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PENN: A MERE FLESH WOUND

PENN’s pre-announcement looks worse than it is due to Hurricane Gustav and significant pre-election lobbying expenses. However, business is not good for PENN or any gaming company for that matter. Excluding one-time expenses of $18 million, PENN took its EBITDA guidance down about 8% for the quarter.

But let’s be realistic. No one should own PENN for near term earnings results. One owns PENN because it is well managed and very cheap, even on new numbers, as investors lump it in with the overleveraged gaming operators. Unlike PENN, the competition lacks the liquidity to actually take advantage of increasingly attractive acquisition opportunities. At only 2.5x leverage, PENN and its ROI focused management team has the powder to lever up while most of the other guys are scrambling to de-lever. That means the competition is cutting costs and services and not investing for the long term. The line between the haves and the have-nots is clearly drawn and PENN is on the right side of that trend.

As I write this PENN is trading off 15% and down 41% from its recent high just one month ago. To me this is a gift. While there isn’t a definitive near term catalyst, it is not often one gets to buy into a very well managed company as strategically and financially well positioned as PENN for 6x EBITDA.

PENN trading at historical low valuation

MCD – When I see MCD accelerating expansion……

This story appeared on Reuters today:

“Poznan, Poland, Oct 2 - Fast food giant McDonald's Corp will speed up its expansion drive in Central and Eastern Europe to tap into the region's vibrant growth and increasingly affluent middle class, its No. 2 official said.

Over the last several years, McDonald's has not grown significantly in Europe's emerging economies such as Poland or Romania as it focused on improving its image in the continent's more established markets, such as France and Britain.

The group plans to invest another $1-$1.1 billion in its European restaurants next year, McDonald's President and Chief Operating Officer Ralph Alvarez told Reuters in an interview at a newly remodeled restaurant in Poznan, western Poland.”

Given we are now in fiscal 4Q08, MCD senior executives have nearly, if not completed the budget for 2009. The budgeting process at MCD is a bottom up aggregation of profit growth from around the world. Since I don’t believe MCD is going to change its long-term sales and earnings growth rates, if growth is accelerating in Europe, it must be slowing in other parts of the world. Asia – I don’t think so. The U.S. – I thinks so.

More importantly, the dollar is going to be a headwind for the first time in three years. The headwinds continue to build for MCD. I took the chart on the dollar from Farmprogress.com
  • The $ headwinds will be steady in 2009.
A view of MCD Europe

Happy Hunting

According to the Economist’s September 27th issue, “there have been only 13 attacks by black bears resulting in injury (including one death) in the whole of North America this year. Grizzlies have carried out a further 11 attacks, resulting in no deaths. Neither species has averaged more than two kills a year since the 1950’s… there are 70,000 grizzlies and 900,000 black bears sharing the continent with 440M people… that puts bear attacks well below bee stings and lightning bolts as threats to human life…”

Bear markets don’t kill people. So let’s all take a deep breath this morning and relax. If you proactively prepared for this crisis, you are smiling at the opportunity born out of it. You’ve had your bear mace in hand. You don’t have to depend on the US jobs report this morning as your lifeline. You don’t have to pray that US Congress votes “yes” to bail you out. You don’t have to panic. You don’t have to run.

Everyone from the Canadian town where I am writing this note from this morning (Thunder Bay, Ontario) is street smart enough to know that the last thing you do when facing a growling bear is run. If your boss is screaming and running this morning, let him do that – right out the door. Goodbye and good luck. It’s not time to be pointing fingers at your teammates. It’s time for leadership. It’s time to buy low.

As we strap on the global bear hunter pants, we are waking up to a world that’s on sale this morning. From commodities to foreign currencies, the deleveraging and deflationary cycle is in full motion. The CRB Commodities Index has lost -10% of its value this week alone! Currencies from the Russian Ruble to the South Korean Won are running for the exits. Fertilizer stocks and the “smart hedgies” who bought them have been put out to pasture, and Jim Cramer’s buy everything Brazil call from the ‘You Tube’ archives of 6 months ago saw the Brazilian stock market lose -7.3% in one fell swoop yesterday! Sell high. Buy Low. Don’t run.

Asian markets got crushed again last night. As sure as the sun rising in the east, Japan was down again, losing another -1.9% of its perceived “value”. India got mauled by the bear and closed down another -4.1%, leading Asian markets to the downside, and stocks in Hong Kong lost another -2.9%. We’ve been patiently waiting on China via the EWH and FXI exchange traded funds. Prices pending, I may very well step up and buy them in the ‘Hedgeye Portfolio’ this morning.

European equities look less interesting to me than those in Asia, but more interesting than Mexico or Canada who have over 75% of their exports tied to the US panic room. European Central Bank chief, Jean Claude Trichet, is going to be forced to cut bait (interest rates) or dance with the bear himself. Europeans, unlike Americans, actually have some cushion to make some moves on the monetary policy side simply because they held onto their bear mace, and didn’t start running too soon.

On October 29th, expect the US Federal Reserve to do more of the same, and run from reality. They’ll cry wolf, play Japanese, and cut real rates to zero. Rather than providing leadership as lender of last resort, the Fed has been politicized. This is unfortunate, but it’s the truth.

We’re looking for solutions. We’re looking for opportunities born out of our competition’s internal crisis’. One of the ideas we have been suggesting is for Obama to bring in the 6 foot 7’ cigar smoking bear hunter, Paul Volcker. He wasn’t popular with politicians, but he was right. Running from this growling bear is not the answer. It’s time to stand up, cock the hammer, look this “Investment banking Inc” animal in the eyes, and pull the trigger.

Happy hunting,
KM



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GEORGIANS WELCOME

Desperate for visitors, the Federal Migration Service began a program to allow hotels in Moscow to register visas themselves. I’m sure President Saakashvili will appreciate the convenience on his next vacation to Moscow.

Given the state of world tourism and travel, I wouldn’t be surprised to see other countries introduce similar measures.


Decent Week For Sports Apparel

Total sports apparel sales as reported by SportscanInfo came in +3.0. This might not seem meaningful, but it is the fifth consecutive week of accelerating yy sales. Not bad. Interesting to see a massive divergence between channels, with the Sports Retailers and Discounters/Mass taking share, with the ‘Family’ channel off by 30%. This category includes the likes of Boscov’s and other regional department stores that are struggling to stay afloat. Apparently they’re losing the struggle…

UA: Next Gen Trainers – In Case You Missed It

Just got the promo image below emailed to me about a minute ago. Fyi...

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