The Economic Data calendar for the week of the 10th of May through the 14th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
In the midst of the current correction, Keith continues to look towards quality names with stability in earnings momentum, proactively-driven top line growth, and plenty of cash to boot. In other words, Bed Bath & Beyond.
Here’s a reminder as to why we like this one…
Valuation: At 8x EBITDA and 15x P/E, we ‘get it’ that it is not exactly the cheapest name in retail. But its been a long time since I’ve seen a name in retail where more people say “it’s too expensive…I missed it.” That’s a tough argument to stick to when you have a quality name that’s got growth, earnings momentum, market cap, and cash.
March is a tough act to follow.
Mc Donald’s is expected to report its April sales before the market open on Monday. On a year-over-year basis, April 2010 has one less Wednesday, and one additional Friday, than April 2009. The impact from the Easter shift in school and business holidays from March 2008 to April 2009 positively impacted Europe’s comparable sales by approximately 2%.
Below, I am providing my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based largely on 2-year average trends.
To recall, MCD management made the following comments about April trends on its 1Q10 earnings call:
U.S. (facing a 6.1% compare, including a calendar shift which impacted results by 0.0% to +0.4%, varying by area of the world):
GOOD: Any result greater than approximately 4% would be perceived as a good result because it would imply that the company was able to sustain its U.S. sales momentum from the outstanding print in March. Last month’s number resulted in a 2-year average trend of 4.9% (or 5.4% if you adjust for the negative calendar shift in March 2009), which was the best 2-year number since February 2009. In order for April’s number to imply a 2-year average trend in line with what was seen in March, the comparable store sales figure will have to be approximately 4%.
NEUTRAL: Roughly 3% to 4% implies 2-year average trends that are about even with March to slightly lower, but still remain above prior month trends, confirming a real rebound in MCD’s U.S. business.
BAD: Any comparable store sales number below 3% would imply a sequential slowing from March on a 2-year average trend basis. While this would not be a disaster in the context of the trends over the last couple of years, it would fail to confirm the resurgence that was seen in March. Given that many management teams have been making positive comments on April trends, I think it would be a disappointment to see 2-year average trends slow sequentially (especially given the run that the stock has been on since March trends were reported).
Europe (facing a 8.4% compare due to Easter holiday shift, which positively impacted April ’09 by 2% and a calendar shift which impacted results by 0.0% to +0.4%, varying by area of the world):
GOOD: Above 4% would signal a sequential improvement in 2-year average trends; despite improving last month, the 2-year average trends are still at historically low levels. A +4% trend would imply a return to 2-year average trends in the region of +6%.
NEUTRAL: +3% to +4% would signal that 2-year trends are roughly even with March levels. While this level is neutral with respect to sequential trends, it would indicate continued softness in the Europe business compared to the most part of 2009 when 2-year average trends were consistently in the 6.0% to 8.0% range.
BAD: Below +3% would indicate that trends have sequentially deteriorated further from March levels.
APMEA (facing a 6.5% compare, including a calendar shift which impacted results by 0.0% to +0.4%, varying by area of the world):
GOOD: Better than 6.0% would signal that 2-year average trends have rebounded strongly from last month’s (adjusting for the calendar impact on March) dip after a strong showing in the first two months of the year.
NEUTRAL: Roughly 3.0% to 6.0% would indicate that 2 year-trends were stable-to-slightly better on a sequential basis from March.
BAD: Below 3% would imply 2-year average trends that have either stagnated or slowed further from the level seen in March. Below 1% would point to trends in line with the trough 2-year average trends indicated in December.
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Position: Long Germany (EWG)
Per Wikipedia, undertow is defined as “a strong subsurface flow of water returning seaward from shore, often as result of wave action.” If the strong subsurface flow in the UK is the threat of stagflation as the UK economy is forecast for meek growth alongside expanding inflation and a looming double-digit budget deficit to GDP ratio, more surface waves could result, including those from yesterday’s general election result.
Number 10 Downing Street
Yesterday’s election yielded no clear majority government, or the 326 seats needed (of the 650 seats in the House of Commons) to gain an overall majority in Parliament. Although Cameron won the most seats with 291 versus Gordon Brown (251) and Nick Clegg (51), the inability of one party to form a majority sets the stage for three likely outcomes:
While a hung parliament was largely priced in, the uncertainty on the political and economic direction of the UK could likely put further downward pressure on the Pound, which is down -9.2% versus the USD year-to-date (or flat versus the EUR) and also on the equity market (the FTSE is down 5% YTD).
The UK’s Producer Price Index for April was released today and the figures remind us why we want to steer clear of this economy. The Input Price Index jumped 13.1% in April year-over-year and output rose 5.7% versus the previous year and suggest that producers will pass on higher input costs to consumers. The most current reading of CPI is 3.4% in March Y/Y.
Clearly, whoever emerges as the winner in the UK will have the challenge of righting an ailing economy. The UK has a hefty budget deficit that will likely reach ~13% of GDP this year with gross debt climbing to some 73% of GDP which would force the government into a very difficult position of cutting the deficit (expediently) while not smothering growth (think Greece, Portugal, Spain, USA...). While the UK debates spewed idealism on the country’s future, the reality of the country’s anemic fundamentals is formidable.
I wouldn’t say we’re bullish, LVS actually missed our estimate, but we were way above the Street. Here’s what we found interesting.
QUITE FRANKLY WE'RE A LITTLE DISAPPOINTED WITH MACAU
LAS VEGAS PLAYS LUCKY ON SLOTS AND TABLES
The Macau Metro Monitor, May 7th, 2010
CHINA PROPERTY: IS THE SKY FALLING FOR MACAU? Intelligence Macau
Several analysts believe that VIP volumes should slow down due to the Chinese government placing restrictions on credit at mainland banks and reining in the speculation in the real estate market. But Intelligence Macau staff believe that these government actions would accelerate the movement of wealth offshore and slow down the recycling of wealth back into depreciating assets on the mainland. This may suggest that VIP volumes are not, in fact, going to dry up in the wake of the obvious correction underway on the mainland right now. Indeed, they might even get bigger –until the central government decides that enough is enough.
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