How McDonalds will screw Labour. $MCD, $WEN, $BKW, $YUM, $DNKN, $KKD #QSR

Union activists are making a noisy splashy push to unionize food service workers at Quick Service Restaurants. (QSR) The claim is wages are too low. Correct; the work does not pay very well. The further claim is big quick service restaurants can afford to pay big bucks. Disputable; but also way off the point.

Quick service restaurants are factories deployed close to consumers. Factories need materials, labour and capital equipment. As the cost of labour increases, the cost of capital becomes more attractive. We are in a low-interest rate high wage environment. Capital will trump.

QSR has grown by adding locations, expanding hours and growing the menu. Growth was never driven by labours input. As long as it stayed cheap, it stayed in. When labour gets too expensive it will be factored out.

Don’t believe me? Look at any factory environment which has increasingly turned to robotics to improve productivity. Labour has not kept up. So sad so sorry. In many extreme cases factories left and went off shore.

Labour understands one model and one model only. Organize and then leverage your power at the negotiating table. They have never understood competition and probably never will. They are  fighting yesterdays battles.

Right now technology is working over time to replace disgruntled low productivity workers.

The labour issues may become the silver lining for many quick service restaurants seeking the next thing.

Moral of the story. Stay in school, acquire skills, develop a positive can do attitude and add value. The world is Darwinian and will eventually weed out the inadequate.

In the mean time if I was running Quick Service Restaurants I would be worried about the nutritional quality of my offering. Health consciousness is growing stronger every day.

George Gutowski writes from a caveat emptor perspective.

Why Labour Costs are not Black Swan Events for #QSR $MCD $BKW $WEN $YUM

A lot of noise coming from unions about organizing low wage employees at Quick Service Restaurants. Quick math shows the industry cannot pay $15 plus rich benefits. Will creeping unionism hurt Quick Service?

Answer: No

Quick Service Restaurants are factories and subject to much process engineering. If wages become a problem watch for more or revamped machinery and processes and less labour. This will cause existing workers more job loss.

Part of the organizing dynamic is many QSR employees have become trapped because competitive better paying jobs are not as available. As the economy improves ever so slowly this rationale should dissipate. Previous efforts to organize were hampered by huge turn over rates. Corporations can drive those rates and turn employees in many ways. Cutting back hours and closing a few locations is one. Selective termination of union activists while dirty pool is another.

Wal-Mart has been known to close stores that unionized and everyone is out of work. QSR can easily close locations and laugh it off.

In the mean time a few headlines here and there but this will not be a factor in a buy hold or sell decision.

George Gutowski writes from a caveat emptor perspective. Follow him on twitter @financialskepti

Ultimate Hedge Position. Short Mcdonald’s $MCD Long Diabetes. Open to suggestions-Diabetes Contango.

Business Week has an interested cover of the reality of hedge funds. Long overdue.

Consider the ultimate hedge position. Play the Diabetes Contango. Short McDonald’s (NYSE:MCD) who with extra fries has done a lot to promote diabetes. Go long something with a Diabetes solution. Which raises the question which stock will be the financial standard-bearer in the fight against diabetes. Currently an epidemic in western countries with some 20% of general population affected. Drugs, health care provider, diabetes supply manufacturer. This is perhaps the next golden grail.  This is just the strategic big bet that Jack Welch and the old General Electric or GE (NYSE:GE) were famous for.

Who will make it this time?

George Gutowski writes from a caveat emptor perspective. Lots of home work to do after this post.

Chipotle Mexican Bad Spices Creating Financial Indigestion $CMG $MCD

The exterior of Chipotle Sand Lake Road locati...

The exterior of Chipotle Sand Lake Road location (in Orlando, Florida) (Photo credit: Wikipedia)

Chipotle Mexican (NYSE:CMG) which was spun out of McDonald’s (NYSE:MCD) some six years ago is creating some serious financial indigestion. The class action lawsuits are piling up. The finger is being pointed at officers and directors for misleading shareholders about the true state of financial affairs. Sour grapes and blood sucking litigation lawyers you say. Well lets take a look at what some will say is probable cause.

The stock traded around $450 around March/April. now its down to a very dull $295. OK so whose fault is that. How come investors were so like stupid.

So here’s a few facts to chew on.

CFO Jack Hartung sold 10,000 shares on that April high.

Total insider sales that took place over the class-action period (February 1, 2012 to July 19, 2012):

1.)    Montgomery Moran, Co-CEO, sold 160,000 shares worth$63.7 million

2.)    Steve Ells, Chairman & Co-CEO, sold 150,000 shares worth $58.5 million

3.)    Jack Hartung, CFO, sold 67,300 shares worth $27.7 million

4.)    Robert Blessing Jr., sold 20,000 shares worth $7.7 million

5.)    Mark Crumpacker, Chief Marketing Officer, sold 15,297 shares worth $5.8 million

6.)    Albert Baldocchi, Director, sold 10,000 shares worth $3.7 million

The directors and officers emptied 422,597 shares on to the open market between February 6 and April 13 with the stock climbing nearly 20 percent between those dates (from $371.63 to $440.40). Incidentally the last day of these insider sales, April 13, marks the highest price of the Chipotle’s stock since that date and only two dollars short of Chipotle’s 52-week high.

So like the insiders were not shy when it came time to run for the hills. You can excuse the class action types for smelling blood in the water.

I’m not a lawyer and I cannot comment on the tactics of this type of litigation. But management and directors will be very distracted and will take their eye off the ball. Chipotle growth is decelerating. Profits margins are under pressure. The business is getting tought to run.

In the meantime investors are looking at the 36 trailing PE and having a genuine WTF moment. No dividend has been issued while we are looking a things. The short position is about 10% of the float which would normally be bullish but not at a trailing 36 PE ratio. Money flow is about even steven so no valid signal there.

So no fundamentals screaming at you with a buy signal. Nasty legal trouble in the executive suite so be skeptical, very skeptical about this one.

George Gutowski writes from a caveat emptor perspective. Follow him on twitter@financialskepti

Burger King Fast Return Flip. Something Spooked 3 G Capital $BKW $WEN $YUM $MCD

Current "blue crescent" logo (July 1...

Current “blue crescent” logo (July 1, 1999–present) (Photo credit: Wikipedia)

Give me a break. Burger King (NYSE:BKW) returns to the investment stage claiming that it has revamped its stores and menu. Also the last quarter sales were very encouraging so they thought they would rush back into the markets. Give me a break, a very big break.

Just recently the Brazilian group (3 G Capital)  takes them private because the hard restructuring is best done in private. Also the Brazilian group controlled a lot of cattle farming. So creating an integrated supply chain from birthing calves to flipping big whoppers to depositing money in the bank made sense.

Quite frankly do not see too many refurbished stores out there so the capex budget still needs to be big. Menu change well what is new. I am not lovin it because I cannot spot it.

This is a disguised short move. Private equity usually needs more time to fix the problems which were substantial. They seem to have panicked and are now off loading.

So what made them panic.

George Gutowski writes from a caveat emptor perspective.

Wendy’s Non Food Refresh Gamble. Deep Value? $WEN $MCD $YUM

Wendy's

Image via Wikipedia

Wendy’s Company (Nasdaq:WEN) reported Q4 and year end numbers announcing same store increases and all time highs for average unit volume. Investors many be pondering is this a deep value play a la Warren Buffett. Lets go through some of the upcards.

Wendy’s is the third largest Quick Service Restaurant (QSR) chain behind McDonald’s (NYSE:MCD) and Yum Brands (NYSE:YUM).  Both McDonald’s and Yum Brands are very expansion focused. Wendy’s needs to do something to get back into the game. A refresh has been long anticipated. Despite this being an earnings announcement Wendy’s President and Chief Executive Officer Emil Brolick took the opportunity to remind investors that the program is expected to earn 15%. Currently the new Image Activation costs between $750,000 to $850,000. The Wendy’s system has 6,594 stores. You can do the math. Management is quick to point out they are still value engineering the concept.

Emil Broderick also reminded investors that they intended on using their balance sheet and cash flow to pay for the program. Investors are only too aware of the huge $1.3 billion dollar loan that continues to hang around their neck.

They only plan to spend $80 million on new restaurants and remodels.  Not enough to make a difference. So its back to the basics. Food and value. Sure customers like to hang in a nice place. But until customers have compelling value propositions Wendy’s will not have a reliable driver.

Can this company become a deep value proposition? The following will have to be lining up.

  1. Compelling menu’s  that bring back customers and generate good margins.
  2. Decreased debt load releasing cash flow for investor friendly strategies.
  3. Fast paced expansion plans increasing store count. Many markets have been surrendered.

Investors will have to monitor managements heavy lifting and look for well priced entry points. Deep value investments look ugly when purchased.  McDonald’s and Yum look way prettier than Wendy’s.

George Gutowski writes from a caveat emptor perspective.

 

 

 

Mcdonald’s $MCD Global Perspective

Big Mac Japan Version Box

Image via Wikipedia

Mcdonald’s (NYSE:MCD) announces same store US sales did not meet street expectations. But the economy is recovering and jobless rate is dropping. Why does the workforce not spend its money for a Big Mac? Answer maybe the recovery is weaker than announced.

$MCD is a global company. The analysis that equates poor US sales to a drop in overall enterprise value is provincial and blinkered. Investors relying on this logic exclusively will be disappointed. Wall Street talks a good story about global outlook and then fails to apply it in the most fundamental way.

McDonald’s is subject to food/agricultural price inflation. Can they maintain margins in a food inflation cycle? The US$ has dropped so the value of foreign earnings is more important in real terms. If as and when the US$ recovers significantly will these analysts be satisfied with lower foreign earnings but better same store domestic sales.

The analytical thinking is suspect. Now what will executives do to manage street expectations in the light of poor thinking? It appears that the value of foreign expansion has not engaged some of the analysts and investors.

Disclosure: “George Gutowski” writes from a “caveat emptor perspective”. I hold no positions in stocks mentioned in this post. I have no plans to initiate new positions within the next 72 hours.