Favorable mix in Macau, higher gaming volumes in Singapore, and better cost controls drove revenue and EBITDA higher than our Street high estimates.



Not much to say other than Steve Wynn must be kicking himself again for not bidding on Singapore.  Macau wasn’t too shabby either.  Las Vegas was a disappointment but who really cares other than MGM shareholders? 



Venetian Macau revenues were $15MM above our estimate and EBITDA was $16MM better

  • The revenue beat vs. our numbers came from
    • Mass revenues coming in $9MM better
    • Retail and other was $5MM better
    • F&B was $2MM
  • EBITDA was boosted by better fixed cost controls.
    • We estimate fixed costs were $91MM down $1MM from 2Q and 11% YoY. We assumed that Venetian has lapped their ability to cut costs and that fixed costs would increase to $95MM.
    • $5MM of lower commission payments to junkets due to a higher direct play mix which were completely offset by $6MM in higher taxes on better revenues
    • Bottom line variable expenses were in-line with our estimate despite better revenues
  • Direct play was 23% vs. our estimate of 21%
  • High Mass hold benefited property revenues by $21MM and higher than normal hold benefited VIP gross revenues by $17MM and we estimate that the impact on EBITDA was about $19MM

Not much to add on Sands Macau as revenue and EBITDA were exactly in-line with our estimates

  • Direct play was 14%, a few points above our estimate
  • High hold on VIP helped revenues and EBITDA by $9MM and $4MM, respectively
  • Slightly higher gross gaming revenues were offset by higher rebates which were 1% of RC
    • Could be partly due to higher direct play
  • Slightly higher non-gaming revenues were offset by higher promotional expenses
  • Implied fixed costs increased 2% YoY to $47MM

Four Seasons revenues were $22MM above our estimate and EBITDA was double our estimate

  • Why was our revenue number so off?
    • Net VIP revenues were $15MM higher than we estimated due to a rebate rate of only 83bps vs. a rebate rate that was 101bps last quarter on hold of 3.07% and a rebate rate of 94bps in 1Q2010 on a hold of only 2.5%.  The low rebate rate accounted for $10MM of the revenue difference while VIP gross revenues were also $5MM higher
    • Retail & other revenue was $7MM above our estimate; basically doubling QoQ
  • Why was EBITDA so off?
    • Variable expenses were only $2MM higher than we estimated on a revenue beat of $22MMM since the lower rebate brought down the total commission rate
    • Non-gaming margins are very high and non-gaming revenues were $6MM higher
    • Fixed expenses were only $20MM vs our estimate of $25MM
    • Put another way, last quarter, FS printed a $33MM EBITDA quarter with gross gaming win of $181MM and this quarter on $182MM of gross gaming win, they printed $49MM
  • Direct play was only 42% vs. our estimate of 50%, and therefore hold was actually not low as we had estimated but high at 3.08%
    • High hold boosted revenues by $11MM and EBITDA by $2MM
  • Mass play was $2MM higher than we projected but hold was also off the charts at almost 30%
    • High hold helped revenues by $4MM and EBITDA by $2MM

MBS reported revenues were $22MM higher and EBITDA was $6MM better

  • Bottom line – handle and drop were stronger than we estimated and beat our numbers despite low hold
  • Low hold depressed VIP gross revenues by $15MM and EBITDA by $6MM
  • Rebates were 1.34% this quarter or $135MM (basically difference between calculated gross gaming revenues and reported net casino revenues)
  • Fixed expenses were $145MM

Las Vegas net revenues were $19MM higher than we estimated but EBITDA was $10MM below our estimate

  • Casino revenues were $7MM below our estimate and rooms revenues were $4MM below our estimate, but F&B, retail and other were $30MM better, while promotional was exactly in-line
  • Operating expenses increased 20% YoY (Revenues- EBITDA)
  • Rebates were 3.6% of gaming revenues  and promotional expenses were 31% of gross gaming revenues
  • Added over 200 slots sequentially at Venetian


American Solitude

“However many people you may consult, you are the one who has to make the hard decisions. And at such moments, all you really have is yourself.”

-William Deresiewicz


Those were the closing sentences of a lecture that William Deresiewicz gave to the plebe class at the US Military Academy at West Point in October of 2009. The lecture was titled “Solitude and Leadership.” It was posted in The American Scholar on March 1, 2010.


The timing of this lecture was critical. It was given by an ex-Yale professor at a time in American history when leadership was failing us. Deresiewicz is a literary critic who has no qualms calling today’s Yalies “professional hoop jumpers.” He taught Yale kids for 10 years; his opinion isn’t irrelevant. Whether we like reading it this way or not, the rest of the world thinks we’re still failing. Americans need to stop making excuses for losers. America needs winners.


Winning starts by having conviction in what you do, taking a stand, and beating someone. Whether on the field or in your portfolio, you can see the score during each second of the game. Don’t blame “depressions.” Embrace adversity. Confront your opponent. You have to play this game with passion.


Winning continues by staying true to what got you to start winning in the first place. Grit, guts, and determination works for some. Patience, poise, and flexibility works for others. You, at the end of the day, have to focus on being you.


Winning becomes your culture when you inspire your teammates to walk through walls with you. You cannot do this alone. American Solitude is having as much conviction in yourself as you have in your teammates. You have to trust them if you want them to trust you.


I’m giving you my 3 cents on this today because I’ve been travelling the American roads less travelled for the better part of the last 2 weeks. I’ve been in 8 different states (Connecticut, New York, New Jersey, New Hampshire, Massachusetts, Maine, Florida and Missouri). I’ve met with a lot of different people. I’ve also spent a lot of time on my own.


American Solitude is taking the time to think. As Deresiewicz said, “solitude can mean introspection, it can mean the concentration of focused work, and it can mean sustained reading.” Solitude can also mean friendship. “Long, uninterrupted talk with another person. Not Skyping with 3 people and texting with 2 others at the same time… talking to one other person you can trust.”


Whether your solitude is an hour long conversation at an airport bar in Kansas City, Missouri with Howard Penney or speaking with someone you never have enough time to listen to, we need to make time for conversation. Attempting to observe this interconnected world from behind your trading or manic media desk is a very dangerous place.


When I get back from the road, the first thing that people tend to ask me is “what are people saying?” or “what’s sentiment out there?” As if the cosmos lined up in a way where my perfectly qualitative sample survey can be disguised as quantifiable edge. Whether it’s right or wrong, that’s Wall Street.


The #1 headline on Bloomberg this morning is “FED ASKS DEALERS TO ESTIMATE SIZE, IMPACT OF DEBT PURCHASES.” So, after creating massive disconnects in global expectations and seeing both inflation and interest rates rise this week, look at what the New York Federal Reserve is doing this morning – giving conflicted and compromised bankers a “survey” on the size and impact of Quantitative Guessing. This isn’t leadership – this is a joke.


Can you imagine if another Washington (Ron Washington, the Manager of the Texas Rangers) took a stinking survey days before game-time? What in God’s good name would his players think? Ben Bernanke has stated this plainly, so take his word for it – he has no idea what QE’s impact will be.


A better question to ask yourself is what aren’t people talking about? What’s the risk that the current market debate is about the bark on a QE tree as opposed to the burning forest of credibility in the US economic system? What if the Chinese or Japanese sell Treasuries and rates rip higher?


What people aren’t talking about on Wall Street is the crisis of leadership in this country. We’re hyper focused on what group-thinkers at the Fed will do next. At the same time, the politicized members of this conflicted institution are being held hostage to where the political wind blows. We’ve stopped thinking about re-thinking US monetary policy altogether.


I often get asked for my advice – what would I do? First, I say stop. That’s it. Just stop what these people are doing to your hard earned savings. Put that in your survey Bill Dudley. Stop. Then start to un-learn bad policy and re-learn the lessons of the US Military’s 2009 plebe class:


“We have a crisis of leadership in America because our overwhelming power and wealth earned under earlier generations of leaders, made us complacent, and for too long we have been training leaders who only know how to keep the routine going. Who can answer questions, but don’t know how to ask them. Who can fulfill goals, but don’t know how to set them. Who think about how to get things done, but not whether they’re worth doing…”


Yesterday was a win for my team. We sold volatility (VXX) on strength and we covered some shorts (XLY and HCBK) on weakness. We bought oil (USO) and we bought casino operator Pinnacle Entertainment (PNK). If the government is going to sponsor shortened economic cycles and amplified volatility, I’ll just as soon assume the position of American Solitude and trade this market proactively. Every man for himself.


My immediate term support and resistance lines for the SP500 are now 1168 and 1192, respectively. In the Hedgeye Asset Allocation Model, I now have a 61% position in Cash, 24% in Bonds, 12% in International Currency, 3% in Commodities, and 0% in both US and International Equities. In the Hedgeye Portfolio, I remain short both the US Dollar (UUP) and US Equities (SPY).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


American Solitude - AA


TODAY’S S&P 500 SET-UP - October 28, 2010

As we look at today’s set up for the S&P 500, the range is 24 points or -1.22% downside to 1168 and 0.81% upside to 1192.  Equity futures are trading above fair value in the wake of Wednesday's session which saw the S&P 500’s 5-day winning streak end.


Focus today will be further corporate earnings and weekly jobless claims.

  • Akamai Technologies (AKAM) 3Q profit, sales beat est.
  • Allstate (ALL) 3Q EPS, rev. missed ests.
  • Cavium Networks (CAVM) 3Q EPS, rev. beat ests.
  • Energy XXI Bermuda (EXXI) offers 9.5m shares of common stock, $200m convertible preferred stock.
  • Express Scripts (ESRX) sees 2010, 2011 EPS inline or above ests, 3Q rev. misses ests.
  • Las Vegas Sands (LVS US) sees 2011 Ebitda >$3b, 3Q EPS, rev. beat ests.
  • Norfolk Southern (NSC) 3Q EPS beat ests.
  • Skechers U.S.A. (SKX) said 4Q, 2011 sales will increase. 3Q rev. missed est.
  • Sourcefire (FIRE) forecast 4Q EPS, rev. below ests.
  • Symantec (SYMC): Forecast 3Q sales above est.
  • TriQuint Semiconductor (TQNT) forecast 4Q adj. EPS in-line with ests.
  • Visa (V) 4Q adj. EPS in-line with ests., sees FY2011 rev. growth 11%-15%


  • One day: Dow (0.39%), S&P (0.27%), Nasdaq +0.24%, Russell 2000 (0.38%)
  • Month/Quarter-to-date: Dow +3.14%, S&P +3.61%, Nasdaq +5.68%, Russell +4.15%
  • Year-to-date: Dow +6.70%, S&P +6.04%, Nasdaq +10.32%, Russell +12.61%
  • Sector Performance: Materials (0.92%), Industrials (0.74%), Energy (0.42%), Healthcare (0.61%), Consumer Disc (0.62%), Consumer Spls (0.52%), Utilities (0.41%), Financials +0.07%, Tech +0.29%


  • ADVANCE/DECLINE LINE: -946 (-707)  
  • VOLUME: NYSE: 1022.31 (+5.77%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Broadcom +11.66%, Devry +7.04% and Prologis +6.41%/Sprint -9.85%, Molex -7.67% and Unitedhealth -4.37%.
  • VIX: 20.71 +2.42% - YTD PERFORMANCE: (-4.47%)
  • SPX PUT/CALL RATIO: 2.15 from 1.97 +9.15%


  • TED SPREAD: 16.24 0.406 (2.564%)
  • 3-MONTH T-BILL YIELD: 0.14%    
  • YIELD CURVE: 2.35 from 2.27


  • CRB: 299.14 -0.71%
  • Oil: 81.94 -0.74% - BULLISH
  • COPPER: 377.55 -2.42% - OVERBOUGHT
  • GOLD: 1,322.55 -1.23% - BULLISH


  • EURO: 1.3771 -0.67% - BULLISH
  • DOLLAR: 78.149 +0.57%  - BEARISH


European markets:

  • FTSE 100: +1.128%; DAX +0.86%; CAC 40 +0.91%
  • Risk appetite was in evidence again early on following successive falls as a weaker dollar encouraged selective buying.
  • Mining, Retail and Technology names were the main gainers across the continent with a number of better than expected earnings adding to the improved mood among the continent's investment community.
  • Germany Oct unemployment rate +7.5% vs cons +7.4%  

Asian markets:

  • Nikkei (0.22%); Hang Seng +0.20%; Shanghai Composite (0.15%)
  • Markets closed mixed-to-little changed despite Wall Street’s decline.
  • Tokyo recouped some of its earlier losses but closed in the red following the results of a Bank of Japan meeting while in Hong Kong Bank of China rose on beating expectations.
  • Australia was lifted by strong results for ANZ Bank.
  • Insurers weighed on the Shanghai index
  • Bank of Japan keeps o/n call rate target unch at 0-0.1%. Sep retail sales +1.2% y/y. Dept-store comps (5%), convenience-store comps +12.2% 
Howard Penney
Managing Director

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The Macau Metro Monitor, October 28th 2010



According to director of DSAL, Shuen Ka Hung, the Bureau has already recommended 6,000 local workers to Sands.  About 1,800 workers attended for interviews and 40% have been successfully offered a job.  The Bureau stressed that they will continue to assist the casino operator in terms of labor recruitment.


Relating to Macau, The Communist Party of China (CPC) Central Committee's 5-year plan stressed the implementation of "one country, two systems" policies and a high degree of autonomy for the SAR.  The proposal also stated that the basic law of Macau should be strictly observed and all-out efforts should be made to support the chief executive and the local government.


Conclusion: PFCB’s lowering of guidance is realistic and it is fitting that the stock has reacted as it has.  While top-line trends were soft in the third quarter, management commentary indicates that October saw improvement on a two-year basis as both concepts.

PFCB’s earnings results were on the lower side of expectations and the stock traded down accordingly after management lowered their full-year outlook for 2010 EPS to $1.95 from $2.00.  As compared to results seen by the majority of its peers thus far, the third quarter was clearly less than what investors were anticipating. 


Firstly, the Bistro posted an improvement in comps and operating margins.  The +2.3% comparable sales number was less than expectations but, more importantly, the 0.5% run-rate given for October on the earnings call implies that two year trends in October, -2.9%, have improved slightly from the -3.1% two-year average trend in the third quarter.  In terms of restaurant-level margins, the Bistro saw a year-over-year increase of 130 bps but the sloppiness that Co-CEO Bert Vivian suggested during the 2Q10 earnings call would impact the labor line may have compounded deleveraging from soft sales as the company experienced labor inflation in the quarter.  Nevertheless, margin performance was strong this quarter at the Bistro.  Management plans on raising prices “roughly 1 to 2%” at both concepts in the early part of 2011 to offset slightly higher commodity and labor costs.  How this impacts traffic is clearly a concern for investors heading into next year.  The unit growth outlook for the Bistro is for three-to-five new units in 2011, roughly in line with the four scheduled to be open by end of year 2010.


Pei Wei comps disappointed by a wider margin than those at the Bistro, coming in at +0.8%.  September comps drove this downside trend with -1.3% growth in comparable sales (-4.3% traffic!).  Running the LTO in October this year, versus September last year, is helping traffic in October by approximately 4%, according to management commentary during the Q&A session today. The +1.5% comp at Pei Wei in October is indicating a significant boost from trends in the third quarter, according to the run rate cited by management, and implies acceleration in trends on a one and two-year basis.  However, the general outlook is likely also focused on how traffic levels at Pei Wei (and the Bistro) respond to the 1-2% price increase management is planning to implement “in the first part of next year”.   Investors’ perception of sustainability, or the lack thereof, may be reflected in the stock price reaction today.  While comps are positive in 70% of states where Pew Wei operates, the most significant states in terms of exposure – CA, AZ, TX and others – are underperforming. There is room to improve on the top line for Pei Wei.  The unit growth outlook for Pei Wei is for between ten and twelve units in 2011 versus two for 2010. 


Overall, there were several other interesting points of note emerging from the earnings call:

  • 4Q10 guidance was lowered to $1.95 and G&A pressure was cited as the primary for this revision (along with the reality that 4Q making up the slack is a stretch)
  • FY11 guidance expects slight margin expansion and 10% EPS growth, which is in line with the three-to-five year plan outlined by Vivian during the presentation he gave on September 29th.  Of course, this guidance is contingent on sales holding up.  The need for sales performance and pricing is underlined by the unfavorable cost outlook provided by Vivian on the call
  • Cost pressure is clearly a concern for PFCB over the intermediate term.  While this company has one of the more straight-talking management teams in the space, hearing how “cost pressure” was going to make 2011 from the end of 1Q on “a little bit of a battle for us” was interesting
  • 4Q results will be adversely impacted by the Christmas calendar shift (Saturday this year) although management played down the significance
  • As we can see from the SIGMA chart below, margin performance in the third quarter was strong and is likely to continue in the fourth quarter.  However, top line performance remains the top priority for investors and PFCB
  • The strategy of raising price at a time when traffic growth is fragile is a risky one.  However, with food prices where they are the company has few choices
  • Labor and cost of sales are two of the primary factors Vivian cited as headwinds for FY11 EPS growth (and the reason why the company is taking price)
  • I would like more specificity as to how management is going to address the slowing trends that seem, on the evidence of this most recent quarter at least, to have bifurcated from some peer casual dining companies



Howard Penney

Managing Director


NA shipments were weak but everyone knew that. The miss was driven by the black box that is systems and international shipments.



The bottom line is that BYI missed consensus and while it doesn't change our long-term outlook for the sector, a miss is a miss.  The good news is that systems sales and international shipments drove the miss and they are notoriously lumpy and difficult to model.  That is why annual guidance for fiscal 2011 (ended 6/30/11) is still in-line with consensus estimates.  However, with the back half EPS higher than the first half, BYI is now a show me stock that has to deliver to regain credibility.

There seems to be something lost in communication between BYI’s executives and the investor community in terms of guiding to appropriate expectations for FQ12011.  BYI suggested that absent some slippage of systems revenues into 2Q, their results were in-line with their expectations, which seems to have been around $0.42 vs. the Street at $0.46.  I suppose therein lies the problem – because “the Street”, we included, has no real way to model systems revenues outside of company guidance and the company provides little color on international box sales.  Hence, the miss versus our estimate for the quarter.


So let’s start with the BAD stuff this quarter

  • Systems:  they missed our revenue number by $11MM and our gross margin number by $7MM
    • Was anyone was thinking $40-handle here? – only once has BYI reported a systems quarter under $51.5MM since September 2007 ($47MM in June 09).  So if mid 40’s was management’s expectations, they certainly didn’t communicate that, especially when guiding to 5% growth in FY2011.
  • Game equipment revenues missed our expectations by $3.4MM and gross margin by $2MM
    • We’re probably in the minority here but they actually exceeded our unit expectation to North America by 50 units but International shipments were more than 500 units below our estimate
    • While we didn’t count any Maryland units in the Q, its good to know that they were participation shipments which will benefit future quarters
    • BYI provides very little color on international shipments which makes it difficult to model on a quarterly basis.  The only guidance we saw was shipping more units to international markets in 2011 than 2010 given that 1/3 of their shipments to Italy will be for sale and their entrance into Australia.  Both Italy and Australia are heavily weighted to the F4Q2011.

The Good

  • Gaming operations
    • Apparently Cash Spin is doing so well, some will argue that that is what prompted the timing of WMS’s lawsuit
    • Despite a sequential decline in footprint, gaming operations achieved a record quarter
    • Exceeded our estimate by $1MM on revenues and $1.5MM on gross margin
  • Despite the miss, the FY2011 guidance range of $2.05-2.30 still bookends the Street at $2.23 and us at $2.27

Other thoughts

  • They didn’t try to save the quarter by cutting SG&A or R&D, both of which came in above our estimate (by $2MM in aggregate)
  • D&A was very low though – we thought that the net new premium placements would cause D&A to start growing but maybe it is just due to their overall base shrinking and perhaps them investing their capital more wisely.

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