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In preparation for IGT's FY Q4 2010 earnings release this afternoon, we've put together some forward looking commentary from the company's FY Q3 and subsequent conferences.



Post Earning Conference Commentary

  • “As we mentioned back in November, when we laid out guidance for the current fiscal year, we anticipate replacement sales ranging anywhere from flat in 2010 to slightly up, and that’s really what predicated the range in our guidance.”
  • “So at the low end of your guidance you’re assuming a flat replacement environment and at the high end you’re assuming up 10%?”
    • A: “Right, correct”
  • “I think on the operating expense line, I think as where we sit today, we’re probably comfortable at the level of operating expenses, but if things should stay protracted for a longer period then I think we have to take a harder look at  what we need to make some structural changes in how we operate the business.”
  • “You’ve seen us in the area of R&D really stick to holding that number right around 200 million year. The big difference that’s going on there is how we’re spending those R&D dollars. I think today much more focus, lot of analysis going into every dollar that’s deployed in R&D so that we make sure that we’re managing the ultimate returns of products, so killing products sooner in the development lifecycle.”
  • “We’re going to continue to take costs out of the margin through consolidation of product lines, reduction of the number of products we support where there isn’t incremental value being derived from offering, let’s say, 11 cabinets versus what you could accomplish with, say, 6 or 7.”
  • “We probably have another year or so before we’re on a – what I’ll say a standardized platform.”
  • “I think American Idol has been out there now about 60 days. I think the indicators on it are that it’s a pretty successful game, so we’ll see how well it does as it gets out into broader deployment. It’s been on an exclusive with, I believe, 9 of the MGM properties for the first 60 days, but we’re encouraged”
  • “I mean we’re always looking for opportunities to grow the installed base.”
  • “So we have a promotion running right now that entitles the customers to some additional discounts above their normal discounts as dictated by the volume of business they do with us. And that really is for them to commit to product between now and the end of the calendar year. And then we have some others that will be introduced as part of G2E”
  • “We’re going to run out of pre-payable debt here before too long. And so one of the things we’re looking at right now is what, if anything, maybe we should do with some of our long-term debt. So stay tuned. It’s still unclear. We’ll, early part of next year, be sitting down with our bank group to redo our credit facility, which goes current in June of ‘11.”
  • “I think the more likely area for us is really in the online space or things that could be complementary to our business, when you think about technologies that maybe we can incorporate into the products, either online or in the core business.”


4Q2010 Earnings Call Commentary

  • “Moving into 2011, we may see SG&A stay about flat on a total dollar basis when compared to the full year 2010 as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities.”
  • “We expect R&D to be about flat to up slightly for fiscal 2011.”
  • “We will plan to further reduce our reliance on the North American replacement cycle by taking advantage of our diverse global revenue sources.”
  • “We expect to begin to see improvement in our Gaming Operations yield. We believe we have the most exciting titles both on the floor and in our pipeline and I cannot wait for the world to see some of the best games IGT has ever introduced at G2E this year.”
  • “We are planning for increased adoption of our improved systems products and heightened returns on our vast intellectual property portfolio.”
  • “We will continue to find ways to drive our improving profitability and margins even higher.”
  • “We are planning to accelerate our growth in the online and mobile business.”
  • “For the current fiscal year 2011, we offer GAAP earnings guidance of $0.77 to $0.87 per share.”
    • Guidance includes: “Very little if any for Illinois; and I want to say about 1500 units for Italy.”
    • “At the higher end, we’d assume we see some improvement in replacement activity."
  • “2 cents of potential upside depending on the timing of some software recognition at ARIA I think it was. Did that 2 cents happen in this quarter or was that not recognized in the September quarter just yet?”
    • A: “It was not…It will more than likely happen in FY 11.”
  • “I think another thing that’s worth noting, Joe, when you look at the international business in the quarter, not only were the units that we recognized up from the expectation, but the ASPs were up pretty significantly, so $3,000 year-on-year and $1,200 sequentially, so we’re finding that the health of the business in the international marketplace is really holding up”
    • “We hope it’s not a one-time thing, one of the opportunities that IGT has is it has a broad portfolio of markets to sell within and a broad portfolio of products to sell.”
  • “I would expect for the next couple of years that we would expect outsized growth in our international marketplaces. I think it’s a combination of jurisdictional expansion and an ability for us to take some share in markets where perhaps we haven’t been as aggressive as we have in North America. So I would expect to see the international business closing the gap a bit on the U.S. business, if you will, I would say in 11 and 12.”
  • “This year’s fourth quarter had fair amount of MLD carry-over from the dynamics promotion that ended the end of June, i.e. people had to have their orders in. Some of those orders came in in Q4. That’s really what explains the lower ASP.”
  • Game ops margin guidance: “I think 58 to 60% is the right kind of range”
  • “Do you have any intentions of … trying to take out the convert?”
    • A:  Actually studying all that right now... Because at the rate we’re generating cash we won’t have any pre-payable debt before too much longer, so a lot of analysis being done at this time around that.”


Q4 was likely very strong on most metrics but may not provide the upside that investors have come to expect.  Will 2011 be any different?



Singapore generated more revenue and profits than virtually anyone predicted in 2010.  Bravo.  Where do we go from here?  We are trying to put the math behind a credible theory that a lot of the initial upside was driven by the local Singaporean business.  If that business has been fully penetrated then growth could be impeded.  We estimate locals drove roughly one third of 2010 gaming revenues.


The problem won’t be growth.  Singapore should grow nicely, probably in-line with Southeastern Asian GDP plus a kicker from licensed junkets.  However, we suspect analysts and many in the investment community are expecting much more.  Indeed, analysts appear to be valuing Singapore EBITDA on a Macau-like trajectory.  We estimate the consensus target price is derived using an 18x 2011 EV/EBITDA multiple on LVS’s MBS property.  That’s aggressive even for a Macau property, despite the fact that in Singapore casinos pay income tax on gaming income while in Macau they don’t.


For Q4, our sense is that rolling chip was only up modestly from Q3.  Mass likely grew but will it be enough to drive more than the 15% sequential revenue gain that analysts appear to be projecting?  It might be tough.  October was clearly the strongest month of the quarter and December appears to have been a good month, but maybe lower gaming volumes than the operators were projecting.  Indeed, the monthly government tax receipts from gambling for October and November did not grow that much from Q3.


For 2011, will Singaporean tourism growth match the 20% increase generated in 2010?  To some extent, growth may be limited by a tough comparison of an explosive 2010.  The Singaporean government is projecting much lower visitation growth for 2011 and GDP estimates have recently been cut.  GDP and tourism growth will likely be the main drivers in gaming growth and while both are expected to be strong, they may not be enough to satisfy investors’ appetites for Macau like growth.  The licensing of junkets should boost growth, but not for LVS, at least not in 2011.  LVS is not sponsoring any junkets at this point.


Despite the recent underperformance of LVS versus other Macau stocks, the valuation remains steep and is indicative of expectations of upside over current Singapore estimates.  Consensus 2011 estimates of $1.4 billion in EBITDA for Singapore in 2011 look reasonable to us, not conservative.  We remain bullish on Macau, although the recent LVS market share loss looks sustainable.  Even with Macau, we question whether there will be a lot of upside to existing estimates.  Besides, if there is Macau upside, the more directly exposed Macau players (WYNN for instance) will fare better. 

Athletic Trends in the January Duldrums


Underlying trends for the athletic space remain very positive despite a meaningful deceleration in the latest week’s data. We’re going to float some benefit to the industry for taking a sales hit last week due to weather, and therefore expect it to pick up meaningfully this week. It is also worth noting that the second week in January has been among the Top 5 lowest grossing weeks in footwear in each of the last 2-years with the final two weeks of the retail calendar typically recording 40%-50% more sales volume compared to the 1H of the month. Here are a few key callouts from the week:

  • The bifurcation between performance and non-performance footwear continues to be at near-term highs of a 40% differential. Product portfolio management continues to be a potential source of outperformance at individual retailers – good for DKS & HIBB, even more favorable for FL & FINL.
  • In apparel, Running and Basketball apparel were the clear positive callouts accelerating on the week up +17% and +11% respectively while Outerwear was not only noticeably absent from the top performing categories, but actually turned negative on the week down -5%.
  • Sales of sports apparel at athletic specialty retailers continue to outperform up +2.3% on the week compared to +0% for the overall category. The family channel lead the week up +2.7%.
  • Continued apparel ASP increases were offset by a decline in unit sales across the industry reflecting the impact of anomalous weather. Sport Retailers were the only channel to increase unit sales on the week driven by lower prices down -1%.
  • On a regional basis, the South Central and South Atlantic regions materially underperformed after snow blanketed the region early in the week causing many businesses to close Monday. The Mid-Atlantic region was the positive callout up +12% after bringing up the rear only 2-weeks ago.

Athletic Trends in the January Duldrums - FW App Ind 1Yr 1 19 11


Athletic Trends in the January Duldrums - FW App Ind 2Yr 1 19 11


Athletic Trends in the January Duldrums - FW App Reg 1 19 11


Athletic Trends in the January Duldrums - FW weather 1 19 11


Athletic Trends in the January Duldrums - FW Perf v NonP 1 19 11


Athletic Trends in the January Duldrums - FW Table 1 1 19 11


Athletic Trends in the January Duldrums - FW App App Table 1 19 11


Casey Flavin



I love this quote from Nelson Peltz, Chairman of Wendy’s/Arby’s Group, in the company’s press release today, “We believe the way to maximize shareholder value is to focus all of our management and financial resources on continuing to build the Wendy's® brand.” 


Although I would tend to agree with this statement, the first thing I thought of was the company’s initial rational for the transaction…. I thought putting the two brands under one roof was the best way to maximize shareholder value?  Just over two years ago when the company announced the completion of its merger, Roland Smith, President and Chief Executive Officer of Wendy's/Arby's Group said, “As one company, we are well-positioned to deliver long-term value to our stockholders through enhanced operational efficiencies, improved product offerings, shared services and strong human capital.”


So what has changed over the last two years?  Wendy’s business has improved with restaurant level margins moving higher YOY almost every quarter since the merger (3Q10 margins were impacted by higher commodity costs) while Arby’s trends have continued to decelerate with margins down every quarter.


On May 19, 2010, we published a note titled, “WEN - Undervalued Yes, Where is the Opportunity?” that discussed WEN’s stock and provided a sum-of-the-parts analysis that suggested that the company’s stock was trading below its intrinsic value.  Specifically, we highlighted the fact that the Wendy’s brand alone accounted for more than 100% of the value of the company, which implied not only that investors were seemingly getting Arby’s for free but also that the significant erosion of the Arby’s brand was overshadowing Wendy’s value as a standalone concept.  Our sum of the parts analysis (shown below) shows that the Wendy’s brand continues to be undervalued. 


Given Trian Partners’ past success in creating value from mispriced securities, WEN management must recognize that they can unlock value by spinning off Arby’s.  And, it is likely not a coincidence that management is putting Arby’s up for sale after 4Q10 company same-store sales trends improved to +3.1% from -9.5% in 3Q10, implying a 325 bp acceleration in two-year average trends and the first quarter of positive comp growth in at least 15 quarters.


WEN - SUM OF THE PARTS  - wen sotp


Howard Penney

Managing Director




The headline initial claims number fell 41k WoW to 404k (37k after a 4k downward revision to last week’s data).  Rolling claims fell 4.5k to 411.5k. On a non-seasonally-adjusted basis, reported claims fell 212.5k WoW.  As the third chart below shows, claims usually fall sequentially in this week of the year.


We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.








In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.




Joshua Steiner, CFA


Allison Kaptur

Early Look

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