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CKE Restaurants Focused On Rates, Not Food


Many companies today are essentially hedge funds masquerading as businesses.


Business may be still pretty good. But it just doesn't matter.

Take a look at CKE Restaurants (CKR), which ostensibly owns and operates fast food restaurants (more on that in a moment). It reported earnings today, but here's what stood out: it's taking a $1.8 million charge due to an interest rate swap agreement that didn't quite turn out as planned. How so? During the third quarter the company entered into an interest rate swap agreement which effectively fixed the interest rate on $200 million of its term loan debt at 6.22%, set to expire in March 2012.

The problem is after entering into the agreement, current and future expected interest rates declined. Hence, the charge. Since recording the charge the company has reset its interest rates to the current market rate.

But wait, there's more.

Future declines in interest rate yield curves would require CKR to record additional charges, naturally. Of course, thinking about this optimistically, if forward looking interest rate yield curves should increase, CKR reverses a portion or potentially more than all of the charges it recorded in the third quarter. Sweet.

The downside however, and there is always a downside, is if interest rates were to remain at current levels (as of yesterday) the company would expect to record an additional charge of $3.5 million in the fourth quarter.

Keep in mind that since 2004 the company has repurchased more than 13 million shares for $331 million.

This is what is meant by the phrase "finance-based economy." Increasingly, earnings for these companies are only tangentially related to their core business. For many of these companies, say, a restaurant operator, or a network equipment seller, how its "business" is going is only a sideshow. Many companies today are essentially hedge funds masquerading as businesses.

So, how's business? It really doesn't matter. Ask CKR about the market instead.

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No positions in stocks mentioned.

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