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TIS THE SEASON

Think there are no catalysts for the slot guys after this run up in the stocks?

 

 

We are now entering that time of year where the state legislatures “fix” their budgets.  Their options:  a) raise taxes, b) cut spending, c) postpone the pain via accounting tricks and debt, or d) legalize/expanding gaming.  Republicans don’t like a) and haven’t been good at b), Democrats abhor b), which leaves c) they all do all of this, and d) is a more likely option this year and next.

 

Dare we say that gaming is now the more politically palatable option?  In many cases, this is true.  In this politically charged atmosphere, gaming legalization/expansion may be the easiest road to raising revenues that both Democrats and Republicans can get behind.

 

This is not a new theory.  Historically, we’ve seen gaming expansion in times of big state budget deficits.  New and expanded markets are a big part of the 3-5 year bull thesis on slot suppliers.  With the new year upon us, we are now entering the legislative season in many states and budgets need fixing.  We think the upcoming headlines will be positive for slot suppliers.  This is why we found the recent downgrades by Goldman and JPM interesting.  With expectations fairly low and estimates looking reasonable, there shouldn’t be any negative surprises.  Headlines could drive the stocks over the near term.

 

We count as many as 11 states that are considering some sort of gaming expansion in 2011 and while most might not pass this year, most will expand over the next few years.  Here is the list:

 

 

Delaware

Bill: HB 194--3 gaming venues--Del Pointe Resort and Racino in Millsboro; Old Georgetown harness track off Route 9; Delmar International Speedway off Route 13 in Delmar

Est Slots: 6,000

Status: House Gaming and Parimutuels Committee to decide bill hearing date

Timing: 2011

Convene Session Date: Jan 11, 2011

Adjourn Session Date: June 30, 2011

 

Florida

Bill: 4-5 Las Vegas-style casinos in Miami, Tampa, and 3 other locations; 8-10% tax rate; possible developers: LVS, CZR, MGM, PENN, GENTING

Est Slots: +8,000

Status: Bill sponsored by Sen. Dennis Jones (R) will be ready in late January; "50-50 chance of Legislature approving casino games this year"--Senate President Mike Haridopolos

Timing: 2011; earliest date for casino opening is 2015

Convene Session Date: Mar 8, 2011

Adjourn Session Date: May 6, 2011

 

Illinois

Bill: 4 riverboat casinos: 3 near Chicago, 1 in Danville; 4,000 position land casino in Chicago; 1,200 slots at 4 tracks near Chicago; 900 slots each at two St. Louis area tracks; Existing casinos to expand from 1,200 to 2,000 gaming positions in 400-position increments

Est Slots: 7,000

Status: Stalled in the House on Jan 11; process would need to begin all over

Timing: June/July 2011

Convene Session Date: Jan 12, 2011

Adjourn Session Date: Meets year-round

 

Kansas

Bill: HB 2002--casino and racetrack slots in Southeast Kansas

Est Slots: 1,500

Status: In current form, unlikely to pass given the large GOP majority in both Houses; 1) minimum casino investment at $100MM, 2) slot payout at 58%

Timing: 2011

Convene Session Date: Jan 4, 2011

Adjourn Session Date: Late May 2011

 

Massachusetts

Bill: 3 resort casinos, 2 racetrack slot parlors (Casino resorts located in Western, central and Greater Boston areas; likely racetracks--Plainridge Racecourse, Raynham Park)

Est Slots: 5,000

Status: Passed state legislature in August but Gov Patrick disapproved of slots at tracks. Revisions expected this year.

Timing: 2011

Convene Session Date: Jan 5, 2011

Adjourn Session Date: Meets year-round

 

Maryland

Bill: Slots at Prince George's County's Rosecroft harness racing track

Est Slots: 750

Status: Very preliminary; needs House and Senate approval

Timing: Referendum Nov 2012

Convene Session Date: Jan 12, 2011

Adjourn Session Date: Early April

 

Minnesota

Bill: Racino Act--slots each at Canterbury Park and Running Aces; Governor Mark Dayton proposed Mall of America casino

Est Slots: 4,000

Status: Sen. Dick Day (R) says the Racino Act is still shy of 20 votes in the House.

Timing: 2011

Convene Session Date: Jan 4, 2011

Adjourn Session Date: May 23, 2011

 

New Jersey

Bill: 2 boutique casinos

Est Slots: 2,000

Status: Waiting for Gov Christie's signature

Timing: Jan/Feb 2011

Convene Session Date: Jan 12, 2011

Adjourn Session Date: Meets year-round

 

New York

Bill: Mohegan Sun-style casino in the Catskills; to be operated by Stockbridge-Munsee Band of Mohicans

Est Slots: 5,000

Status: Secretary of the Interior Ken Salazar has 45 days to approve or reject the gaming compact. If he takes no action, the gaming compact becomes binding.

Timing: Feb 2011

Convene Session Date: Jan 5, 2011

Adjourn Session Date: Meets year-round

 

Ohio

Bill: Slots at 7 racetracks

Est Slots: 17,500

Status: Passed Legislature and ready for implementation but facing outside legal issues (Ohio Supreme Court/ Let Ohio Vote.org). Gov Kasich is looking over slot proposal and will decide whether to seek a court order to determine authority over the matter.

Timing: 2011

Convene Session Date: Jan 3, 2011

Adjourn Session Date: Meets year-round

 

Texas

Bill: 4 "destination resort" casinos (Dallas, Harris county, Bexas county, South Padre Island); Slots at 13 racetracks and 3 federally recognized Indian reservations;

Est Slots: +15,000

Status: Texas Gaming Association expects to release financial projections in late Jan. No planned date for introduction of bill.

Timing: 2011

Convene Session Date: Jan 11, 2011

Adjourn Session Date: May 30, 2011

 

 

 


TALES OF THE TAPE: CAKE, CMG, JACK, YUM, BWLD, PFCB, CPKI, SBUX, PEET, MCD

News/price action callouts from restaurant space yesterday:

  • CAKE down on big volume in reaction to its pre-announcement of 4Q10 System wide comps of +0.9% the company noted 4Q10 comps would have been +2.1% ex weather/calendar-shift.
  • CMG reiterated unit growth guidance for 2011 of 135-145 units and no comments on current trends.
  • JACK noted Jack-in-the-Box and Qdoba F1Q11 comps were above 1% and 6%, respectively, and the high-end of the guidance range.  Management also affirmed its expected completion of reimaging program by year-end 2011 and refranchising by 2013.
  • YUM continues to focus on its Emerging Markets strategy reiterated its 2011 EPS growth targets.
  • The CAKE news took BWLD, PFCB and CPKI down on accelerating volume.
  • SBUX, PEET and CMG also struggled yesterday on accelerating volume.
  • SBUX price target raised from $33 to $37 at UBS.
  • MCD: Interesting story in the Wall Street Journal this morning on MCD Japan adding calorie-laden menu items to its menu.

TALES OF THE TAPE: CAKE, CMG, JACK, YUM, BWLD, PFCB, CPKI, SBUX, PEET, MCD - tott part 1

TALES OF THE TAPE: CAKE, CMG, JACK, YUM, BWLD, PFCB, CPKI, SBUX, PEET, MCD - tott part 2

 

Howard Penney

Managing Director



Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 12, 2011

 

As we look at today’s set up for the S&P 500, the range is 25 points or -0.39% downside to 1269 and +0.62% upside to 1282.  Equity futures are trading above fair value in a continuation of Tuesday's modest gains with early focus centered on Portugal's bond auction.  In focus today, Treasury Secretary Geithner will speak about China ahead of President Hu's visit to the US.

 

MACRO DATA POINTS:

  • 8:30 a.m.: Treasury’s Geithner speaks on China
  • 8:30 a.m.: Import price index
  • 8:30 a.m.: WASDE grains, commodities
  • 8:30 a.m.: USDA quarterly grains
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: Fed’s Richard Fisher speaks on monetary policy in New York
  • 1 p.m.: U.S. sells $21b 10-yr notes reopening
  • 2 p.m.: Fed releases beige book economic survey
  • 2 p.m: Monthly Budget Statement
  • USDA broiler eggs set, Jan. 12

TODAY’S WHAT TO WATCH:

  • Big 5 Sporting Goods (BGFV) prelim 4Q adj. EPS, rev. miss ests.
  • Evergreen Solar (ESLRD) sees $340m charge to close Devens mfg plant, affecting 800 workers
  • Lululemon Athletica (LULU) sees 4Q rev. $237m-$239m, up from $210m-$215m forecast in Dec. vs est. $221.6m
  • Synnex (SNX) high end of 1Q adj. EPS forecast above est.
  • Zale (ZLC) same-store holiday sales rose 8.5%  

PERFORMANCE:

  • One day: Dow +0.30%, S&P +0.37%, Nasdaq +0.33%, Russell 2000 +0.40%
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +0.82%, S&P +1.34%, Nasdaq +2.41%, Russell +1.42%
  • Sector Performance - (6 sectors positive) - Energy +1.66%, Materials +0.81%, Healthcare +0.50%, Financials +0.40%, Industrials +0.37%, Utilities +0.14%, Consumer Disc (0.03%), Consumer Spls (0.08%), Tech (0.16%)  

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 552 (+476)  
  • VOLUME: NYSE 943.92 (-1.20%)
  • VIX:  16.89 +3.71% YTD PERFORMANCE: -4.8%
  • SPX PUT/CALL RATIO: 1.90 from 1.59 (+19.55%)  

CREDIT/ECONOMIC MARKET LOOK:

 

Treasuries snapped a three-day winning streak with the modest bounce in stocks and supply impact.

  • TED SPREAD: 16.22 +0.406 (2.568%)
  • 3-MONTH T-BILL YIELD: 0.15%    
  • YIELD CURVE: 2.77 from 2.73

COMMODITY/GROWTH EXPECTATION:  

  • CRB: 331.46 +1.41%
  • Oil: 91.11 +2.08% - trading -0.19% in the AM
  • Oil Trades Near One-Week High as Alaska Pipeline Outage May Last Five Days
  • COPPER: 434.90 +1.98% - trading +0.67% in the AM
  • Copper Rises for a Second Day on Efforts to Contain European Debt Crisis
  • GOLD: 1,382.25 +0.79% - trading +0.02% in the AM
  • Gold Imports by India Surge to Record as Price Is `Not a Factor,' WGC Says

OTHER COMMODITY NEWS:

  • Soybeans Gain Before USDA Report Forecast to Show Lower Stocks; Corn Rises
  • Coffee Climbs for Third Day as Indonesia, Vietnam Rains May Tighten Supply
  • Gold May Rise as European Sovereign-Debt Crisis Spurs Demand for a Haven
  • Latex to Plummet as Weather Improves, World's Biggest Glove Maker Predicts
  • German Tainted-Food Scandal Widens as China Halts Imports of Pork Products
  • Incitec Moranbah Plant May Be Delayed by Queensland Floods, Citigroup Says
  • Rice Growers in the U.S. May Switch Some Area to Soybeans, Federation Says
  • Cotton Advances to Three-Week High as Deadly Floods Damage Australian Crop
  • China Freeze Hurts Sugar Cane, May Cut Production in Guangxi, Top Grower
  • Aluminum Stockpiles in Japan Advance 6.5%, First Increase in Four Months
  • Grain Exports From Brisbane Are Halted After Port Closes, GrainCorp Says

CURRENCIES:

  • EURO: 1.2969 +0.22% - trading +0.02% in the AM
  • DOLLAR: 80.846 -0.04%% - trading -0.10% in the AM

EUROPEAN MARKETS:

  • European Markets: FTSE 100: +0.59%; DAX: +1.46%; CAC 40: +1.59%
  • European markets opened higher and have modestly extended gains after the Portuguese debt auction.
  • Peripheral equity markets led the regions advance, Greece up +3.86%, Spain +3.84 and Italy up 2.72% - Portugal is up +0.98%
  • Peripheral debt spreads have stabilized.
  • All 18 sectors trade higher led by banks +4.9% and basic resources +2.3%, whilst personal & household product and autos +0.2% lead laggards.
  • Germany 2010 GDP +3.6% vs consensus +3.6% and prior (4.7%)

ASIAN MARKTES:

  • Asian Markets: Nikkei +0.02%; Hang Seng +1.54%; Shanghai Composite +0.62%
  • Asian markets rose today as concerns ease about European debt and a buoyant US market.
  • Local property stocks and Chinese resource issues led Hong Kong’s rise.  Alibaba.com rose 4% on speculation that its parent and Baidu will invest $100M in Sina’s microblog product.
  • China rose, with property shares going up on news that pending proposed property taxes will not apply to all transactions.
  • Taiwan went up 0.38%.
  • Miners lifted Australia to a small rise on predictions of higher commodity prices, though companies directly hurt by the floods fell.
  • Japan finished almost literally flat. Financials went up on foreign buying and short-covering and trading houses gained on higher commodities prices. Exporters went up on a weaker yen.
  • Japan December M3 +1.8% y/y. December M2 +2.3% y/y. November trade surplus ¥259.7B, (46.6%) y/y. November current account surplus ¥926.2B vs consensus ¥977.7B.

 


STORMY SAILING

“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.”

-Abraham Lincoln

 

I recently pulled off the shelf Doris Kearns Goodwin’s book "Team of Rivals" which looks at the political genius of Abraham Lincoln.  It’s an amazing account of how Lincoln, as president, was able to bring his “disgruntled opponents” together to complete the task of saving the Union.  As Lincoln did, Barack Obama must pull together a team of rivals and win the respect of his competitors to help us navigate the stormy seas ahead. 

 

If the United States’ economy were a vessel, it could be said that she has held up quite well over the past couple of years.  Through the Great Recession, government bailouts, flash crashes, and the most contentious political climate in some time, the United States keeps cruising. 

 

How much secular damage was sustained in the “economic storm” or was simply deferred by the Fed grabbing its cavernous bucket and bailing water from inside the ship back overboard is unknown. 

 

Consumers don’t know, politicians don’t know, CEO’s don’t know, and you can bet a dollar, I don’t know.  What I can tell you with certainty is that at some point the structural problems with the U.S. economy need to be addressed sooner rather than later.  Fans of Big Government enjoy preaching the folly of applying long term solutions to short term problems. 

 

While not ideal, clearly long term solutions that ensure economic progress in the long term, notwithstanding short term pain, are preferable to short term solutions that never address the long term, leaving us and our posterity to forever bail buckets of water over the side of the ship while we hope and pray for a miracle. 

 

All the while, the long term problem grows larger, but politicians and policymakers keep their jobs.  The mounting of debt upon debt by governments around the globe is leading to inflation on a global basis. 

 

I would be remiss to ignore the various supply-side shocks that have occurred around the world related to weather and other factors.  However, simply stated, the inverse correlation between the dollar and commodities denominated in dollars remains high and the U.S. consumer is feeling the effect of that.  U.S. consumers are not alone; India, Brazil, China and many other countries around the world have seen inflation break out to the upside recently. 

 

Food inflation, in particular, is causing significant social unrest in some countries which is drawing political attention.  India’s government has adjourned to address the problem of rising food costs there and Algeria saw riots yesterday over food costs.  For now, consumers’ wallets in the U.S. have been relatively shielded from the impact of food costs increasing over the past 6 months.  However, if and when these costs are passed along in addition to the backdrop of high gas prices, it could greatly impair the “recovery” that is now consensus.

 

Today, Thailand joined the party and raised its benchmark raised interest rates for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation.  And this morning, officials from Mozambique to China are signaling their belief that rates in their respective countries will be raised in the near-term. 

 

On a more granular note, one company that will begin to feel the pain of higher food inflation in 2011 is McDonald’s and I don’t believe the bullish consensus has fully accounted for this.  Last year McDonald’s saw its basket of commodities decline by 5-6% and, accordingly, restaurant level margin rose by over 200bps from lower food costs alone.  I have other concerns which are more structural in nature and those will be addressed, in detail, on a conference call with clients on Friday. For qualified prospective institutional subscribers, please email for more details.     

 

Also on Friday, the Hedgeye Macro team will be discussing its three themes for the first quarter of 2011 and they are:

 

(1)    American Sacrifice - We are bullish on the USD and we will focus on how the Q1 macro calendar of events (Ron Paul auditing Bernanke, midterm election spending cut promises, the debt ceiling debate and debt/deficit commission decisions) are supportive of a strong USD as the country begins to address its long-term fiscal problems.

(2)    Trashing Treasuries – We are bearish on US Treasuries.  The breakout in global inflation, sovereign, State, and municipal risk and rising global interest rates are a problem for treasuries.

(3)    Housing Headwinds Phase II – We remain bearish on housing and continue to believe that a decline in home prices will be a governor on consumer consumption in 2011.  We will update our view on how much further home prices have to fall over the next 12-months according to the supply and demand issues facing the industry.

 

It’s now just under two hours before the market opens and equity futures are trading higher in a continuation of yesterday’s modest gains with the early focus centered on Portugal's bond auction which went better than expected.  Also overnight, bullish sentiment increased to 57.3% from 54.5% in the latest Investor's Intelligence poll, while the ABC consumer comfort index improved to -40 from -45; it is now at its highest level since 2008. 

 

While all of this is good news for equity markets, it’s an ominous sign that all of the early dogs of the S&P 500 so far this year (YTD price changes below) are predominately consumer names that have been impacted by either weaker-than-expected consumer spending or inflation pressuring margins or a combination of both.  I expect this list to grow as debt mounts, sovereign debt concerns accumulate, and inflation is passed through to the consumer.

 

SCRIPPS NET: -7.79%

MACY'S: -8.14%

TARGET: -8.22%

GAP: -8.22%

ABERCROMBIE & FITCH: -8.24%

VULCAN MATERIALS: -8.70%

GAMESTOP: -11.76%

FAMILY DOLLAR STORES: -13.02%

CONSTELLATION BRANDS: -13.18%

SUPERVALU INC: -21.18%

 

I’m not the only one using a “stormy” metaphor today as the snowstorm continues outside and CNBC started Squawk Box today with the Doors classic song “Riders on the Storm.” 

 

“Into this house we're born
Into this world we're thrown
Like a dog without a bone
An actor out alone
Riders on the storm”

 

Function in disaster; finish in style

Howard Penney    

 

STORMY SAILING - EL chart of day 1.12.11


MPEL: AN ENCORE PERFORMANCE?

Well, not quite Wynn Encore but MPEL should put up its second straight estimate beating quarter.

 

 

The stock has been on a tear and justifiably so.  Macau is booming and MPEL has held its own in terms of market share.  The Galaxy Cotai is a big overhang and MPEL is at risk.  However, Q1 estimates also look low.  For Q4, we are expecting MPEL to deliver another strong quarter, beating Street expectations.  We project revenues of $776MM and EBITDA of $143MM, 8% and 22% ahead of consensus, respectively.

 

We estimate that City of Dreams (CoD) will report net revenues of $504MM and EBITDA of $111MM, ahead of consensus by 18% and 14%, respectively.  Below are some of the details behind our estimates:

  • VIP net table win of $328MM
    • Assuming 15% direct play, we estimate that CoD’s Rolling Chip (RC) grew 58% YoY reaching $14.7BN.
    • Hold was above normal at 3.1% - much higher than last year’s low 2.4% hold
  • Mass table win of $127MM, up 70% YoY and 14% sequentially
  • Slot win of $36MM
  • Non-gaming revenues of $43MM and promotional expense of $29MM
    • Non-gaming expenses of $17MM
  • Variable expenses of $316MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $60MM compared to $55MM in 3Q2010 – we’re assuming some ramp for the Dragone show

For Altira, we estimate net revenue of $243MM and EBITDA of $40MM,--20% and 30% above consensus, respectively.

  • VIP net table win of $324MM
    • We estimate that Altira’s RC volume grew 31% YoY reaching $11.65BN - the best quarter since pre-CoD opening
    • Hold was normal at 2.8% but much higher than last year’s low 2.3% hold
  • Mass table win of $23MM, more than double last year’s number.  We understand that Altira has introduced an SJM-like model on its floor for Mass – offering large rebates to players.
  • Variable expenses of $180MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $21MM

Other Stuff:

  • Mocha slots: $29MM revenues and $8MM Of EBITDA
  • Depreciation: $63MM
  • Amortization: $19MM
  • Interest expense: $28MM

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