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IGT: FQ2 BUCKS THE TREND

We knew IGT had more levers to pull than the other guys and was regaining some share but a beat and raise of this magnitude was a surprise. 

 

 

IGT had been our favorite supplier heading into earnings season because we felt it was the safest pick.  Despite our longer term concern with participation share, we felt IGT had more near-term margin levers to pull and ship share was on the rise over the next few quarters.  What we didn’t bank on was a big beat and raise.

 

For the first time in a really long time IGT not only beat consensus but also raised guidance.   The beat was across the board – higher product sales, better game operations, and better margins.  IGT’s guidance raise was due to a combination of cost efficiencies and reduction in borrowing costs.  IGT also appeared to gain ship share this quarter in North America (NA).

 

 

Q2 Detail

  • Product sales of $215MM beat our estimate by 3%, while gross margins were $18MM above our estimate
    • Total units recognized were in-line with our estimate but once again NA units beat our estimate while international units fell short of our estimate
    • ASP’s were below our estimate – decreasing 4% YoY and over $1k QoQ.  While IGT did not elaborate on the call – nor did any analysts bother to ask, part of the reason for the depressed ASPs was due to a new promotional launch, which we wrote about in our preview.  The other reason for depressed ASPs was due to the conversion of 1,200 leased units to for sale units at very low prices.  Leases often have buyout options so this is not that unusual but would also explain the depressed ASPs in the quarter.  We estimate that the sale of the leased units could have depressed ASPs by about $600.
    • Domestic gross margins were also a lot higher than we estimated although IGT guided that a more normalized margin should be around 52%.  We suspect that some of the margin lift has to do with growth of high margin software included in non-box sales.
    • While international units were weak, margins of 56% were the best that IGT has had in at least 10 quarters.  We assume that normalized margins are lower (low 50’s).
  • Gaming operations revenue of $267.5MM beat our estimate by 4% and gross margins were 5% above our estimate
    • The install base was 300 units better than we estimated
    • Daily yields were 3% above our estimate
  • Other stuff:
    • Excluding the $1.7MM restructuring charge, SG&A was $7MM higher
    • D&A was $3MM lower than we estimated.

Outlook:

  • IGT increased the midpoint of its guidance range by 5 cents. 
    • We estimate that the interest savings from the new credit facility and the swap accounted for $0.02
    • This quarter was a beat – we estimate it contributed at least 2 cents to the guidance raise
    • Also, better gaming operations results and lower D&A, offset by higher SG&A

Hedge Fund Advisor Long China, Gold; Short US Stocks, Treasuries, Dollar


THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK


TODAY’S S&P 500 SET-UP - April 25, 2011


The Inflation trade remains in place; US Dollar down (down 13 of the last 17 weeks); continued signs of growth slowing with copper down -1.2% this morning (bearish TREND); while monetary inflation skyrockets (gold and silver hitting new highs).  As we look at today’s set up for the S&P 500, the range is 20 points or -1.37% downside to 1319 and 0.12% upside to 1339.

 

SECTOR AND GLOBAL PERFORMANCE


The Financials remain the only sector broken on both TRADE and TREND.    

 

THE HEDGEYE DAILY OUTLOOK - levels 425

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 952 (-1033)  
  • VOLUME: NYSE 812.78 (-15.44%)
  • VIX:  14.69 -2.52% YTD PERFORMANCE: -17.64%
  • SPX PUT/CALL RATIO: 1.60 from 2.17 (-26.33%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.30
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 3.42 from 3.43
  • YIELD CURVE: 2.74 from 2.74 

 

MACRO DATA POINTS:

  • 10 a.m.: New Home Sales, est. 280k (up 12%), prior est. up 250k (down 16.9%)
  • 10:30 a.m.: Dallas Fed Manufacturing, est. 13.4, prior 11.5
  • 11 a.m.: Export inspections, grains
  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 4 p.m.: Crop progress (winter wheat, cotton, corn)

WHAT TO WATCH:

  • Average pump price climbed 11.5c to $3.88 thru April 22: Lundberg survey. Obama said last week a task force will examine if oil, gas prices driven higher by market manipulation. 
  • Nike (NKE) may be poised to climb as it works to control rising materials and labor costs, Barron’s
  • China’s 2011 trade surplus may narrow to 2% of GDP because of rising commodity prices, Reuters says, citing a report from the State Council’s Development Research Center.

COMMODITY/GROWTH EXPECTATION


THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Silver Surges to All-Time High as Investors Seek Protection From Inflation
  • Crude Oil in New York Rises a Fourth Day as Middle East Violence Escalates
  • Copper Drops in New York on Signs of Ample Supplies in China, Biggest User
  • Palm Oil Declines as Lower Malaysian Exports Threaten to Boost Inventories
  • Corn Advances as Rains Delay Seeding in U.S.; Wheat Jumps to 2-Month High
  • China's Corn Imports May Expand This Year to 2 Million Tons, Baize Says
  • Rubber in Tokyo Declines as Demand May Weaken on Reduced Car Production
  • Hedge Funds Bullish on Natural Gas as Nuclear Output Falls: Energy Markets
  • Corn, Soybeans May Rise as Cold, Weather Slows U.S. Seeding, Survey Shows
  • India Gold Imports May Fall for Third Month on Prices, Industry Group Says
  • Tsunami Quickens ‘Terminal Decline’ of Northern Japan’s Fishing Industry
  • Most China Aluminum Capacity Lacks State Approval, Business News Reports
  • Corn Seen Topping Wheat on Demand, Raising Tyson's Costs, Helping Syngenta  

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European markets are closed in observance of the Easter holiday

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

  • Asian stocks were mixed overnight on earnings concerns and China declined on increased inflation concerns.
  • Japan March corporate services price index +0.4% m/m, (1.2%) y/y.
  • Japan March supermarket comps +0.3% y/y.
  • Hong Kong’s market is closed for a holiday.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director


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The dollar, less almighty: Big investors see possible long-term currency weakness



CAKE – EXTEND AND PRETEND

CAKE reported 1Q earnings after the close Wednesday, announcing diluted EPS of $0.34 versus consensus at $0.33 and guidance of $0.29 to $0.33. 

 

The Cheesecake Factory reported 1Q earnings after the close Wednesday and, while the results were in line or slightly above expectations, the commodity outlook – and the question of company’s ability to pass it along to consumers – is causing uncertainty.  This uncertainty weighed on the stock Thursday as CAKE traded down 3.9%. 

 

Comparable restaurant sales came in at +1.6%, or +2.4% excluding weather, which implies a sequential increase in two-year average trends of 220 basis points.  The street was expecting comps to come in at +1.2%.  Exiting the quarter, CAKE had +1.4% of price on the menu.  Grand Lux did experience negative comps during the quarter, coming in at -3.8%, but management attributed that weakness to a difficult compare (+4.0%) versus 1Q10 and volatility in sales at the Las Vegas locations. 

 

CAKE – EXTEND AND PRETEND - cake pod1

 

 

In terms of ROP Margin, CAKE’s performance was less reassuring.  Cost of sales increased 70 basis points year-over-year.  With 60% of its food cost basket contracted, management anticipates inflation of approximately 3.5% for 2011.  The prior guidance was for inflation of 3% in the food basket.  Tellingly, management now forecasts the commodity impact on EPS for 2011 to be $0.11 from $0.05 prior.  Along the lines of my post on CAKE in February, titled “CAKE – PUNT AND HOPE”, management is betting the ranch on food inflation falling off a cliff in the back half of the year.  While that may happen, on a year-over-year basis, it is less than certain and does not jive with much of the agriculture news at present which point to disappointing harvests in grains and produce and increasing feed costs supporting protein prices.  Despite having protein costs locked, to the extent CAKE has to renegotiate contracts with suppliers in 2011, the overall cost of its commodity basket could increase further than the general rate of food inflation.   The company is guiding to 2.5% inflation in 2H11, with 1.5% in 4Q11, as compared to 4.5% inflation in 1H11. 

 

In order to address this inflation, management maintained that pricing would be taken, if necessary, to absorb cost pressure.  As I stated before, price was +1.4% at the quarter’s end and, with 0.7% in price rolling off the menu at the end of summer, the company anticipates taking 0.7% in the 2011 summer menu change to maintain the 1.4% price.  Management also underlined its willingness to take price closer to 2% with that menu change if the commodity environment required it.  G&A/labor efficiencies will also contribute to offsetting inflation, according to the company.

 

CAKE – EXTEND AND PRETEND - cake pod2

 

 

EPS guidance was raised at the low end, from $1.55-$1.70 to $1.58 to $1.70 (full year consensus EPS is $1.65), despite the incremental $0.06 of pressure from food costs that management is expecting.  This full-year earnings guidance is based on a comparable restaurant sales forecast of 1.5-3.0%.  For the second quarter, EPS guidance is at $0.39 to $0.41, which is below the street at $0.44 and will result in a shift in EPS from 2Q to 2H, absent a reduction in full year consensus expectations.  I would not be shocked if 3Q inflation, which could well be as bad as, or worse than, 2Q, prompts an additional shift in EPS expectations to 4Q!  Whether or not CAKE has sufficient pricing power to absorb the coming inflation will be the key question from here.  I do not believe that CAKE has the ability to price its way through the inflationary period ahead.  There is a significant risk of full-year EPS being reduced from here, especially given the lop-sided sentiment around the stock of late.

 

CAKE – EXTEND AND PRETEND - sell side rating chart cake

 

 

Howard Penney

Managing Director


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