- BYD should be able to generate $2.50 in net free cash flow next year. That is a 25% FCF yield. As I discussed in my 6/25/08 post, 15% is the magic number for the regional stocks where outsized returns have followed. By no means is BYD sitting on its cash flow. The dividend yield is 6% which is as high as I’ve seen for a gaming company. We’re big on dividend stocks right now at Research Edge.
- How safe is that dividend? With Echelon on hold, BYD has tremendous liquidity. Unlike the rest of the industry, borrowing costs will not explode higher in 1 to 2 years. BYD maintains $2.4bn availability in its credit facility that doesn’t mature until 2013. The interest rate on that facility ranges from 0.625-1.625% above LIBOR. PENN is the only other liquid gaming company.
- I’m not predicting blow out quarters but management has set the bar pretty low. Near term comps get a lot easier in the LV locals market and at Blue Chip in Indiana. They have been getting killed in both those markets. Of all the gaming markets, I think the Strip has the furthest to fall. BYD now has no exposure there. With gas prices declining, the regional markets could show some stability. With a 25% free cash flow yield, stability is all we need.
- Breaking the $38.71 line was the tell. Look at this volume accelerate thereafter!
Three simple reasons:
1. The weekly Bullish to Bearish Institutional survey has finally moved to the decidedly Bearish side
2. The Volatility Index has hit my immediate target level of 35.11 today
3. Volume and Breadth are capitulating intraday on the negative side
Buy Low. Sell High.
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By Andrew Barber, Director
Research Edge LLC
The year has seen the major Wall Street banks squander generations of work spent building the trust of investors globally. Now the contagion is spreading.
Yesterday I spoke with a friend of mine who is a successful wealth manager in Greenwich. This friend is a savvy investor who has built a successful practice. When I called him he told me that he had gone to the bank where he keeps his personal saving and checking accounts and withdrawn funds to spread around among other institutions because he was paranoid about having his liquid cash accounts frozen in case his bank failed. This is a rational and informed person that I am describing who is almost at the point where he would rather bury his savings in a jar in his backyard than keep it in a bank. This represents the total markdown of the greater US financials system’s largest intangible asset – trust. Reserve Primary, the oldest money market fund in the country, had to take a big markdown on that asset today when they broke the buck and sent more people like my friend scurrying to the bank to withdraw their life savings.
The US does not have a monopoly on trust. As we all know, doing Business in China is impossible unless you have a partnership with a local firm. We talked about the potential dangers of Chinese JVs repeatedly in the first half of this year as companies like Danone and Caterpillar wrestled with bad Chinese marriages. None of the problems they experienced compare with the complete betrayal that Fonterra is feeling today. Fonterra is a 43% owner of the Sanlu group –a company that used a dangerous chemical to make baby formula. The allegations are not that this is an accidental situation caused by a mistake at the factory –this is believed to have been a heinous, deliberate decision driven by greed that has caused at least 6,200 infants to suffer kidney damage and at least 3 to die. Imagine waking up to find out that your business partner was poisoning babies. By the way; some of the early reports that came out from the Chinese media (the government is now reportedly controlling coverage now to avoid panic) mentioned that some families of sick children were pursuing legal action. Welcome to the newest consumer trend in China: litigation. It’s global this time.
The commodity markets are not immune from this crisis of trust either. Today at 1 PM the EIA will release crude oil stock data. Everyone in that market, already on edge over the fighting in the Niger delta, will be watching closely to see how much Ike disrupted supply. The data that is reported today will be the first report drawn from surveys conducted after it was announced that the CFTC is investigating whether energy firms have been supplying false inventory data to manipulate the markets. We will have to wait until the regulators finish taking depositions from more traders to see if any charges are filed –but the shadow of doubt has already been cast. How can you trust the fundamentals if the data is corrupt?
AIG has shaken my trust in my own judgment of risk. I regarded AIG’s derivative trading subsidiary, AIG Financial Products, as one of the greatest firms to ever operate in the risk markets. I have personal friends and trusted business associates there -people who are, without doubt, some of the most intelligent and honorable people in our business, period. With a massive “double-triple A” balance sheet as a foundation and an awesome concentration of intellectual firepower, AIGFP was THE counterparty of choice for the largest institutions on earth as they sought to modify their market risk. They could do trades for bigger size, in more markets and for much, much longer duration than any other player in their markets. At some levels they WERE the market. From pensions and endowments executing index swaps to bulge bracket investment banks lying off equity volatility –the success of AIGFP’s derivatives team in winning trust hardwired them directly into the US financial system’s central nervous system. I implicitly trusted any derivative contract they guaranteed as being safe as, well, milk.
So that is the question I find myself asking today is: who is left to trust?
Apparently, I am not the only one concerned about DRI’s growth outlook as management was questioned on its conference call this morning about its continued commitment to restaurant development at Red Lobster in 2H09 relative to the concept’s performing below expectations. CEO Clarence Otis replied by saying that from a traffic standpoint, Red Lobster has outperformed the industry in the last couple of years with a materially higher average check, which leads him to believe Red Lobster has performed strong competitively. I found this answer to be a little surprising because the industry has experienced negative traffic for the better part of the last three years so outperforming these negative metrics will not lead to enhanced returns.
Additionally, Mr. Otis said that the decision to add new Red Lobster units is more of a restaurant by restaurant and market by market type of analysis. “I don't know that we have a pace of expansion that we think makes sense versus we scour the country and look at the markets and decide market by market does this restaurant make sense from a return perspective. And so it is very much a bottom up driven expansion. Here's a market that's expanded, that is strong a trade area we think we can get X guests out of. It makes sense to open this restaurant. All that adds up to five one year, other years to ten. It is more about that, and to the extent that the guest count level that we start to make that restaurant by restaurant assumption from is lower and we scale out over 30 years, fewer trade areas will make sense. So that's a little bit of how we think about Red Lobster. I don't know that there's a master plan as opposed to a unit by unit investment decision.” I found this comment to be interesting because if the CEO does not know the master plan, who does? Given the trends in the quarter and the outlook for the balance of the year combined with the current level of unemployment, trends in macro factors would point to a different strategy.
How is this possible!
To reiterate what I posted last month, here are is what we know so far:
4Q07 – No comment from the company when asked on the conference call about the number of stores selling specialty coffee, but they did not expect to see critical mass until later in 2009.
1Q08 – “We are currently in about 1300 restaurants and expect the rollout to accelerate and pick up pace later in the year.”
2Q08 – “Specialty coffees is just one element of the combined beverage business and it’s currently in more than 1600 restaurants.”
3Q08E - ???
If we assume the company accelerates the conversion process in 2H08 and converts 1,200 stores, the total number of McDonald’s stores with the ability to sell specialty coffee in the US would be 2,800. This represents only 25% of the McDonald’s system! McDonald’s senior management has set expectations for a national launch for the specialty coffee program in mid-2009. If it has not started already, the 2009 budgeting process needs to incorporate the national launch of the specialty coffee program. If only 25% of the store base has the ability to sell specialty coffee, how can the company justify spending the marketing dollars in 2009? More importantly, will the franchise system embrace the move?
I believe they need to reset expectations.
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