Following a sharp, albeit somewhat expected, decline in two-year average trends in May in the U.S., MCD trends need to rebound.


McDonald’s is scheduled to report its June sales numbers, along with its 2Q10 earnings, before the market open on Friday.  Relative to earnings, it is important to remember that 2Q10 is the last quarter of easy comparisons on the food and paper expense line.  To recall, MCD reported its highest restaurant level margin in the U.S. in 1Q10 in nearly 16 years.  The 210 bps of year-over-year margin growth was driven largely by lower food and paper costs, which management said “have allowed [them] to continue to grow margins, while holding the line on price increases.  “Specifically, the company’s basket of goods decreased about 5% in both the U.S. and Europe during the first quarter, but full-year guidance assumes only a 2%-3% decrease in the U.S. and a slight decrease in Europe.  Although food costs likely remained favorable in 2Q10 on a YOY basis, this benefit will go away in the second half of the year (with comparisons becoming increasingly more difficult as we trend through the year).  Given the current unemployment picture and the still fragile state of the U.S. consumer, MCD may have to choose between driving traffic by keeping prices low and holding the line on margins.



June sales preview:


McDonald’s is scheduled to report its June sales numbers before the market open on Friday.  On a year-over-year basis, June 2010 has one less Monday, and one additional Wednesday, than June 2009.


June’s results will likely reflect the impact of the company recalling the “Shrek Forever After 3D” collectable drinking glasses due to potential cadmium risk.  For reference, MCD partly attributed the momentum in May in the U.S. to the popularity of its Shrek-themed Chicken McNugget and Happy Meal promotions.  June also is the last month of the summer without any impact from the rollout of the new smoothie beverages.  The impact of the McCafe smoothies, and the heat wave that gripped most of the country in early July, will be seen next month.


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 two-year average trends (adjusting for calendar shifts).



U.S. (facing a relatively easy 1.8% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD:  4.5% or greater  would be perceived as a good result because it would imply that the company was able to improve U.S. two-year average same-store sales (by 30 bps) on a sequential basis.  Given the current unemployment picture, together with the recent drop in consumer confidence, a 30 bps sequential increase would be meaningful.  While May’s U.S. result was less-than-stellar, and therefore does not pose a lofty sequential hurdle for June, a 4.5% number would be the best result this year.


NEUTRAL:  Roughly 3.5% to 4.5% implies two-year average trends that are roughly in line with those seen in May.


BAD:  Below 3.5% would indicate that two-year trends have deteriorated sharply on a sequential basis.  May had already seen a decline from April; further decline would be decidedly negative and would imply a two-year trend below 3%, a level not seen since January. 




Europe (facing a 4.7% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD:  6.5% or above would be a good result for McDonald’s European operations.  This print would imply a roughly level-to-slightly lower two-year average trend with May but would still be in the 6%+ area which is traditionally the “GOOD” level for Europe.  The two-year trend in Europe accelerated rather significantly in May from the April level so maintaining that trend would be viewed positively. Although the heavy involvement of the European nations in the World Cup may have had somewhat of an impact on McDonald’s sales, economic issues in Europe – such as unemployment – are still weighing heavily on consumer behavior.


NEUTRAL:  5.0% to 6.5% would imply two-year average trends roughly in line with what we saw in the months preceding May’s tick up in trend.


BAD: Below 5.0% would signal that two-year trends have declined sharply from May and decidedly back into the sub-6% region.



APMEA (facing an easy +0.3% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD: A print of +9% or higher would be a good result for the APMEA branch; this number would imply that two-year average trends held steady or improved in June.  APMEA is lapping an easy compare of +0.3%.  The slowdown in APMEA in June last year was attributed to weakness in Japan and China, with China running negative comparable store sales.


NEUTRAL: Comparable-store sales of 8% to 9% would result in two-year average trends slightly lower than those seen in May, but 8% still represents a strong comparable-sales number when compared to the past three months.


BAD: Below 8% would result in a significant sequential deterioration in two-year average trends and, therefore, would be perceived as a negative result.



MCD JUNE SALES PREVIEW - mcd june preview


Howard Penney

Managing Director

Bear Market Macro: SP500 Levels, Refreshed...

Conclusion: We remain short both the SP500 (SPY) and US Dollar (UUP).


Gotta love a bear market that rallies on rumors of “Fed cuts”, when they can’t cut from zero. I suppose if the rumor is that Bernanke could implement more quantitative easing, that would be more believable. If he does that, the US Dollar and balance sheet position will weaken further…


We continue to believe that the 7 consecutive weeks we’ve seen of the US Dollar trading lower (week-over-week) bodes ominously for both future US economic growth and equity performance. Unlike the bullish REFLATION trade we made in 2009 (Dollar down = stocks up), this time US Dollar weakness won’t have accelerating global and domestic growth at its back.


The Bear Market Macro intermediate term TREND line of resistance remains firmly intact up at 1144, and our refreshed immediate term TRADE line of resistance is now 1080. We probably should have covered our SPY short position on this morning’s open near our immediate term TRADE line of support (1058), but shoulda, coulda, woulda, only works in men’s league hockey when you are on the bench talking to yourself.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed... - 1

IGT 3Q2010 Preview

IGT is now officially cheap but near term catalysts remain elusive. Whisper expectations for the quarter are pretty low. The focus will be on replacement demand.



The sell side remains stubbornly above IGT’s fiscal 2010 guidance of $0.77-0.85.  We suspect that buy side expectations are lower, however, so a reiteration of guidance should not disappoint.  For FQ3, our projection of $0.21 is in-line with the Street.  Replacement demand should be a major focus for both the quarter and the outlook.  Despite investor pessimism, replacements have been accelerating, which should bode well for next year’s earnings.  Of course, if casino revenue trends don’t recover, all bets are off.  In that environment, no gaming company will do well but the suppliers should be better off.


Here are the details of our projections:


FQ3 Detail


Product revenues of $231MM with gross margins of 49%

  • North American product revenue of $146MM and gross margin of $73MM
    • 6,350 new units ( 4,700 replacement) at $14.4k.
    • As we wrote about on 7/1/2010, “Q2 AND Q3 MARKET SHARE COULD BE MISLEADING”, IGT typically sees a big sequential increase in ship share in the June quarter, which is also typically a seasonally stronger quarter for replacement orders than March.  Since 2006, IGT’s replacement orders have seen some sequential pick up in June. 
    • While new and expansion shipments are nothing to write home about, we estimate that June shipments will be roughly 1,200 better than March shipments.
    • IGT’s Dynamix package offer, which was supposed to expire in May, was extended through the end of June, so we expect similar pricing to March.
  • International product revenue of $88MM at a 47% gross margin
    • 5,300 new units at $10.8k.
    • Our sequential decline is due to the removal of 2,200 units shipped to Japan in March, and less units shipped to Asia, since March included shipments to Singapore, and is offset by higher shipments to Australia, UK, and S. Africa.
    • Better margins due to the removal of impairment charges related to Japan last quarter.  Pachislot also had lower margins.

Gaming operations revenue of $281MM and gross margin of $171MM

  • Average install base of 60,300 with an average win per unit of $51.30.
  • June has seasonally lower yields than March for IGT.
  • Given the shipment of a lot of new product, we assume a small pickup in D&A and therefore, a small tick down in margins.

All the other stuff:

  • SG&A (including bad debt) of $89MM.
  • R&D of $52MM.
  • D&A (expensed) of $19.8MM.
  • Net interest expense of $23MM.
  • Tax rate of 38%.


The dollar continues to look as awful as the underlying health of the USA’s balance sheet.




As we look at today’s set-up for the S&P 500, the range is 26 points or 1.9% downside (1,052) and 0.6% upside (1,078).  Equity futures are trading below fair value this morning. 


One of our 3Q Macro Themes, Bear Market Macro, continues to find support in the data and GDP estimates on the Street are being cut accordingly.  While there are two sides to this debate, our view is that data related to earnings and housing will continue to shape this debate and we are not bullish on either area.


The dollar continues to slide and looks bearish from an intermediate term perspective; Hedgeye Risk Management’s TREND line of resistance for the USD Index is 84.13.


Following Monday’s session, there are only three sectors bullish on TRADE: Utilities (XLU), Consumer Staples (XLP), and Technology (XLK).  Utilities (XLU) remains the only sector positive on TREND.


On the MACRO front today, Housing Starts came in below expectations: 549k reported vs. 580k consensus. Based on our Q3 Macro Theme of Housing Headwinds, we expect reporting risk to be to the downside for housing data points over the next 6-9 months, barring further government intervention.



















The Macau Metro Monitor, July 20th, 2010



According to a source close to the deal, HSBC has pulled out of a US$850m five-year loan for MGM Grand Macau.  HSBC was committed for US$100MN.  The move comes as a surprise because while the facility is a club-style loan, HSBC worked behind the scenes on coordination and promotion of the deal.  A banker said HSBC's exit will not affect the outcome of the loan since it was  “comfortably” oversubscribed.


In preparation for the HST Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from the company’s Q1 earnings release/call and subsequent conferences.



Trends & Forward Looking Commentary

  • “Our top line results improved on a relative basis in each period of the quarter and turned positive in March. As you may remember, due to the timing of our reporting period, our first quarter does not include the operating results for a significant portion of our portfolio for the month of March.” 
  • “For the third straight quarter, we experienced year-over-year growth in our Transient business with an overall increase in Transient room nights of more than 12%. More importantly, this increase in demand was led by our Special Corporate business where room nights increased more than 28%, and our Premium and Corporate segments where room nights increased for the first time in nine quarters at a rate of nearly 9%.”
  • “On the group side, frankly, we were pleasantly surprised by the pace of our short-term bookings during the quarter.” 
  • “RevPAR growth for period four exceeded 5%, continuing the recent trend of improving results. Group bookings continue to be strong as bookings in the first quarter for the second quarter have more than tripled when compared to last year and even slightly outpaced our 2007 level of activity. Transient bookings for the second quarter are also trending ahead of last year. Overall, improvement is still relying on the strength of the economy, but we are optimistic that businesses are beginning to loosen their travel budgets, spurring a recovery in lodging demand.”
  • “Overall, wages and benefits decreased 1.3% or 8.2% on a per occupied room basis, and unallocated cost declined by 2.7% for the quarter as hotels reduced management headcount and lowered other controllable costs. Utility costs also decreased 8.4% through a combination of lower usage, lower rates and the impact of energy saving capital improvements. For the quarter, real estate taxes were flat.”


  • “We are increasing our estimates for RevPAR for the year to an increase of 1% to 4% with a comparable adjusted margin decline of 125 basis points to 50 basis points. Based on these assumptions, full year adjusted EBITDA would be approximately $750 million to $800 million and FFO per diluted share would be $0.58 to $0.65.”
  • “We are increasing our expected capital expenditure estimate for the year to $300 million to $340 million, and we'll continue to evaluate other projects as we work through the year.”
  • 2Q 2010 Guidance:
    • “We expect the Philadelphia market to underperform the portfolio due to lower levels of both transient and group demand.”
    • “As expected, the Miami Fort Lauderdale market performed very well with a RevPAR increase of 10.3% …We expect the Miami Fort Lauderdale market to have a weaker second quarter but still have positive RevPAR.”
    • “We expect San Antonio to have a decent second quarter and a strong second half of the year.”
    • “We expect our Boston hotels to have a great second quarter with double-digit RevPAR growth due to strong citywide activity and improvement in transient demand.”
    • “We expect the Orange County market to continue to perform well in the second quarter.”
    • “We expect New York City to have an outstanding second quarter due to high levels of business transient demand.”
    • “We expect Chicago to perform much better in the second quarter and for the outperformance of the Swissotel to continue.”
    • Hawaii: “We expect the hotels to perform much better in the second quarter but we need to see further increases in airline capacity versus stay in recovery.”
    • “Our DC hotels had positive RevPAR in period three and we expect DC to have positive RevPAR in the second quarter.”
    • “We expect the San Diego market to continue to struggle in the second quarter but improve in the second half of the year.”
  • “Looking out through the rest of the year, we expect occupancy to increase further, which will likely lead to growth in wage and benefit cost at inflation after taking into consideration the benefit from productivity gains. We expect unallocated cost to increase at inflation except for utilities where rates will increase and occupancy improvements will drive higher utilization, and sales and marketing where higher revenues will increase cost. We will also incur cost for the implementation of new sales and marketing initiatives. We expect property insurance to increase at inflation and property taxes to rise in excess of inflation. As a result, we expect comparable hotel adjusted operating profit margins for the year to decrease 50 basis points at the high-end of the RevPAR range and decrease 125 basis points at the low end of the range." 
  • “For all of 2010, cancellation and attrition fees will be significantly lower than 2009. Adjusting 2009 to a typical year of cancellations would result in an improvement of the above margin guidance of 70 basis points.”
    • 2009 attrition: “It's $40 million incremental, over a typical year.” 
  • “On the margin front, I think our estimate is that we are looking at a 50 basis point decline tied to a 4% overall full year RevPAR growth rate."


  • “Earlier this month, we purchased the junior tranches of a mortgage loan secured by a 1,900-room portfolio of hotels in Europe. The par value of the tranches we purchased are approximately EUR 64 million and we purchased the notes at a meaningful discount. While we cannot get into more specifics regarding this investment, the return we expect to generate on the notes meets or exceeds our return target for a levered investment.”

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.36%