Sloppy quarter and lower guidance. Our low confidence in this Q was confirmed but long-term positive outlook remains intact.



"I am pleased with the acceptance of our recent innovation, including the new ALPHA T platform, the strength of our new gaming operations products, and the interest in our iVIEW DM player-centric networked gaming system. We continue to see excellent growth opportunities for Bally in Canada, Italy, Australia, Mexico, New York, and selected other U.S. and international jurisdictions."


- Richard M. Haddrill, the Company's Chief Executive Officer




  • "During the second quarter, we purchased approximately 475,000 of our shares for $18 million"
  • "Calendar 2010 represented one of the toughest environments for replacement and new game sales. As we look towards calendar 2011 and beyond, we expect to see both an improvement in replacement demand and jurisdictional expansions."
  • "Our lower than normal revenue levels in the first half of fiscal 2011 have not been fair indications of our backlog, pipeline, and win-loss ratio levels, all of which continue to remain strong. Our competitive strength and positioning in Systems have never been better. The commercial rollouts of iVIEW DM and ELITE Bonusing Suite products are now beginning to take shape."
  • ASP's for new unit sales of $15,244 (+7% YoY) "primarily as a result of product mix and sales of Pro Series cabinets with ALPHA 2 technology."
  • Lower GM's on gaming equipment "due to higher costs for the initial production runs of the Pro Series cabinets."
  • Lower new unit sales due to "continued sluggish North America replacement market and fewer new openings and expansions during the quarter."
  • "New unit sales to international customers were 34% of total new-unit shipments"
  • Systems "maintenance revenues increased to a record $16 million"
  • "The effective tax rate for the three months ended December 31, 2010 was 20 percent, which benefited from certain discrete items including the retroactive reinstatement of the U.S. research and development tax credit to January 1, 2010 and conclusion of the IRS audit for 2003 to 2005."
  • 2011 Guidance:
    • "Diluted EPS from continuing operations to $2.00 to $2.15 (down from $2.30), which includes $0.89 per diluted share earned during the first half of fiscal 2011. This Diluted EPS guidance range continues to assume a challenging North American replacement market, as well as limited new casino openings and expansions during the period."
    • "Total systems revenues of $205 million to $215 million, including systems maintenance revenues of $63 million to $65 million."



  • First quarter ASP's included some custom sales. Over 1/2 of quarterly shipments were Pro Series cabinets.
  • Systems revenues were at the lower end of their expectations.  Systems have been impacted by longer decision making by their customers. Have signed commitments for 2/3rds of their 2H2011 systems revenues.
  • 35-36% tax rate for the balance of FY2011
  • Inventory increased as a result of an increase in new materials, the new Pro Series capital, and the Italian units due to be shipped later this year
  • Have a backlog of 500 units for Vegas Hits game
  • 2,305 of their units sold were to clients in NA - 78% were replacement sales
  • Estimate their NA shipshare at 17%. Their MD units are on a leasing model and therefore impact their shipshare.
  • Continue to focus on international expansion opportunities. Expect approval to sell their games in Australia within 30 days. 
  • In Italy, most of their units will be recurring revenues
  • 75% of their domestic sales were video product
  • Their first Alpha 2 games will ship this quarter
  • Getting great feedback from customers on their new Pro Series cabinet
  • Sense some optimism from their customers but remain cautious on replacement sales for FY2011
  • Excited about FY2012.  Think that the IL situation is a delay, not a cancellation
  • Acqueduct should open in the summer of 2011
  • iVIEW DM and Bonusing suite products are at a stage where the major challenges are behind them. Thinks that they have reached the tipping point for server based gaming.  Expect a good portion of their systems revenue growth to come from international sources (which have more than doubled over the last 3 years)
  • Continue to gain traction with small casinos to their windows based system
  • Reasons for the 15 cent guide-down:
    • Canada revenues won't begin until late Calender 2011
    • Lower systems revenues
    • Deferral of Italy due to some regulatory delays as well as more recurring units. They expected that 1,800 units would be for sale in FY2011 (40% of their total games). However, given the stronger yields, most of their games will be recurring revenue with very little profit in fiscal 2011


  • Thought that Canada systems business would begin to be recorded in F4Q11
  • Their EPS range does assume a buyback of $20MM/Q
  • They are finding that the larger deals are taking longer than expected to execute. No deals have been lost; they are just taking longer to execute. The delays aren't price related but boards are taking longer to approve projects.
  • The Canada system deal hasn't been signed yet - and they don't expect signing for a few more months
  • They are confident in signing some more iVIEW DM deals over the next 90 days and should see revenues from that in the March Q
  • Interest in DM is much stronger than the interest they had in regular iVIEW
  • Reduction in their guidance range is due to far fewer uncertainties. Reduced the systems guidance mostly due to Canada and because of a slightly weaker 1H11.
  • A signed commitment on systems means that its a done deal but it could slip, timing-wise
  • They included the 5 cent gain from the R&D tax credit
  • No caps on their new WAP games
  • No change in their R&D budget
  • Not many Cash Spins have been placed internationally.  They have sold it in a few markets because you can't do participation in many markets.
  • The Vegas Hits backlog is domestic only
  • When will they have critical mass in their Alpha 2 titles? - 1/3 of shipments were the new cabinet and would expect that % of quarterly shipments to increase going forward. By the June quarter they should have a critical mass of games.
  • Had a sizable order for new units just recently. Feel pretty good about their guidance.
  • Washington and Mexico drove some of the additions to their gaming operations install base
  • Gun Lake was in the quarter and shipped the balance of their Cosmo units this quarter- most of Cosmo were shipped last quarter.
  • 505 new units - 78% were replacements
  • Acqueduct - will be July- October opening ... could be in 2 installments. Will not be in this fiscal year.
  • Total capex this year will be up year over year.  Games ops capex was $44MM almost 2x what it was in 2010 due to Cash Spin deployment and Italy games.

Buying Swedish Fish

Position: Long Sweden (EWD); Short Italy (EWI); Short Euro (FXE)


Conclusion: Despite the real risks for the Swedish economy to decelerate from 2010 levels (comp pressure, inflation risks, and headwinds for exporters from a stronger Kronor), we think we bought EWD at an attractive price for another quarter of favorable comps and due to the country’s relatively robust outlook versus most of its European peers. While talk from the Riksbank Governor to increase Tier 1 capital ratios of Swedish banks above their peers is alarming, we don’t think it is any more than talk.  


We’ve been waiting for the right price to buy Sweden (via the etf EWD) for months, and today we got that price as Electrolux, Sandvik, Scania, and Nordea Bank dragged down the overall OMX 30 equity market (-1.4%) and the etf (-2.8%) on in-line to slightly negative earnings expectations and company concerns over a rising Kronor for exports.


Under the hood we’ve liked the fundamentals of Sweden and the Kronor for many months, especially given the volatility on continental Europe associated with its sovereign debt issues. However, and as part of our hesitation to buy Sweden, it’s important to look at the upside and downside risks governing the country’s macro landscape, especially following the estimated (and monster) annual GDP growth of +5.5% last year!


Buying Swedish Fish - sw1



Hawkish Monetary Policy:


The Riksbank has proactively raised the benchmark repo four times since July 2010, most recently hiking 25bps in mid-December to 1.25%, in an effort to head off inflation (see chart). While CPI stands at 2.1% in DEC Y/Y, just above the Bank’s 2% target, there’s a real threat due to home price inflation.

  • Swedish house prices  rose for a 20th month in the quarter through December
  • The average house price rose an annual 4% in the three months through December, following a 5% gain in the November quarter as reported last month according to Statistics Sweden

Given, this adds to the likelihood the Riksbank will raise again when it meets next month. 


Buying Swedish Fish - sw2



Consumer Spending Slips:


The follow-through of rate increases has equated to a squeeze on household credit and retail sales in recent months:

  • Borrowing rose an annual +7.8% in December, after increasing +8.4% the previous month
  • Retail sales fell -0.8% from November, when they dropped a revised -0.2%. From a year earlier, shop purchases increased +3.1%, versus a +4.6% median estimate in a Bloomberg survey of economists


Currency Risk/Reward:


The Kronor vs the Euro (SEK-EUR) has seen steady gains (up 13.6% since Feb. 2, 2010) alongside healthy growth over the last 4 quarters (see chart above) and as a flight to safety given the volatility in the EUR due to continental Europe’s sovereign debt issues. As the probability increases that the Riksbank will raise rates again, this an additional bullish catalyst for the currency.


That said, and as we saw in the commentary from Electrolux, Sandvik, and Scania today, a strong Kronor erodes export margins. With exports making up more than half of GDP this is a significant concern, and as the table below present, exporting companies contribute heavily to the holdings in the etf:


Buying Swedish Fish - sw3



Banking Rebound vs Regulatory Drag:


Statements yesterday from Riksbank Governor Stefan Ingves in which he said that Swedish lenders should “mull imposing tighter standards than those set out by the Basel Committee and enforce the rules faster”, also weighed on the Swedish market today. Nordea Bank CEO Christian Clausen was quick to criticize the remarks due to competitiveness issues vis-à-vis European banks, and rightfully so in our opinion. 


You’ll remember that the Swedish banking system is just getting back on its feet.  Grave concerns arose in late 2008 and into 2009 due to its bank leverage to the Baltic states. In July 2010 the major lenders -- Nordea Bank, Svenska Handelsbanken, SEB, and Swedbank-- passed the EU stress tests with a “comfortable margin” according to the Swedish Financial Supervisory Authority, showing a core Tier 1 ratio (a measure of financial strength) in the range of 8.9% to 10.3%.


Since then, Swedbank, which return to profit in 3Q10, had a core Tier 1 capital ratio of 13.4% at the end of the 3Q, above the so-called Basel III rules for banks which mandate a 13% level, and compared with the 7% minimum set by regulators. (Basel III rules are scheduled for full implementation by 2019).


In short, Swedish lenders look to be well capitalized and cognizant that banks can’t take on the risks they did pre-Lehman, emphasizing the importance of raising tier 1 capital ratios, however not above their European peers as to make Swedish banks less competitive. 


Matthew Hedrick


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The following is a monthly look at restaurant trends, valuations, and key macroeconomic factors.  For a complete look at my overview of the restaurant space for January, please click here for a pdf, or copy and paste the link into your browser:



  • Consumer stocks are underperforming in January and Restaurant stocks underperformed the S&P 500 by 180bps in January. 
  • Heading into what I believe will be a turbulent year for restaurant stocks from a commodity cost perspective, there is a divergence between companies that have simplified their focus and operations and those that are less focused and, therefore, more exposed.
  • EAT, SBUX, COSI, and – most recently- WEN, are a few of the management teams that I think are focusing their energy in the right areas and best positioning their companies to navigate 2011.
  • I still like where SBUX is going with is business model and that is good for PEET and bad for GMCR.
  • I continue to believe that MCD faces serious challenges in 2011, as detailed in my Black Book released mid-January.  The company has been less and less focused on its core business over the past couple of years.  While that worked in the short term, boosting comps through frappes and smoothies, in 2011 I believe MCD will face serious issues with slowing sales and soft margins.
  • DRI’s inflation outlook for FY 2012 is sobering and the company will likely experience margin compression in FY 2012.



  • CMG continues to maintain its premium valuation, as it has been for some time.  While its food with integrity resonates with consumers, concerns are emerging about the company’s commodity exposure.  Longer term its new focus on an Asian-style chain will likely be a negative, not a positive, for the stock.
  • I expect GMCR’s multiple to contract as SBUX paves its own way through different channels of the coffee category.
  • WEN is cheap and set to improve returns with a more focused approach now that Arby’s is on the block.



  • EAT remains one of the cheaper names in this category from a valuation perspective and the potential upside remains significant.  I expect a continued improvement in the relative fundamentals of the company on the top line as well as marked progress towards the net 400 bps of margin expansion management is targeting.
  • Like it or not, weather is an issue for the group.



  1. Inflation – it’s not just in Egypt that people are fed up with high food costs.
  2. Unemployment – the jobs picture has been improving but at a crawl.
  3. Consumer sentiment – points 1 and 2 are keeping sentiment down.  There is a disconnect between sentiment surveys and the SPX.
  4. The Government continues to support consumer spending trends, but the impact will wane as we move through 2011.


Howard Penney

Managing Director

The Perch: SP500 Levels, Refreshed

POSITION: no position in SPY


The SP500 scaled all the way up to its new perch yesterday of 1307. That was a new closing high for this intermediate-term cycle. From here, the view gets a lot steeper. There are no immediate-term TRADE lines of downside support until 1292.


Steeper doesn’t mean this bullish bid can’t be scaled higher. As everyone knows, higher-highs are bullish, until they become lower-highs. Then again, if you use a long-term TAIL duration, we’ve been making lower-highs for 3 years. This entire debate about how much higher from here smells Japanese.


What’s fascinating to me is that if this market scales all the way up to 1340, that it will only be -14% from its all-time highs. That’s not to say it’s going there, but it definitely could. And the more expedited its ascent, the higher the probability that it comes crashing down on everyone who chases it.


For now, we have no position.



Keith R. McCullough
Chief Executive Officer


The Perch: SP500 Levels, Refreshed - 1


In preparation for HOT’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HOT’s Q3 earnings release/call and subsequent conferences.



  • “Both business and leisure travel continue to show strength in the quarter.”
  • “Trends in group business remain robust, particularly in-the-quarter, for-the-quarter bookings. In September, for example, bookings for 2010 were up 19%. As we have entered the back half of 2010, 2011 bookings are picking up nicely. Again, looking at September bookings, revenues for 2011 jumped almost 30%, driven by room-night volumes up 22% and rates up 7%.”
  • “2011 group pace has improved by almost 15 points over the last six months, and is now flat.”
  • “We’re also keeping a tight lid on corporate costs. Headcount is flat over 2009 and will remain flat through 2011. So despite adding new hotels, we expect SG&A spend in 2011 to be similar to 2010 levels.”
  • “We expect to see strong pricing power in the industry, particularly in the gateway cities”
  • 2011 commentary:
    • “We expect corporate rates to be up high single-digits”
    • “Group business in 2011 is also trending well, with strong volumes and steadily improving rate, and the overall trajectory of business appears to have stabilized at current levels”
    • “If the current trends continue, we would expect to deliver worldwide RevPAR growth of 7% to 9% in 2011. With our demonstrated ability to control costs, we expect that this RevPAR growth will result in an EBITDA within the range of 950 to 980 million.”
    • RevPAR composition: “Rate two-thirds, occupancy one-third”
    • “Most of our emerging markets will be lapping some hefty growth from 2010, and we will not have events like the World Expo in Shanghai that helped China. As such, it would be reasonable to expect that the rate of growth will slow down sequentially year over year, and the growth delta between emerging and developed markets will narrow."
    • “EPS range of $1.44 to $1.55"
    • “Owned margins to improve 150 to 200 basis points with a focus on revenue management and continued cost control.”
    • “Our vacation ownership business will be flattish, with a continued focus on cash generation.”
    • “Overhead will only grow 1% to 2%”
  • “I feel very comfortable that we will end the year with EBITDA of 840 to 845 million, which is at the high end of our prior guidance range of 815 to 845 million. We expect 2010 global RevPAR growth at company-operated hotels of 8% to 9% in constant dollars, also at the high end of our prior range… This implies a Q4 EBITDA range of 230 to 235 million.”
    • “I want to point out that our year-over-year comparisons are muddied by a variety of factors in Q4. In our vacation ownership business, we had a large gain from securitization last year, as well as the accounting change. In the owned hotel business, we had some asset sales as you know, and some one-time items that helped our Latin American business last year… we had a termination fee last year. In SG&A, we had higher incentive compensation this year. Also we had some items moving between Q3 and Q4 this year, helping Q3 to some extent and reducing Q4.”
    • “We expect global RevPAR growth at company-operated hotels in Q4 of 7% to 9% in constant dollars.”
    • “We still expect to receive a 200 million-plus tax refund before the end of the year. With the refund, we expect our excess cash balance to climb to 500 million by year-end, and our net debt to be under 2.3 billion.”

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