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Apparently another bidder has emerged for the assets of CKE Restaurants.


For those following the saga, I’m putting my stamp on what I think is a fair price for the company.  If I was a shareholder I  would be extremely disappointed in THL Partners’ offer of $11.05 for CKR.  A more appropriate price is closer to $15.


While a sum of the parts analysis is never an exact science, I believe my assumptions are very conservative in valuing the cash flows of the company’s two brands.  I also believe that the company was mismanaged and there are a number of opportunities to make the company more profitable.


First, the current management team has an inflated view of what it is worth.  For the last three years, the senior executives were some of the best paid in the industry running two of the smaller chains.  That being said, there are a number of ways for the company to reduce G&A.    


Second, we think there is an opportunity to enhance shareholder value by focusing on restaurant operations. While I appreciate the legacy issues surrounding the distribution business, the economics of the distribution model more than justify the company exiting the business.  Today, running a franchise restaurant company has never been more challenging; the challenges are even more complicated when management’s time is consumed with managing a distribution business and a restaurant company at the same time.  After analyzing other distribution companies, it would suggest that the economics of running the distribution business are under pressure and CKR could be well served by letting bigger, more efficient companies manage the business. 


CKR has justified retaining its warehouse and distribution operations for its Carl’s Jr. system because it allows the company to more effectively manage its food costs, provide adequate quantities of food and supplies, generate revenues from franchisees, and provide better service to its restaurants in California and some adjacent states.  Although these motives for keeping the business may all be true, we do not think they trump the potential cost savings that could be realized from outsourcing such operations. 


Hardee’s distribution business is based primarily on equipment sales to franchisees and actually generated slightly negative profits over the past five years and this does not take into account the G&A expenses associated with operating the business. 


It will be interesting to see where things shake out…..


Howard Penney

Managing Director





Strip gaming revenues increased 33% and it was all Baccarat. Baccarat volume and win were up 131% and 255%, respectively, thanks to CNY and a lot of luck. Slot revenue declined 9%.



Owing to the timing of Chinese New Year (CNY) and good luck on the tables, the Strip posted a 33% YoY increase in gaming revenues in February 2010.  As we wrote about a few weeks ago, we thought growth would be positive but this is much better than expected.  Of the $141 million positive variance from last year, $82 million was driven by higher Baccarat drop which increased 131%.  Baccarat win increased 255% partly due to the higher drop and partly due to a higher hold percentage - the Baccarat tables held at a 17.0% clip versus 11.1% last year.  Normal hold percentage is 12-13%.  The good Baccarat luck contributed about $65 million to the variance.  Slot revenues actually declined for the month by 8.5% all due to lower hold percentage.  The table below breaks down the YoY variance in millions of dollars.




While the February numbers were outstanding, a little caution is in order.  Revenues were down 23% last year so the comp was easy.  CNY fell into February of this year versus January of last year which helped Baccarat volume.  Baccarat volume and hold percentage can be very volatile and no doubt the strength on the Strip is mirroring the VIP strength in Macau.  It is unclear how sustainable these volumes are. 

The End of Quantitative Easing, As We Know It

 “It’s the end of the world as we know it and I feel fine.”



R.E.M. is an iconic American rock band that was founded by Michael Stipe in 1980.  While the band is not known for its thoughts on monetary policy, the line quoted above from their song, “The End of the World Was We Know It”, provides a good metaphor for the Federal Reserve’s recent decision to halt quantitative easing.


While many market observers expected this planned ending of policy to lead to an increase in interest rates, particularly for mortgages, we have seen only a marginal change in rates.  In fact, over the last three weeks 30-year fixed mortgage rates have only increased marginally from 5.05% to 5.25%.  In essence, the quantitative easing world has ended, but those still borrowing via mortgages “feel fine”. 


To its credit, the Federal Reserve did an effective job at prepping the market for the end of this policy, so new buyers stepped in and the mortgage market has remained stable.


Backing up for a second, though, what exactly is quantitative easing? 


Central Banks have basically two key tools to implement monetary policy:  interest rates and reserve requirements.  By lowering interest rates, central banks can stimulate money supply by making borrowing rates more reasonable to borrowers and the margins from lending more compelling to lenders.  On the reserve front, the central bank can alter the reserve requirements, which is the ratio of cash a bank must hold compared to customer deposits. Any increase in reserve requirements will limit a bank’s ability to lend, or vice versa.


In the scenario where the interbank interest rate is zero and reserve ratios have been maxed out, central banks can initiate another form of policy: quantitative easing.  In simple terms, central banks will begin to purchase financial assets from banks through open market operations.   So the central banks print money to buy assets from banks, which increases the excess reserves on the balance sheet of banks. 


Quantitative easing was used by the Bank of Japan in the early 2000s in an attempt to offset deflation with limited results.  In November of 2008, the United States implemented their first ever policy of quantitative easing.  The policy had two aspects to it.  First, the Federal Reserve indicated they would purchase direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.  Second, the Federal Reserve indicated they would purchase mortgage back securities.


The objective of this program according to the Federal Reserve was to, “reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”  In effect, as credit markets ground to halt in late 2008, the Federal Reserve had to take the extraordinary and unprecedented measure of quantitative easing to offset the potential risk of deflation.


While the program started on a smaller scale with $500 billion of mortgage backed debt, the program was increased in March of 2009.  As the program ended on March 31, 2010, the Federal Reserve had purchased $1.2 trillion of mortgage-backed debt from banks and $200 billion of direct obligation debt of Fannie Mae and Freddie Mac, for total purchases of $1.4 trillion.  As a result of these actions, the Federal Reserve now owns almost 25% of the stock of mortgage-backed securities.


In the chart below, we have charted the increase of excess reserves on bank balance sheets.  The current amount of excess reserves is estimated to be around $1.2 trillion.  Assuming that these excess reserves were turned into loans at a 10:1 ratio, the increase in money supply into the system would be $12 trillion.  This is larger than the current amount of outstanding mortgages in the United States!


The reality is simply this: we have no idea what the consequences of this quantitative easing policy action will be.  It is an unprecedented move that, in time, will have to be unwound.  If the unwinding is natural, which would involve banks reducing their excess reserves to a more normal level, the inflationary impacts on the U.S. economy could be extraordinary.


At this point, I’m not going to predict the “end of the world as we know it” due to this massive increase in excess reserves, but this policy will have to be unwound at some point.  Either the Federal Reserve will have to pay competitive interest rates on these reserves so as to discourage loans, or the banks will begin to lend.  And lend.  And lend.


I can promise you this, if the $1.2 trillion in reserves starts to make its way into the economy, money supply will increase dramatically, and with it, inflation.  While there is increasing discussion of inflationary pressures, very few people are currently considering the unintended consequences of quantitative easing.


Daryl G. Jones

Managing Director


The End of Quantitative Easing, As We Know It - Excess Reserves

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Following a spate of upgrades, restaurant stocks shot up yesterday on high volume in a down market.  We’ll see if today brings more of the same.


Volume on upmoves has been harder to come by in this space recently.  However, it is clear that some names continue to work well.  CBRL, PNRA, and (to a lesser extent) CMG and RUTH maintained their consistent performance on high volume.  KONA released preliminary  results this morning, exceeding topline expectations.  March comparable store sales were positive for the first time since early 2008.


While retail sales data have been strong for retailers such as Nordstrom, and the restaurant sector was upgraded yesterday, I am not convinced of the sustainability of this upward move.  While RT’s results showed stronger-than-preannounced trends and management described the commodity environment as “benign”, it is clear that restaurant companies have far less margin-boosting levers to pull relative to the retailers.  RT beat the numbers but momentum is clearly slowing.  We believe that momentum will slow further as we look towards the summer months.  RT opened down 3.3% following yesterday’s results.  See our note published this morning for further thoughts. 


Looking at the table below, it is notable that the full-service companies had a strong day yesterday.  The Street seems to believe that the restaurant recovery will continue for some time, but I’m not in that camp…


TALES OF THE TAPE - stock 4.7



TALES OF THE TAPE - commodity 4.7



Howard Penney

Managing Director



March was an odd month; a hot start, some head-fakes and misinformation, and ending in disappointment. VIP hold was lower than normal and the American companies continue to lose share.



VIP hold percentage was below normal which may have been partly responsible for the March misinformation in the press about revenues potentially being up 60% or more.  March's hold (quantified on just reported Junket RC) was 18 bps light of the TTM average,  20 bps below the average 3yr hold, and 55 bps below March 09 hold levels. Using a 3yr average hold would have resulted in 7% higher y-o-y growth. Alternatively, Junket RC increased 75% while VIP revenues only increased 47%.  Mass revenues grew 32% y-o-y, inline with a 6 month average 35%.


While some of this can be hold related, there is a clear trend of American companies continuing to lose share.  LVS lost 40bps of share from February and 680bps from March 2009.  Wynn lost 160bps and 280bps, respectively.  Despite the 42% increase for the market, LVS grew total revenues only 5% year over year while Wynn Macau increased only 17%.  Here is some detailed commentary.



Y-o-Y Table Revenue Observations:


LVS table revenues increased only 5% with all growth coming from a 16% increase in Mass revenues while VIP revenues were actually down 0.4%

  • Sands fell 3%, dragged down by a 6% decrease in VIP which was somewhat offset by a small 2% increase in Mass
    • The VIP decline was entire driven by weak hold coupled with a difficult hold comp.  Junket Rolling Chip (RC) was actually up a healthy 51%.  In March 2009, Sands benefited from very strong hold of roughly 4%, assuming 13% direct play.  If we assume 10% of total VIP play was direct in March '10, this implies hold of 2.6% 
  • Venetian was down 6%, driven by a 23% decline in VIP revenues which was only partly offset by 30% growth in Mass
    • Junket VIP RC only increased 60bps, so the decline in VIP revenues was hold related.  Assuming 19% direct play, we estimate that Venetian held at 2.6% compared to a hold of north of 4% last year assuming 17% direct VIP play.
  • Four Seasons was up 210% y-o-y entirely driven by 458% VIP growth with Mass declining 21% 
    • Junket VIP RC increased 189% to $727MM. 

Wynn Macau table revenues were up 17%, primarily driven by a 21% increase in VIP while Mass revenues were only up 4%

  • A massive 84% increase in Junket RC was dampened by what looks like very weak hold of roughly 2.3%
  • Wynn Macau was only able to grow Mass revenues in single digits in all three months of Q1 

Crown table revenues grew 133%, with the growth fueled by 653% growth in Mass and 101% growth in VIP

  • Altira was down 4%, with VIP down 4% while Mass increased 4%
    • VIP RC was down 1% and luck was bad - only 2.3%.  However, hold was also bad last year
  • CoD table revenue increased 2% sequentially, due to a 6% increase in VIP win which was partly offset by a 7% decrease in Mass
    • Mass was $33MM
    • Junket VIP RC increased 18.4% sequentially
    • If we assume 20% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $3.75BN.  However, hold in March was weak at only 2.4%.

SJM continued its hot streak, with table revenues up 67%

  • Mass was up 32% and VIP was up 90%
  • Junket RC volumes increased 122%
  • As we wrote about on several occasions, we believe SJM is being very aggressive on junket pricing

Galaxy table revenue was up 59%, mostly driven by a 67% increase in VIP win, while Mass increased 18%

  • Starworld's table revenue was up whopping 102%, driven mostly by 116% growth in VIP revenues, while Mass increased 14% y-o-y

MGM table revenue was up 17%

  • Mass revenue growth was 20%, while VIP grew 16%
  • VIP RC grew 33% y-o-y but hold comparisons were unfavorable. Assuming 15% direct VIP play, hold was 2.8% vs. 3.6% last year


Market Share:


LVS share dropped 40bps sequentially to 19.2%, with all the share loss coming from VIP. This is LVS's lowest share month since August 2007

  • All of the share loss was from VIP.  LVS's share of VIP revenues decreased to 16.4% from 17.2% in February'  However, LVS's share of Junket RC actually increased 20 bps to 13.5%
  • Mass share increased by 30 bps to 26.9%.
  • Sands lost 40bps, dropping to 6.4% sequentially.  This marks the properties' lowest share quarter since we've been tracking the data and likely its lowest share quarter since opening.  Sands lost share across both VIP and Mass.
  • Venetian lost 70bps to 10.2% sequentially.  Venetian's has only had one month (Sept 09) with worse share since opening.  
    • Venetian actually gained 70bps of market share in Mass sequentially to 17.1% but Mass gains were offset by a 140bps sequential drop in VIP share
  • FS share increased 70bps to 2.6%
  • After SJM, LVS commanded the second highest share of the Mass market with 26.6%, followed by Crown at 10%


WYNN's share fell to 12.9% from 14.5% in February

  • Wynn's loss was entirely driven by low VIP hold.  Wynn's share of the VIP revenues plunged from 16.5% in February to 14.1%.  Junket RC share only fell by 10 bps to 15.6% - still second only to SJM but Crown was a close 3rd.

Crown's market share fell by 70bps to 12.9% in February

  • All of the share loss came from Altira, whose share dropped to 5.3% from 6.1% in February. 
  • Altira's share drop was entirely due to a 1% decline in VIP share to 6.8% which was driven by the property's low hold
  • COD's share was flat at 7.5%.  Mass market share decreased by 1.2% to 7.6% and VIP share increased by 50bps to 7.5%

The American's loss was SJM's gain.  SJM's share climbed to 35.1% from 32.3% in February and 30.9% in January - its highest share month since Nov 2007

  • All the gains came from VIP share which increased 390bps to 32.6%
  • As we've been writing about, SJM has been aggressive on junket commissions to pursue market share at the expense of margins
  • More scrutiny on the American companies in regards to junket relationships may continue to erode their share of the VIP business
  • SJM Mass share declined by 1% to 41.6% sequentially

Aside from SJM, Galaxy was the only other concessionaire that gained share.  Galaxy's share increased to 11.9% from 11% last month

  • Starworld's market share was increased by 1.3% sequentially to 9.5%
  • Galaxy and it's flagship property gained share in both Mass and VIP in March

MGM's share decreased by 90bps to 8.1%

  • MGM's share loss can be attributed to a 1.2% sequential decrease in VIP share to 8.2%.  Mass share decreased 10 bps to 7.7%

Slot market commentary:

  • Slot win grew 32% y-o-y to $83MM
  • LVS's slot win grew across all 3 properties by 24% y-o-y to $27MM
  • Wynn slot revenues increased by 7% y-o-y to $16MM
  • Melco's slot win grew 109% y-o-y
  • MGM's slot win grew 48% y-o-y to $9MM
  • SJM's slot win grew 22% to $12MM
  • Galaxy was the only concessionaire that didn't see y-o-y grow in slot win.  Galaxy's slot was was down 20bps to $2MM







Claims data this morning worsened. Claims climbed 18k week over week to 460k on a seasonally adjusted basis (after last week’s number was revised up 3k to 442k).  The 4-week rolling average rose 2,250 to 450,250.  Consensus had expected just 442k initial claims.  The chart below shows the rolling average trend line. 




After approaching our 3 standard deviation channel for the last three weeks, this week’s data moved away from its upper bound.   A Labor Department official noted that seasonal factors relating to Easter (which is hard to correct for, since it moves on the calendar) likely had an impact on this week’s numbers. Looking forward, we continue to expect claims to move lower in the coming months as we see the tailwind associated with Census hiring kicking in. 




As a reminder, the following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this spring. 




Joshua Steiner, CFA

Managing Director

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