fueled acquisition binge would come to an end.  If you look at what the underlying assets are worth and subtract the debt, you get an equity value that is closer to $20. 


We spent the better part of six months researching Valeant, and there were no shortage of red flags. To name a few: Alternative pharmacy channels, inventory accounting on the Aesthetics assets, FDA investigations, price increases and questionable organic growth rates…


Trying to reconstruct the financials of Valeant’s business was near impossible given the acquisitions/divestitures and number of reclassifications… a huge part of the long thesis was a “Trust Me” story with management and that didn’t cut it with us.” 


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 ron


CLICK HERE to access Tobin's institutional research report on Valeant.


(If you’d like to learn more about our institutional research offerings please ping

Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums

Takeaway: LAZ should put up decent earnings tomorrow and will be generally upbeat on its CC. A diagnostic of the market however is not as bullish.

Lazard (LAZ) is set to report earnings tomorrow in what we expect will be a solid print. With the large $67 billion AT&T/Direct TV transaction having closed in the period and limited proxy disclosure about the associated fee, revenues have upside within the result. Consistent with the rest of the industry, there will also be "constructive" language on the conference call regarding the state of the industry, however we have always ascribed to this guidance only being valuable in the very short run for a couple of quarters.


When zooming out for a broader perspective, the M&A market has chugged along in 2015 but we think expectations of further gains into 2016 are hopeful at best. Looking at merger premiums across cycle, takeout multiples on global transactions are setting new all-time record premiums at 11.9x EBITDA (in 1Q15) and 1.8x sales in the most recent quarter. Historically, the M&A market has been most profitable to investors in the space with low take-out multiples and investing ahead of a jump in merger activity. Simply put, whether M&A participants are strategic or financial, investors are chasing returns with expanding premiums increasing the risk of putting in a high water mark in activity. The prior highs in consideration values were in second half of 2007 with EBITDA premiums of 11.1x in 3Q07 with revenue multiples at 1.7x in 4Q07.


Private equity (PE) participation levels continue to pick up and since we flagged new cyclical highs in PE participation rates last quarter (new highs since the Financial Crisis but not new all-time highs), several blockbuster deals involving financial buyers have been announced. Yesterday, BlackStone purchased Stuy Town/Peter Cooper village from Tishman Speyer for $5.3 billion (in a near mirror valuation of the original '07 sale by Metlife for $5.4 billion) and Dell/Silver Lake is looking to pull in EMC for $67 billion in the biggest technology deal ever. We haven't re-run our PE participation rates for 4Q15 until we get more representative data further into the quarter, but odds at this point call for an even higher percentage of financial buyers of overall activity. 


While the top of the market will only truly be available in hindsight, we can comfortably say that expectations for Lazard already reflect a continuation of current trends and that the story is already modeled for growth on growth. Street estimates assume an +8% top line assumption for 2016, which is very healthy considering apparent late stage markers including PE percentages and an all-time high in merger premiums. EPS estimates also sit at an optimistic $3.69 for next year (but have come down from near $4 since the start of the year and our flagging of the asymmetry in the story). Importantly, with the firm's running NOL's from its IPO having now been marked to its balance sheet as of 2Q15, the company's tax regime is moving from 20% to the "high 20's" which imply that the firm will have to increase revenues by +3-9% alone to offset this operating item. Our estimates continue at near ~$3 flat which imply nearly 20% downside to fair value of $36-$39 per share at 12x our estimate. Importantly LAZ shares continue to screen as one of the highest rated in the Financial sector with extremely low short interest and high sell-side ratings/estimates as outlined within our Sentiment Monitor (see Monitor HERE). Thus despite some rationalization of recent out year numbers, shares are still poised for downside in our view.



 Deal multiples on EBITDA and Revenue have expanded to new all-time highs including the last cycle peak of 2007. This implies that acquirers are reaching for transactions, a less healthy sign versus moderate, mid cycle valuations:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - chart 1 valuations



While a top will only be recognizable in hindsight, 2015 activity has now surpassed 2007 with the recent mega deals in the beverage (Anheuser Busch/SAB Miller) and tech sectors (Dell/EMC):


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Deal Making Pace


Cyclical private equity (PE) activity is also being pulled into the market, with PE activity hitting the highest levels since 2007. Over 23% of global M&A announcements involved a PE fund in 3Q15, the highest level since the 30% in 1Q07:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - final first chart 


Most recently some of the biggest transactions have been financially driven with private equity participants in the recent Stuy Town/Peter Cooper transaction and also the recent Dell/Silver Lake deal:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - PE details final


Lazard's merger pipeline (all deals "pending" from our data venders) continues to be robust from a dollar value standpoint (however having put in a peak in 2Q14). Currently, we only show 5 absolute deals in Lazard's backlog however the over $100 billion Anhesuer Busch/SAB Miller looms large with $70-$100 million in fees for Lazard and another advisor:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Pending Dollar Volume and Count


While Street estimates continue to compress we are still close to the $3 per share range flat for 2016 versus Consensus nearly +20% higher. Our fair value at 12x our estimate is $36-39 per share. 


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Earnings Comp


LAZ shares continue to screen as some of the highest rated in the financial sector with our Sentiment Monitor applying values to short interest and sell side ratings. The higher the Sentiment number, the lower the short interest and the higher the sell side rating:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Sentiment Monitor


Private Equity Historically Marks the Peak

LAZ - As Good As It Gets...Modeled For Perfection

Moelis (MC) Pre-IPO Black Book

GHL - Removing Greenhill From Best Ideas list

GHL - The Best Way to Capitalize on an Improvement in M&A

Hedgeye Black Book - M&A Market to Positively Inflect in 2014



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

investing ideas

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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


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