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MAR SPIN-OFF DOMINATES EARNINGS

Q4 was decent but not breathtaking. We don’t view the timeshare spin-off negatively but it’s hard to imagine that the multiple at this point was being held back.

 

 

While earnings were just in-line, MAR's announcement of a spin-off of its timeshare business will surely dominate investors thoughts and focus this quarter.  The timeshare business clearly is not a favorite amongst investors but it’s unclear that MAR’s multiple gets punished for it either.  We’re not sure separating the companies creates much incremental value.  The deal seems to be perceived positively though and should provide the shares a boost.  Separated, the two companies may be able to grow the timeshare business at a faster rate which would benefit MAR through fees.  That would be the primary benefit of the spin-off, in our view. 

 

4Q Detail

  • While MAR’s revenues came in $7MM above our estimate but reported $325MM of EBITDA which missed our mark mostly due to higher SG&A and lower timeshare results
  • Total fee revenues came in $3MM above our estimate of $386MM and $9MM above the high end of company guidance. The beat vs. our estimate was driven by higher incentive fees
    • Managed system-wide rooms grew 1.7% YoY (vs. our estimate of 1.5%)
    • Franchised system-wide rooms grew 5.6% YoY (vs. our estimate of 6.6%)
    • Base management fees were in-line with our estimate while franchise fees were $1MM lower than we estimated
    • Incentive fees were $4MM higher than our estimate
  • Owned, leased, corporate housing and other revenues of $342MM were $14MM light of our estimate but profits of $41MM (vs. guidance of $40MM) were $2MM better given the branding fees in the quarter and liability reversal related to a hotel that closed in the quarter.
    • The top line miss vs. our number seems to be related to lower F&B and other revenues which appear to have declined YoY
    • Branding fees were $10MM higher YoY; we’ll have to wait for the company to clarify whether this is a one-time increase or an on-going one.  This increase represents a 53% YoY lift at basically 100% margins so it’s very material to the results of the “Owned, leased, corporate housing, and other” business
    • There was also a one-time $4MM benefit to margins from the reversal of a liability related to a closed hotel
    • The company made no comments regarding termination fees in the quarter, but we do know that termination fees increased $12MM YoY, so we suspect that there was a nice increase in termination fees in the quarter as well.  These are also 100% margin fees.
    • Therefore, we suspect that if you strip out the branding fees and termination fees, the owned and leased business results would have been quite disappointing.
  • Timeshare sales and service revenue of $372MM was $18MM above our estimate.
    • Contract sales of $197MM were $2MM above our estimate and above the midpoint of company guidance
    • Timeshare sales and service revenue net of expenses totaled $43MM - $2MM below the low end of company guidance and $5MM below our estimate.  In our preview, we also included expected gains from note sales in our estimate of timeshare and services net results so the total miss vs. our estimate was $10MM (including the gains)

The World's Danger

This note was originally published at 8am on February 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The world is not dangerous because of those who do harm, but because of those who look at it without doing anything.”

-Albert Einstein

 

One of the most influential books that I have read in the last few years has been “Einstein: His Life and Universe” by Walter Isaacson. I say most influential because it fortified something within me that the best teams I played on took to battle every day on the ice. Courage.

 

If you are going to play this globally interconnected game of risk management at the highest level, you need to have the confidence and courage to play it with everything you’ve learned. You have to trust yourself and your process. You have to accept its weaknesses. You have to maintain opposing thoughts in your mind and remain calm.

 

You also have to be able to challenge accepted dogma, groupthink, and consensus when you have an opposing point of view.

 

Now that America’s Almighty Central Planner has laid down the Keynesian consensus, it’s time to take this puck right to the net on him and show the crowd what’s going on in this world outside of the bubbles that Ben Bernanke admits he never realizes he’s in:

 

To recap, Bernanke’s conclusions in his testimony before Congress yesterday were as follows:

  1. US Monetary Policy doesn’t affect Global Inflation
  2. US Inflation is benign
  3. US Dollars are “relatively attractive”

Let’s go through these in reverse order, given that’s how I’d weight the risk implied by a man with this amount of power who looks at the world right now without doing anything:

 

1.  US Dollar – after a +1.3% three-day recovery ahead of Bernanke’s testimony, the US Dollar Index dropped immediately following his aforementioned comments and is now down for the 6th out of the last 7 weeks. The world’s currency market votes on credibility real-time.

 

With the US Dollar being bearish across all 3 of our core risk management durations (TRADE, TREND, and TAIL)… and without any respect or support from the manipulator of the world’s reserve currency, I don’t see why we shouldn’t be modeling a probable scenario analysis for another US Dollar crisis (i.e. a retest of its prior lows).

 

 

2.  US Inflation – while Bernanke did point out that central banks hold more than 60% of their foreign currency reserves in US Dollars, he forgot to remind himself that “the Dollar is used in 85% of all foreign exchange transactions worldwide.” (Barry Eichengreen, “Exorbitant Privilege”)

 

Furthermore, there isn’t one major asset class in the world right now that implies that inflation expectations are low. Sure, the Fed’s compromised and conflicted calculation of inflation is benign, but we’re not willing to accept that as gospel. Here’s three ways to look at inflation:

 

A)     Bonds – US Treasury and Emerging Market bonds have been going straight down, literally, since QG2 was introduced at the beginning of November of 2010. Inflation is bad for bonds. Bernanke is implying the entire global bond market has this wrong.

 

B)      Stocks – Emerging Market stocks have been getting absolutely crushed since QG2 in November, 2010 and in the US stock market there’s a huge sector performance divergence embedded in the SP500 that is also inflationary. The S&P Energy Sector (XLE) is the best sector of the 9 we track for 2011 YTD at +7.51%, while the S&P Consumer Staples Sector (XLP) is the worst at +0.75% YTD. Ben, who is taking it in the margin? Bingo, the American consumer.

 

C)      Corporations – Yesterday on the Coca Cola conference call (a relatively large company with a global footprint) this is what management had to say about inflation - citing bills for juice, plastics, and sweeteners, they saw a 60% ramp in cost of goods sold in the October to December period. Management went on to say that they’ll need to raise prices on beverages in the US in 2011 as it faces $300-$400M in cost increases from commodities. McDonald’s, Proctor & Gamble, and Sysco Foods have had similar comments.

 

 

3.  Global Inflation – in a shining moment for his academic dogma, Bernanke blamed the highest world food prices in the history of mankind on “emerging market demand.”

 

All the while, almost every single Emerging Market demand signal we measure sequentially is getting hammered as Global Inflation (which is priced primarily in US Dollars) slows last year’s cyclical economic recovery. Overnight, Indian stocks traded down another -0.74% taking the BSE Sensex to down -14.9% for the YTD as concerns of Asian growth slowing continue to spread to Thailand, Philippines, and Indonesia (down -2.1%, -2.8%, and -1.3%, respectively).

 

Pakistan, which is the world’s 6th largest population (so we think worthy of considering in light of The Ber-nank’s accelerating emerging market demand thesis), saw import demand DROP from +29% year-over-year growth in December to +3.7% year-over-year growth in January. Since commodity inflation was raging in January (with the USD down for 6 of the last 7 weeks), we’d have liked to have Ben’s rebuttal to that…

 

Now do I have courage here or common sense? Does Ben Bernanke’s new world order of the world’s reserve currency having no impact on global prices make any sense to anyone who isn’t levered long the inflation trade? How about this concept of the USA decoupling from the Rest of the World? These are important questions that, sadly, our 112th Congress didn’t have the analytical competence or courage to ask…

 

The World’s Danger remains a US Central Planner’s academic dogma.

 

My immediate term support and resistance lines for the SP500 are now 1306 and 1336, respectively. At 11AM EST, our Macro team will be hosting a conference call on one of the latest bubbles perpetuated by the Federal Reserve’s policy of zero percent interest rates in perpetuity – Munis (email sales@hedgeye.com if you’d like to participate).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The World's Danger - aa1

 

The World's Danger - aa2


Delicious Privileges

“That most delicious of all privileges – spending other people’s money.”

-John Randolph

 

After reviewing this Disaster Deficit proposal put forth and watching the political theatre associated with delivering it from an American classroom yesterday, I re-shorted the US Dollar and sold out entirely of the 3% in US Treasury denominated Fixed Income I had left.

 

Since professional politicians from George Bush to Barack Obama clearly don’t have it in them to stop spending other people’s money, the only way to Govern the Government from here on in is going to have to be the old fashioned way - voting with our wallets.

 

The aforementioned quote came from a Congressman in Virginia (who served between 1) most commonly remembered as John Randolph of Roanoke. I am calling out his thoughts because they pertained to the constitutionality of the US government’s concentration of power. Standing up against the tyranny of central planning is not a new idea in America this morning. I’m just reminding you where we came from.

 

In the coming weeks I am going to focus on the history of both US monetary and fiscal policy. I’ll be drawing most specifically on a recently published book that I’m two-thirds of the way done by Barry Eichengreen titled “Exorbitant Privilege” which focuses on the history of the US Dollar, other modern day fiat currencies, and the politicization that supports them.

 

The idea of Delicious or “Exorbitant Privilege” shouldn’t be foreign to any human being. Depending on which part of this world that you live, you may actually call into question the US Dollar having the privilege of being the world’s most recent reserve currency. As Eichengreen reminds us,

 

“This has long been a sore spot for foreigners, who see themselves as supporting American living standards and subsidizing American multinationals through the operation of this asymmetric financial system.”

 

Why have I been so intensely focused on how modern day fiscal and monetary policies affect the US Dollar for the past 3 years? That’s simple. Staying ahead of the big draw downs in the US Dollar’s price over the course of the last 3 years has protected my clients and firm from being long massive bubbles in US Equities (2008) and US Treasuries (2010).

 

Until the huge correlation risk to what the US Dollar Index does every day burns off (and, God willing, it eventually will), I won’t stop weighing the US Dollar as the #1 factor in my 27-factor global macro risk management model.

 

Unlike whatever models Greenspan and Bernanke have been using for the last 10 years, mine has had some credibility in calling out big Global Macro risks before they become consensus. We introduced the Hedgeye Macro Theme of Global Inflation Accelerating in October of 2010 – today the #1 headline at one of the world’s key lagging economic indicators, The New York Times, is “Companies Raise Prices As Commodity Costs Jump.”

 

Having authored the inflation theme 5 months ago, I think we have as good a shot as the next Thunder Bay Bear to call a rollover in inflation – or to appease The Ber-nank fans, maybe we’ll call it The Deflation of The Inflation…

 

Just because inflation concerns are now a global consensus doesn’t mean that they can’t remain. I think the #1 factor in determining where inflation goes from here is where the US Dollar Index goes from here.

 

So, to keep this globally interconnected game of Chaos Theory very simple:

  1. If the US Dollar is debauched from here, I think Global Inflation will continue to accelerate
  2. If the US Dollar is resuscitated from here, I think Global Inflation readings will decelerate

As a reminder, the way we Chaos Theorists measure risks in macro markets is on the slope. Many Big Government Interventionists don’t even know what that means. Being historians and socials scientists can indeed provide impediments to understanding mathematical thoughts.

 

Another way to talk about slopes, sequential rates of change, and the risk management signals embedded therein is to simplify it – so Barney Frank and John Boehner please repeat after me – what happens in macro happens on the margin… what happens in macro happens on the margin…

 

Good. With that trivial math lesson in hand, all we need to give America’s professional politicians are some lines and charts for the US Dollar Index:

  1. TAIL (long-term) resistance = $81.66 (that’s the line you’ll need to challenge to overcome your credibility issues)
  2. TREND (intermediate-term) resistance = $78.98 (that’s the line you’ll need to watch day-to-day during the Deficit and Debt Ceiling Debates)

Now, on the topic of the US Debt Ceiling Debate, going all the way back to that prickly little critter that American folks like John Randolph were so focused on – the US Constitution – I’d be remiss not to remind the current Treasury Secretary of the United States of America that it wasn’t until 1917 that Congress gave the US Treasury discretion to issue debt…

 

That’s right – from 1787 to 1917 is a fairly long time. And we’re pretty sure that the decision in 1917 didn’t have anything to do with Presidents Bush and Obama giving prime time PR speeches from our children’s classrooms to justify deficit spending. The idea behind the issuance of US Treasury debt was grounded in protecting the American people during a time of war, not in protecting government from the people.

 

My immediate term support and resistance lines for the SP500 are now 1318 and 1337, respectively. As the implied default risks associated with US deficit spending and debt issuance continue to be reflected in higher US Treasury Yields, we now have a ZERO percent asset allocation to UST bonds.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Delicious Privileges - ja1

 

Delicious Privileges - ja2


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CHART OF THE DAY: The Global Currency and Bond Markets are Voting with Their Wallets

 

 

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MGM STILL A Q1 STORY (AND AN INFLATION HEDGE?)

After all the optimistic talk about a Vegas recovery, MGM reported a weak Q4. However, all eyes are on Q1 which is off to a good start.

 

 

We have to admit that MGM’s Q4 was pretty disappointing on the Strip.  MGM Macau produced a fantastic bottom line that even exceeded our Street high estimate.  However, we thought we would’ve seen a progressively better performance on the Strip.  Instead, RevPAR trends actually worsened a little from Q3.  MGM missed our EBITDA projections at most of their Strip properties.

 

Alas, the stock market is a forward looking entity and investors have collectively decided to judge MGM on Q1 trends.  That is why the stock was only down 3% yesterday.  We’ve also been focused on Q1 and management commentary was very positive about January trends.  1Q RevPAR is going to be up at least 10% and January was up double digits.  Management will also be meeting with investors this week and their ability to promote their stock should not be underestimated.  Apparently, as we heard on the call last night, MGM as an inflation hedge may be part of that pitch.

 

 

Observations

  • RevPAR trends look like they got sequentially worse from Q3 to Q4 at most Vegas properties. According to our weighted average calculation, RevPAR decreased 4.3% in 4Q vs. 2.3% in 3Q:
    • ADR was down 2% in 4Q vs. only .5% in 3Q
    • Occupancy was down 1.9% in 4Q vs 1.7% in 3Q
  • RevPAR decreased at most Strip properties aside from Mirage which saw a 2% lift
  • Casino and other revenues also declined YoY at most Strip properties aside from some lower tier properties, including:
    • Mandalay Bay: +3%
    • NYNY: +7%
    • Monte Carlo: +17%
  • Total Strip expenses declined 2.5%, compared to a 2% decline in 3Q10
  • Beau Rivage’s D&A expense went from $12MM in 3Q to $2MM in Q4 due to a one-time benefit.  This wasn’t discussed in the release or conference call.
  • City Center:
    • Aria: we assume that if hold was 21%, then table drop was flat with 3Q at around $340MM and that slot revenue was around $32MM. With total rebates of about 5% of gross gaming revenue
    • Aria had $40MM of promotional expense which amounts to 40% of casino revenue or 16% of gross property revenue
    • We think FTE’s are around 5,700 down from 6,300 in 1Q2010
    • Total operating expenses at Aria $168MM vs. $178MM last quarter and an average quarterly run rate $175MM in 2010
    • Total CC revenues – excluding residential, was $231MM compared to 3Q revenues of $247MM, 2Q revenues of $214MM and 1Q revenues of $179MM
    • Total CC expenses - excluding residential, were $215MM compared to $221MM in 3Q2010
  • MGM Macau results were truly impressive. While they don’t disclose a lot detail, here are some of our estimates
    • Slot win of $42MM
    • VIP Table drop of $19.5BN, hold of 3.1%
    • Mass win of $124MM
  • D&A declined for the 9th consecutive quarter as the company continues to under invest in its assets

TALES OF THE TAPE: CMG, GMCR, PNRA, SBUX, DPZ. MCD, BWLD, EAT, YUM

Notable news items/price action from the past twenty-four hours.

  • CMG downgraded to Neutral from Outperform at Cowen.
  • CMG’s new ShopHouse Southeast Asian Kitchen name finally hit the mainstream yesterday.  Sell-side analysts clamored to take credit for being first.  Hedgeye readers knew of the name when we posted on it on 1/27.
  • GMCR gained 6.6% on low volume.  The speculation embedded in this move is – as I have been writing ad nauseum – misplaced.  See my posts yesterday and my first post on the SBUX/GMCR story from January.   Keybanc upgraded the stock to a Buy from Hold this morning. 
  • PNRA was cut to Outperform from Strong Buy.
  • SBUX CEO Howard Schultz made $36.8 million last week by exercising and selling stock options set to expire in the fall.
  • DPZ’s U.K. & Ireland PLC said full-year profit fell on a one-off credit charge.   The company may pass on a 1 to 2% increase in food costs to franchises this year, according to CFO Dale Ginsberg.  
  • Former McDonald’s executive Mike Roberts is now the CEO of LYFE, a new fast food chain with options for vegans and vegetarians. 
  • BWLD gained on accelerating volume on a day of insider selling.
  • EAT declined on accelerating volume.
  • YUM gained on accelerating volume.

TALES OF THE TAPE: CMG, GMCR, PNRA, SBUX, DPZ. MCD, BWLD, EAT, YUM - stocks 215

 

Howard Penney

Managing Director


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