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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

Extrapolating Asia… The Warning Signs Continue to Mount

Conclusion: Recent trends and data points out of Asia lend support to our generally negative outlook for equities globally.

 

As a quick refresher, we are generally bearish on equities as an asset class over the intermediate-term TREND for these three reasons: 

  1. Growth is slowing globally;
  2. Inflation is accelerating globally; and
  3. Interconnected Risk is compounding (Sovereign Debt Dichotomy, Housing Headwinds, and US State & Local Government Budget Headwinds). 

The bulk of the latest data out of Asia supports this three-pronged investment thesis. Below we’ll go through each prong individually in an attempt to extrapolate data points in the context of key themes and trends.

 

Slowing Growth: 

  • Chinese Export and Import growth slowed sequentially in December to +17.9% YoY and +25.6% YoY, respectively. While high-teens and mid-twenties growth rates is nothing to scoff it, they do represent meaningful slowdowns on the margin, falling (-1700bps) and (-1210bps), respectively.
  • Chinese New Loan growth came in at +480.7B yuan in December; while a sequential slowdown, the December number confirms that Chinese loan growth exceeded the government’s full-year target of $7.5T yuan in 2010 by 426.9B yuan. The key takeaway as it relates to slowing growth is that Chinese monetary authorities will be more inclined to step up efforts to limit broad loan growth and monetary expansion going forward. We’re starting to see this implemented via Chinese regulators imposing bank-specific lending quotas w/ potential reserve requirement hikes for non-compliant institutions.
  • Alcoa Inc. said yesterday that Chinese aluminum demand growth will fall (-600bps) to +15% YoY in 2011. This is a meaningful company-specific data point in that aluminum is widely used in property development and automobile manufacturing – two sectors that have helped buoy the Chinese economy since the end of the global recession. 

Extrapolating Asia… The Warning Signs Continue to Mount - 1

 

Accelerating Inflation: 

  • A proxy for Asian COGS, South Korean PPI accelerated in December to +5.3% YoY vs. +4.9% YoY in November.
  • Indian Prime Minister Manmohan Singh convened a meeting with his cabinet today to brainstorm ways to corral accelerating food inflation that’s severely impacting roughly 66% of his citizenry (828 million Indians live on less than $2 per day). In the past 15 years, Indians have voted out two national governments primarily as a result of uncontained inflation. India holds elections in nine states over the next 18 months and the latest polls have Singh’s coalition losing 42 seats the upcoming general elections. This essentially translates to rising political pressure on the central bank to raise interest rates and rein in its liquidity expansion policies – the both of which would be headwinds to Indian growth over the intermediate term.
  • The floods in Australia continue to worsen, adding supply-side inflationary pressure to the prices of coal, cotton and sugar globally. 

Extrapolating Asia… The Warning Signs Continue to Mount - 2

 

Compounding Interconnected Risk: 

  • Yesterday, China came out in support of distressed Euro-area economies and debt issuers. Vice Premier Li Keqiang pledged accelerated purchases of Spanish debt to go alongside the blanket statement of support. This morning, Japan came out with a similar message, pledging to purchase upwards of 20-25% of the European Financial Stability Facility’s (EFSF) debt issuance that is to be auctioned this month. China and Japan’s affirmations of support are in line with the broader trend we are seeing across Asia of late; the region’s buyers accounted for 21.5% of the 5Y debt issued by the EFSF on January 5th, up from the ~4% average since December 2008. In spite of the positive market reaction, we caution that you avoid the media hoopla and realize this for what it is – rising bond yields are enticing marginal buyers. Everything has a price. As we have seen many of times before with “positive developments”, the PIIGS’s collective risk premium has not gone away. We recommend shorting any strength in the euro and in Spanish and Italian equity markets on this news. 

Extrapolating Asia… The Warning Signs Continue to Mount - neu

 

All told, we’re seeing no signs of abatement from Asia regarding our three-pronged global macro outlook. At a point, the overwhelming complacency and suspension of disbelief that has driven US equity markets to cyclical highs will be replaced by actual fundamentals – the bulk of which we believe are deteriorating sequentially.

 

Darius Dale

Analyst


R3: WMT, SKX, JOEZ, PUMA

R3: REQUIRED RETAIL READING

January 11, 2010

 

  

 

RESEARCH ANECDOTES

  • Add Wayne Gretzky to Skecher’s roster of aging former hall of fame athletes signed on to market the company’s Shape-Ups fitness footwear.  While the company is clearly aiming to build some sort of image of authenticity in the athletic space, we still wonder if targeting middle-aged men is the demographic the company needs to sell through its bloated inventory position.
  • In a rare move, Wal-Mart is taking its campaign to open a store in Manhattan to the people.  The company debuted a website, www.walmartnyc.com, in an effort to educate the people of New York about the benefits of having the retailer open stores within the city limits.  The site also features the results of a recent poll which suggests 71% of New Yorkers want Wal-Mart in NYC. 
  • Going “green” may not be as important now that the economy has stabilized.  According to a Harris Poll, 36% of American’s are concerned about the planet they are leaving behind, down from 43% who said so in 2009.  Additionally,  33% of those polled now plan to purchase local produce which marks a 600 bps drop from 2009 results.

OUR TAKE ON OVERNIGHT NEWS

 

Puma Soon to Release BodyTrain - Puma is ready to tone things up for spring with BodyTrain, the women’s toning collection that had its public debut this past weekend in New York after a soft launch pre-holiday. According to the Herzogenaurach, Germany-based company, the shoes were tested at the Chemnitz University of Technology’s Human Locomotion Department and offer 11 percent more muscle activation than traditional walking styles. The shoes use the company’s BioRide rocker outsole, which features flex grooves to allow a natural stride. Two styles from the collection — the $90 BodyTrain Mesh, an athletic sneaker style; and the $90 BodyTrain LS Nbk, a lifestyle-oriented version in nubuck — are available at Lady Foot Locker and Puma retail locations. <WWD>

Hedgeye Retail’s Take:  Definitely an improvement in aesthetics vs. many 2010 toning styles but we wonder how long the $90 price point will hold in an extremely competitive toning marketplace. 

 

Ugg Releases Anti-Counterfeiting Results - In 2010, Deckers Outdoor Corp.’s anti-counterfeiting activities gave crooks reason to be afraid. The company on Monday issued preliminary results surrounding its anti-counterfeiting efforts on behalf of its Ugg Australia brand. Included in the data is information on the single largest seizure of fraudulent Ugg product to date: 244,648 pairs of counterfeit Ugg product seized on Dec. 23 in the Fujian Province in China. In all, 118 raids were conducted in 2010. Not including the Dec. 23 enforcement activity, 154,829 pairs of counterfeit Ugg-branded products were seized in 2010, a 245 percent increase over 2009. During the year, the company also successfully pursued a course of action that resulted in the closure of 4,783 websites that sold fake products, and removed 30,444 eBay listings that offered counterfeit goods.<WWD>

Hedgeye Retail’s Take: In a case of proactive management, DECK certainly didn’t wait for the eBay/Tiffany’s verdict to protect their greatest asset. Retailers should and will take notice of one of the more successful examples of a retailer protecting their brand with increasing success – after ‘how,’ one has to ask just ‘how much’ such insurance/enforcement costs.

 

Joe's Jeans to Pay workers $158K - Joe’s Jeans Inc. reached an agreement with the U.S. Labor Department to pay $158,952 in back wages to 110 workers at one of the company’s Los Angeles contractors. According to the Labor Department’s Wage & Hour Division, the contractor, Angel’s Finishing Inc., did not pay its workers the appropriate minimum wage and overtime required by law. Instead, Angel’s Finishing paid on a piece-rate basis and did not record weekend working hours, the agency said. The contractor worked solely for Joe’s Jeans, based in City of Commerce, Calif.  <WWD>

Hedgeye Retail’s Take:  Note to company. If you manufacture stateside, you must pay workers appropriately.  Fashion denim remains one of the few niche apparel products with a dominant manufacturing base in LA.

 

Bluefly invests in Prescription Eyewear - Bluefly Inc. this spring will branch into a second e-commerce business — prescription eyewear. The New York-based online retailer of discount designer fashion has entered into a joint venture with A+D Labs, a marketer of fashion eyewear, to form Eyefly and launch the site Eyefly.com, which will provide women’s and men’s fashion frames and single-correction lenses for a fixed price of $99. Melissa Payner, chief executive officer of Bluefly and the daughter of an optometrist, believes the combination of an affordable price point and the convenience of online shopping could help it make inroads into the U.S. eyewear market, which she estimated to be about $33 billion a year in sales. <WWD>

Hedgeye Retail’s Take:  While Bluefly’s popularity has not matched that of Gilt, Rue La La, and other online off-pricers, it appears to be taking a lead in developing exclusive merchandise content with this JV. 

 

Evercore Takes Stake in Grupo Axo Grupo Axo is sharing its growing slice of the Mexican retail market with private equity firm Evercore Mexico Capital Partners, which acquired a 20 percent stake in the fashion operator. Evercore, which manages more than $190 million and is part of advisory firm Evercore Partners, did not disclose the size of the investment. Mexico City-based Grupo Axo — which saw revenues jump 30 percent last year and expects another 25 percent rise this year — manages 11 brands in the country, including Coach, Emporio Armani, Marc Jacobs, Thomas Pink and Tommy Hilfiger. Payless ShoeSource and Sephora will be added to the portfolio this year. The company tries to mirror a brand’s international pricing, excluding the varying effects of taxes. It plans to open stores in five new malls this year, taking advantage of a retail commodity the U.S. sorely lacks: new developments. <WWD>

Hedgeye Retail’s Take: While Mexico is not normally thought of as an emerging luxury market, the continued growth in the company’s tourism is likely the driving force behind additional unit growth for Axo.

 

NRF Speakers: Bigger Not Always Better - In retailing, size won’t matter as much, and fashion will take a toned-down turn this year. Those prognostications came out of day one of the National Retail Federation’s convention at the Jacob K. Javits Convention Center here, running through Wednesday. More than anything, the thousands of retailers who attend NRF’s “Big Show” want to know what the future will bring for their businesses. For retailing’s juggernauts such as Wal-Mart Stores Inc., Carrefour and Tesco, bigger won’t always be much better, according to Richard Hyman, Deloitte’s strategic adviser.” Big is still beautiful, but it’s getting less attractive,” Hyman said at a morning session Sunday. “Scale is an enormous advantage, but it’s becoming a slightly less potential advantage on its own.” Retailers with superior scale “may need to think about adding a few more ingredients to their strategic array.…Branding remains relatively undeveloped in retailing.”  <WWD>

Hedgeye Retail’s Take: While branding opportunities are still abundant for most big box concepts, footprint evolution is another key development that has put many ‘supertankers’ at a competitive disadvantage in the current real estate environment. Recall that within the past few weeks, WMT announced a smaller 80k sq. ft. format in order to greater penetrate urban markets – in all likelihood they aren't the only ones thinking smaller = opportunity.

 

The Demographics of Social Shopping Sites -Many consumers unaware of the category Retailers are eager to jump on social trends, be it a simple Facebook or Twitter presence, customer ratings and reviews, or more sophisticated experiences that bring the social graph to retail sites. Social shopping sites like Groupon and LivingSocial form another piece of the social commerce space, and despite the hype many shoppers have not yet jumped on the bandwagon. According to JPMorgan’s “Nothing But Net 2011” report, two in five online buyers surveyed had not heard of social shopping sites, and another 28% knew what they were but had never used them. <eMarketer>

Hedgeye Retail’s Take: Keep in mind, the act of completing a purchase online isn’t the only criteria for determining success of such efforts. While purchasing rates are 2x higher for those with incomes >$100k vs. <$50, the difference in familiarity is only marginally lower between the two demographics at 46% and 38% respectively, which could very well be translating into traffic at the store level.

 

R3: WMT, SKX, JOEZ, PUMA - R3 1 11 11

 

Cost Issues to Take Center Stage at N.Y. Fabric Shows Rising raw material costs and dedicated price consciousness will color the textiles shows taking place in New York over the next two weeks. Cotton prices soared to record highs in the last year and prices for wool and other materials have climbed as well, a situation that is starting to creep further along the textile supply chain and causing buyers to eye their bottom line even more closely than they have the last few years during the recession. As Première Vision Preview starts a two-day run today at the Metropolitan Pavilion & Altman Building, there is still a degree of uncertainty in the industry, said Jacques Brunel, general manager of the show. While buyers always took price into consideration, they used to look first for quality and creativity, Brunel said. In the wake of the economic downturn and buffeted by global market forces, buyers want a competitive price above all, he said, and in some cases are looking to trade down for less expensive fabrics.<WWD>

Hedgeye Retail’s Take: The tradeoff between cost vs. quality will ultimately lie at the retailers feet and may certainly be a consideration, but there are also many brands where a deterioration in quality is simply not an option. An interesting byproduct of this challenge will be how companies chose to shape marketing efforts that either highlight or hide such changes to the end product.

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

Get your Bonds?

Position: Long Germany (EWG)

 

This week is a big one for European bond issuance.  Portugal, Spain, Italy, Netherlands, and Germany are preparing bond and bill sales worth as much as €42 billion ($54 billion) this week:

 

1.       Today: The Netherlands issued €3.5 billion of debt. 

 

2.       Tomorrow: Portugal plans to borrow as much as €1.25 billion, repayable in October 2014 and June 2020. Germany seeks €7 billion. 

 

3.       Thursday: Spain will auction as much as €3 billion of five-year bonds. Italy will market securities maturing in 2026 and 2015.

 

Portugal continues to be one country among the periphery that is getting the most attention due to its sovereign debt fears. The yield on the 10YR government bond is hovering just under the 7% line. As we show in the chart below, the 7% level has been a critical gravitational line. A mere 17 days after Greece broke through it on May 15, 2010 it received a €110 Billion bailout; whereas Ireland broke the line on 10/29/10 and received a bailout of €85 Billion on 11/29.

 

Get your Bonds? - neu

 

The focus now turns to the reception of Portugal’s issuance of €1.25 Billion tomorrow. Hanging in the balance is the country’s need to borrow €20 billion in bonds this year to finance its budget deficit and redemptions.

 

International Support

 

Bullish statements today from Japanese Finance Minister Yoshihiko Nado that his nation will use foreign-exchange reserves to buy “more than 20 percent” of bonds to be issued under a special assistance program for Ireland appear to be reducing yields across the periphery, including Portugal, over the short term.

 

Further, Japan’s insurance follows remarks from Chinese Vice Commerce Minister Gao Hucheng on January 5th in Madrid that China will buy Spanish public debt in the primary and secondary markets and a statement by Chinese Vice Premier Wang Qishan on December 21th that China had taken “concrete action” to help Europe with its debt problems.

 

While over the immediate term TRADE (3 weeks or less) these international actions could buoy peripheral bond prices, on the intermediate term TREND and long term TAIL we do not expect they’ll make a dent in arresting the risk premium to own the region’s sovereign debt imbalances. As the chart above also presents, even the bailouts of Greece and Ireland failed to arrest the expedient rise in yields.

 

Portugal’s Weak Economic Outlook

 

Today Bank of Portugal announced that GDP will shrink -1.3% in 2011 and expand +0.6% in 2012. Back on October 7th the bank had forecast no GDP growth in 2011, however the estimates did not include the austerity measures announced by the government on September 29th.

 

Those budget deficit reduction measures included:

  • Cutting public-sector wage by 5% for those earning more than €1,500/month
  • Freezing public-sector hiring
  • Raising VAT by 2% to 23%

With a budget deficit of 9.3% of GDP in 2009, the government has set a target of 4.6% for 2011, and aims to meet the EU deficit limit of 3% in 2012. However, the government’s 2011 deficit projection was based around a +0.2% GDP.

 

Portugal’s recessionary outlook (GDP has averaged less than 1% in the past decade), will compound the government’s ability to meet its deficit reduction aims as less revenue will be generated from tax payers. In an environment of rising bond yields alongside increasing investor fears, we caution that Portugal may suffer to issue and roll over debt this year, either through a lack of demand or exorbitant levels of interest that will force a Greece or Irish style bailout to meet its obligations.

 

As the EU and Eurozone lack a definitive mechanism to negotiate the sovereign default of member states and Eurocrats remain supportive of the Union in the name of job security, we may well soon see a Portuguese band aid bailout to cover up its fiscal mismanagement.

 

Matthew Hedrick

Analyst

 

Get your Bonds? - EL Chart Debt


A LOOK BACK: Tough Love

A look back at a note we posted on February 24, 2010.

 

 

 

________________________________________________

 

“Think not those faithful who praise all thy words and actions; but those who kindly reprove thy faults.”
-Socrates


 
This weekend I read a booked called "Nurture Shock", which outlines some new theories relating to raising children.  The first question one might ask, is why a 36-year old bachelor is spending weekends reading child psychology?  That is actually a pretty good question and I’m not sure I have an answer.  Regardless, the studies in the book appeal more broadly than to just parenting.  Specifically, there is one chapter that discusses praise and how to effectively use praise.  As I will outline, the insights from this chapter are broadly applicable to the work force and other interpersonal relationships.  Not to mention, quite interesting to a 36-year old bachelor!
 
To some extent, Socrates hit the proverbial nail on the head in his quote above, which is that we need to be very careful with praise.  Not only because there may be ulterior motives behind praise, but also because praise itself may be much less effective than we realize.  In "Nurture Shock", the authors open this chapter, which is called “The Inverse Power of Praise”, with the following quote:
 
“Sure, he’s special.  But new research suggests if you tell him that, you’ll ruin him. It’s a neurobiological fact.”
 
To this point, a survey conducted by Columbia University indicated that 85 percent of American parents think it is important to tell their kids they are smart.  Ironically, a number of recent studies suggest just the opposite, which is that telling your kid he or she is smart may be actually leading to underperformance.
 
Dr. Carol Dweck  studied fifth graders in New York City over a period of 10-years.  The kids were taken out of their classes and given a non-verbal IQ test consisting of a series of puzzles.   At the end of the IQ test, the kids were given a single line of praise.  They were told that they were “very smart at this” or they were told “they worked really hard”.  In effect, they were either praised for their innate intelligence, or praised for their effort and process.
 
In the next round of tests, the kids were given a choice of a set of harder tests or a set of easier tests.  They were told that they would learn a lot from the harder tests, but that they were definitely harder.  Almost 90% of the students that were complimented on their work ethic and process in the first round, chose the more challenging tests. Conversely, the majority of kids who were complimented for “being smart” chose the easier tests.  In effect, the “smart kids” took the easier path.
 
In the next round of tests, none of the kids had a choice and all the kids were given a more difficult test, which was designed for kids who were two years ahead of their grade level.  Not surprisingly, everyone failed the second, but the two groups responded very differently.  The group that was praised for their effort, and not their smarts, after the first round “got very involved, willing to try every solution to the puzzles.”  Conversely, the group that was praised for their smarts “were sweating and miserable.”  The results were astounding. The students that were praised for their effort on the first test improved by ~30% on their first score, while those that were praised for their smarts scored worse by ~20%.
 
In the follow up interviews, Dweck quickly determined the key variable.  Those students that believed success was based on innate intelligence, grossly discounted the impact of effort.  The reasoning was in effect, “I’m smart. I don’t need to put out effort.”  Dweck repeated this initial experiment and found that the results held true for every socioeconomic class and both males and females.
 
The irony of the results of this experiment, and many like it, are that its results are totally disregarded by many school systems and have been for years.  According to Dwek, since the early 1980s:
 
“Anything potentially damaging to a kids self esteem was axed.  Competition was frowned upon.  Soccer coaches stopped counting goals and handed trophies out to everyone.  Teachers threw out their red pencils.  Criticism was replaced with ubiquitous, even undeserved praise.”
 
Much of this self esteem movement was actually supported by studies.  In fact, from 1970 – 2000, there were over 15,000 scholarly studies on self esteem.
 
In 2003, the Association for Psychological Research asked Dr. Roy Baumeister to review this body of research.  Of the 15,000 studies, Baumeister  found that only 200 utilized a scientifically sound way to measure self esteem and its outcomes.  After reviewing those 200 studies in greater detail, Baumeister concluded that self esteem didn’t improve grades, career achievement or decrease alcohol usage.  Ironically up until that point Dr. Baumeister had been an advocate of the unadultered praise philosophy and called this study the biggest disappointment of his career.
 
Dweck’s work and others like it calls into question how we encourage our children, motivate our employees, and coach our players.  One fact that is increasingly clear, telling someone that they are “smart” or “great” merely to boost their confidence will likely have an adverse impact on their actual performance.  The key is to encourage the process or actions that will lead to the successful outcome.
 
As the old saying goes, “Hard work beats talent when talent doesn’t work hard.” That is of course especially true when the talent is only a mirage created by ill advised attempts to promote self esteem.
 
Is not being full of praise for your kids tough love? Maybe, but a little tough love may actually going a lot way towards their future success.
 
Daryl G. Jones
Managing Director


TALES OF THE TAPE: CAKE, RUTH, MRT, COSI, MCD

Restaurant sales results and presentations are ongoing; here is a look at yesterday’s price moves and news items.

  • CAKE released sales this morning ahead of their presentation at the Cowen Conference today.  The Q4 comp result for The Cheesecake Factory and Grand Lux Café increased 0.9% in Q4.  Given that the company grew traffic for the fourth consecutive quarter, and there is roughly 1.5% of price on the menu, it seems that CAKE’s average check problem has not gone away.
  • CAKE reaffirmed 2011 guidance of annual comp sales up 1%-3% and 6-9 new restaurants.
  • RUTH outperformed the space yesterday, gaining on strong Q4 sales results that were released yesterday including comps of +9.2%
  • Overall, the strong relative outperformance continues into 2011
  • Chains focused on the higher end customers and the business traveler continue to show the best trends (RUTH and MRT.  Also in retail TIF posting good numbers today)
  • COSI corrected after a strong first week to the year
  • MCD declined on strong volume.  I retain my bearish view for MCD in 2011 and am holding a conference call with clients to go over the fine details on Friday at 11am.  Email for details.

TALES OF THE TAPE: CAKE, RUTH, MRT, COSI, MCD - stocks 111

 

Howard Penney

Managing Director


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