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HOT 4Q10 PREVIEW

We expect HOT to report an in-line quarter when they report on Thursday and provide lower than consensus guidance for Q1.  Q2 remains our biggest concern.

 

 

At 14.5x EV/EBITDA, will a meet and lower really do it for the stock?  We don’t think so.  It is certainly possible that HOT beats on margin, but it is very unlikely management provides guidance in-line or above the Street for Q1.  Management is historically conservative with its forward guidance and RevPAR has been disappointing thus far in January.  While weather certainly played a role, the performance has been uninspiring.

 

Our bigger issue is Q2, where we think the Street is overly aggressive.  Our conclusion is based on the math from our recent post, “HOTELS: BLAME THE WEATHER” (01/26/11).  We are projecting Q2 RevPAR of only +2% and EBITDA and EPS of $233 million and $0.32, respectively, below the consensus of $258 million and $0.44.  Still, investors ought not wait until Q2 guidance to be concerned.

 

Details:

 

We are projecting Q4 revenues of $791MM, $240MM of EBITDA, and EPS of $0.39 this quarter which is in-line with Street numbers and a little ahead of HOT’s $230-$235MM EBITDA guidance.

  • $471MM of owned, leased and consolidated JV revenue with a 21% gross margin
    • Room count is down about 2.4% YoY
    • RevPAR : $151;  +12.5%  (this is not same store and therefore not comparable to HOT’s metrics). Guidance for SS owned RevPAR was 6.5-8.5%
    • 6.7% growth in CostPAR
  • $187MM of management & franchise fees and other income
    • 11% growth in base fees to $72MM (3.1% YoY growth in management system-wide rooms)
    • 5% growth in incentive management fees to $41MM
    • 13.4% growth in franchise fees to $40MM (4.2% YoY growth in franchised system-wide rooms)
    • Managed & franchise fee revenues of $153MM, or 10% YoY compared to guidance of 4-6%
    • $34MM of other revenues consisting of $20MM of amortization of gains, and termination and other revenues
  • $134MM of VOI and residential revenues at a 21.5% margin
    • 2% decline in originated sales revenue to $80MM
      • Flat YoY price per interval of $15k; 2% YoY in interval sales; 35% margins
    • $58MM of other sales and services revenue (down 16% YoY due to a $23MM gain on sale of timeshare notes in 4Q09)
    • $6MM of deferred revenues
    • $30MM of operating profit, up $10MM YoY which meets the upper end of guidance of a $5-$10MM increase
  • Other stuff:
    • Consolidated D&A of $73MM; total D&A of $81MM
    • Net interest expense of $61MM compared to guidance of $62MM
    • 20% tax rate – in-line with guidance



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BYI: WILL THE Q MATTER?

Software timing remains the quarterly issue but if your time horizon is beyond 3 months, do you really care?

 

 

We are very bullish on the long-term fundamentals in the slot sector space.  Now that earnings calendar 2011 earnings estimates now appear achievable and beatable, we are not as concerned with the timing of the acceleration of replacement demand, and importantly for BYI, the quarterly timing of software shipments.  BYI may be the best positioned of the three big US slot suppliers because:

  • Unlike IGT, BYI should be a long-term participation game market share gainer
  • Quarterly ship share should increase sequentially at the expense of WMS
  • BYI maintains the highest valuation upside

We must admit that we have low confidence in Wednesday’s quarter announcement.  Not that we are predicting a miss – we’re actually above the Street.  However, software sales is always the wild card.  We don’t believe there will be any surprises in the core metrics other than software, but that shouldn’t be more than a timing issue.

 

We’re 2 cents ahead of the Street for the quarter and about 10 cents higher for the year.   We project BYI to post $190MM of revenue and EPS of $0.48 when they report F2Q11 results next Wednesday after close.  We don’t expect there to be a whole lot of news on the replacement front.  The consensus from our conversation with operators is that replacements should be flat to up moderately this year.

 

Details:

  • Product sales of $61MM with gross margins just shy of 50%
    • NA units of 2,600 and 1,000 international shipments
      • 2,250 replacement units and 350 new units (including some units to Cosmo)
    • ASPs of $15k
    • Other product sales flat YoY
  • Systems revenue of $50MM at a gross margin of 72.5%
  • Gaming operations revenue of $78MM at a gross margin of 72.6%
  • Other stuff:
    • SG&A: $54MM
    • R&D: $22MM
    • D&A: $5MM
    • Net interest expense: $2.2MM
    • Tax rate: 33% (R&D tax credit)

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