|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||975||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
|Subject||cec vs appb|
|Entry||11/26/2001 11:28 PM|
|I think this is a good idea but why not short YUM against CEC? YUM has much worse growth prospects than APPB and has a similar multiple?|
|Subject||CEC vs. YUM|
|Entry||11/27/2001 08:35 AM|
|Good question, but there are several reasons why I would prefer the APPB short over YUM. One reason is simply trying to match up similar companies when doing a pair trade. Clearly CEC and APPB have their differences including commodity exposure and customer base. However YUM is a much larger company (9+ billion TEV) than either of the other two and it has large exposure to international markets. A second reason is simply by virtue of its size and liquidity it commands a slightly higher multiple. This is also the case with MCD. Third, this company is viewed as as a turnaround with depressed, but improving earnings. KFC and Taco Bell are finally seeing improvements are several bad years. Thus the higher P/E multiple reflects the belief in this improvement in E. Finally I don't know if its fair to say that APPB growth prospects are that much greater than YUM. Their restaurants are pretty saturated in the US, but they see great potential for international expansion. I also just don't see how or where APPB plans to expand. They already occupy most of the good small markets and I doubt urban areas would accept them into the marketplace. I obviously disagree, but I do appreciate comments.|
|Subject||I gave this a '2'|
|Entry||11/30/2001 08:03 AM|
|You don't short a company with a gigantic annuity-like franchise income stream trading at 13x cash flow in a world of 5% interest rates when comps continue to come in positive, energy costs are going to be lower, and other expense categories appear to be trending downward right now. Also, CEC's unit growth is only 10%. So if you want to fault APPB for tepid top line growth it is nonsensical to recommend CEC.|
In short, I think you did a particularly awful job of researching BOTH of these ideas.
|Subject||wow, pretty hostile|
|Entry||11/30/2001 09:31 AM|
|It seems a little absurd to call a revenue stream from restaurants "annuity like". The environment is everchanging and I hope you never count on a stream of payments from a restaurant to pay the bills when these things constantly turn over. While I am not saying this company is the next Planet Hollywood, the stock has gotton way ahead of itself. If the franchise restaurant business is so great, why do most of the other companies shy away from it? I am just a little curious why someone would pay close to 17x next twelve months earnings for an annuity as you call it. And on CEC's growth potential, I think 20% EPS growth is pretty attractive. 10% unit growth is substantial and will facilitate the growth in EPS. Imagine, if APPB units grew at a 10% rate for 10 years, there would be more of them than Starbucks now (in the US). I think it is fair to say that Starbucks coffee is a bit more attractive on a frequency of use basis than APPB's "honey of a deal" program. In an industry that sees as many firms fold as this one, I would personally rather be long the one with a brand and identity as strong as Chuck E. Cheese rather than one whose only restaurant that I ate at closed within 6 months of opening b/c it was so unpopular. I'm sorry that you do not like the idea, but I would almost be willing to guarantee than APPB will not be trading at a premium or line with companies such as EAT, DRI, and CEC. These are superior companies with proven track records that don't include debacles like Rio Bravo.|
|Entry||11/30/2001 10:08 AM|
|I am only hostile to ideas that I think are shoddily researched. If I feel like that I would assume that you would want to know why. Even these comments are downright peculiar – have you ever looked closely at APPB’s financials? CEC went through its own bankruptcy for pete’s sake, and the deferred tax asset enabled them to expand far faster than they would have done otherwise. Restaurants DREAM of franchising – all the truly successful chains do so because they can’t support the capital requirements of a restaurant build-out otherwise unless they turn to debt or endless secondary offerings. But do you even realize how HUGE that franchise income really is? Try this since 1991: 10041-15097-21324-31419-43739-54141-63647-66722-72830-84738. Do you realize that APPB has the highest margins in the restaurant industry precisely because of this income? Yet you apparently see this as a deficiency? Weird.|
It is true enough that APPB veers ever closer to saturation and must therefore start the process anew of developing a secondary growth vehicle. That might not be enough to be long on the stock but being short? That’s flat out dangerous. You don’t pick one of the best operators in the business to short unless the price is outlandish. This isn’t.
|Subject||But if it matters|
|Entry||11/30/2001 10:12 AM|
|Just because I am hostile to the idea doesn't mean:|
1) other will be
2) you won't make money
3) my opinion means a hill of beans.
That said, I don't understand your rationale here one iota and figured I'd say why. But perhaps it was done too harshly and I didn't mean to offend, but I honestly don't understand this one at all!
|Subject||1) I am not sure why you say|
|Entry||11/30/2001 05:05 PM|
I am not sure why you say that restaurant companies DREAM of franchising and all of the successfull ones use the same model as APPB. This may be true for the quick service guys, but it is simply not the case in casual dining. I will break it down for you:
% of Company Owned Restaurants
I think these stats show that the franchise goal is not the dream of restaurant companies and for good reason. A company risks hurting its brand by over franchising and losing control of the name. There are plenty of people wanting to open Chili's, Olive Gardens and P.F. Chang's, but the companies don't allow it unless they are comfortable with how they will be run. This is a problem for APPB.
It's true that APPB's margins are higher than many of its competitors, but CEC is not one of them. Again, for your benefit I will show you the margin breakout for these two.
Gross margin 53%
SG&A % 37%
EBITDA margin 21%
EBIT margin 16%
Pretax margin 14%
Tax rate 37%
Net Margin 9%
Gross margin 50%
SG&A % 14%
EBITDA margin 26%
EBIT margin 19%
Pretax margin 19%
Tax rate 39%
Net Margin 11%
3) I also read your review ahile back. At the time APPB was trading at a large discount to its peers. When the stock appreciated and much of the discount eroding away, you suggested selling the position. Now that it has continued to run up to a point that it trades at a premium, you think its attractive again? Doesn't make since to me.
4) You must understand the nature of this trade. It is not about shorting APPB b/c I think its going to be the next ENE. The position and belief is that the respective trading multiples of these two companies will contract. The group can go in either direction as long as the discount that CEC is currently trading at comes in. The opposite trade (long APPB, short CEC) would have worked a year ago, and this way will work now.
|Entry||11/30/2001 07:36 PM|
|Each of those non-franchisers you've listed has gone out to the market with hot little hands and said 'gimmie, gimmie, gimmie' in a repeated basis. So far, it has worked for a few of them, but eventually the day seems to come when the market says 'no no no'. That's just my observation and experience with this industry. |
My comment to sell APPB in the earlier string of notes was foolish. However, I didn't suggest being long in APPB right here, I simply said that shorting it - a LONG way away from being long - was a dangerous thing to do. You didn't address my other margin comments either.
Again, I don't like your idea, that's all. I am long CEC fwiw, and I own a bit position in APPB. There was no reason for me to get 'excited' in my reponse to you but that was my immediate first reaction.
|Entry||12/03/2001 06:40 PM|
|I did answer your margin question. While APPB has higher margins than many of the casual diners, they are below CEC. Both CEC's EBITDA margin and Net Margin are higher than APPB. |
Your point about issuing more shares in the market may be true in regards to the new growth concepts, but that is not the case with the established companies. Darden and Brinker are not exactly fly by night companies. My point is that its absurd to assume all the casual diners want to be franchisers like APPB, but they lack the ability. These companies reiterate all the time that they have no intention or desire to switch to this type of model.
|Entry||12/04/2001 10:43 AM|
|I wasn't making a margin comparison between the two companies - again, I don't understand paired trades (and I guard my ignorance), all I understand is you said to be long CEC, short APPB. I view that as two different trades that should both work. |
If you are short APPB you have to consider that various cost pressures for APPB's business are relatively positive right now. Thus, APPB could get a margin upside in the next few quarters. This means that income growth is likely to outperform the top line. Add a lower share count and I come to the same conclusion here - I don't understand why somebody would want to short APPB at this time.
But then again, I never short anything.
On the other issue we can agree to disagree.
|Entry||12/07/2001 10:22 AM|
|seeing that the p/e multiple difference has come in by 2 points for these two companies in less than 2 weeks, this would be a good point to take some profits for a 11% return.|
|Subject||By the way allen|
|Entry||12/11/2001 06:55 PM|
|great call on the CEC side - jury's out on APBB, but in hindsight this didn't deserve a "2". That implies problems with both sides of the trade and clearly I didn't have an issue with the buy end and understand - though don't agree - with the other side.|
Now maybe you can help me figure out what's wrong with PZZA's comps...
|Subject||Good exit point|
|Entry||01/17/2002 03:42 PM|
|This trade is now up 27% since Nov. 26 and CEC is trading at a 10% premium to APPB based on 2002E EPS. While I believe APPB could resort back to the 13-14x EPS it has traded at in the past, this is an attractive exit point for the trade. Hopefully Paul, you have realized that the point of such a trade was to make money without taking on market risk during an extremely uncertain environment( and thus the APPB short was a hedge). Fortunately no other terrorist attacks occured, but you would have been protected if one had because both stocks would have dropped significantly.|
|Subject||All I know|
|Entry||04/13/2002 12:58 PM|
|Is you shared your idea and I got overly excited. Sorry about that. Fwiw, I still don't agree with the logic here, but the bottom line is this worked out for you and that's the only thing that counts. |
Fwiw, I just sold my last remaning CEC shares yesterday. Still own a small bit of APPB.
Since you've followed this industry, any comments you care to make on my PZZA idea just written up would be appreciated.