UA: Thoughts Into The Print

Yeah, we all know they’ll beat big. Market share trends have been so dominant – which is solid given higher inventories last quarter. Top-line trajectory is more vital here than any other name in retail (sans lulu). We need to start to envision $4 in earnings power – else margin of error is nil at $78.


You don’t need to take too much time out of your day running regressions around POS market share data to tell you that Under Armour is performing well at retail. The market  is telling you all you need to know. Well, almost…


1)      First off, market share trajectory is  looking very good in a category that’s been outperforming.

  1. In apparel, UA’s share gains in the quarter were very meaningful, and its share of the industry is sitting at about 11.5%, a full 150bps ahead of last year.  Not bad for a $15bn category at retail.
  2. Footwear is still down yy, so clearly it’s less upbeat there at face value. But the trendline has been hitting higher highs and higher lows. ASPs look very good, and inventories look very clean. This is happening about one quarter away from when we should see meaningfully accelerating growth in the footwear business that was structurally built over the past 2-years by Gene McCarthy.

2)      The bad news is that top line trends HAVE TO continue to work. Aside from the obvious cost pressures that everyone on the planet is talking about, UA is also building working capital business to support retail as well as footwear. So with no margin trigger, no capex/working capital trigger, it needs to be revenue, revenue, revenue. I’m not going to get lost in ‘comps’ here, but UA posted 20-30% organic growth in each of the past four quarters. That’s fantastic, and it’s right in line with the long term plan. But the numbers do get harder as the year progress.


Will this still be a super-human growth rate for a company in this environment? Heck yeah. But I just don’t see how you get paid buying the stock at $78 on $1.60 in EPS with cash flow eroding on the margin.


Putting on my ‘where could I be wrong’ hat, we’d need to get a big jolt in realizing that this company has $4 in earnings power over the next 3-years (5-years is more realistic). That’s about 20x earnings and 10x EBITDA on a 20% long term grower – without penalizing valuation due to having to wait until 2014 to see the earnings.


I think that this company will continue to do the right thing, and invest where it’s warranted in order to enhance long-term value. When it does so, the market tends to get overly punitive. That’s when I’d be more interested in getting involved.



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In preparation for WMS's FQ3 2011 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its preliminary guidance on April 11, FQ2 2011 earnings call, and other releases.





Preliminary FQ3 Results:

  • Revenue $191-193MM (previously $209-215MM)
  • Diluted EPS: $0.40-0.42
  • “Our third quarter results are clearly a disappointment and reflect several factors including lower-than-anticipated new unit demand in the March 2011 quarter, WMS’ execution challenges that resulted in approximately $8 million in product sales revenue from customers’ orders that shipped in April instead of the March 2011 quarter, and continued challenges in commercializing new products, including a slower rate of initial regulatory process approvals arising from the increased complexity of our newest gaming features and networked-technology enablers.” 
  • Cash: $144MM; no debt
  • Repurchased $30MM (750k shares) of WMS stock; for FY2011, have repurchased $80MM (2.1MM shares) of WMS stock.
  • "Following the introduction of several new successful participation themes during the March 2011 quarter, WMS expects gaming operations revenue to have stabilized and be approximately in-line with the December 2010 quarter [$72.7MM], partially reflecting a quarterly sequential increase in average daily revenue per gaming machine."
  • "The Company expects total gross profit margin to be in-line with the December 2010 quarter total gross profit margin reflecting an improvement in gaming operations gross margin with gaming operations being a slightly higher percentage of total revenues, and a decline in product sales gross margin primarily due to higher revenues and lower margin from used gaming machines. The Company’s operating margin for the March 2011 quarter is also expected to be relatively flat on a quarterly sequential basis reflecting lower gross profit due to lower revenues offset by lower operating costs related to expense containment initiatives."
  • “Casino operators’ capital budgets for replacing slot machines have been at historically low levels for several years, and new casino openings and expansions are now at their lowest level in many years.”
  • “Based on recent customer capital budgets and unit demand trends, we don’t expect meaningful improvements in the industry environment over the remainder of CY 2011 or, at this point, for CY 2012 and today we issued revenue guidance accordingly. Until we begin to see consistent economic recovery, growth in consumer spending and improvements in industry replacement and new unit demand, we believe WMS’ annual revenue will continue to grow at a mid-to-high single-digit percentage rate consistent with the growth achieved in FY 2009 and FY 2010, and now in FY 2011.”

Revised FQ4 and FY2012 Outlook

  • F4Q revenues: $210-$220MM
  • FY2011 revenues: $790-800MM
  • FY20112 revenues: $810-850MM
    • "The expected revenue growth is based on continued market penetration, especially in international markets, new market openings domestically and internationally, growing revenues from new networked gaming and online gaming products and increased participation revenues."
  • “Operating margin guidance for the June 2011 quarter of 22.0%-to-23.5% reflects expected quarterly sequential improvements in product sales gross margin and operating costs declining as a percentage of revenues compared to the March 2011 quarter.”
  • FY 2012 operating margin: 21-22%


  • Gaming Laboratories International (GLI) approved the commercial version of WAGE-NET networked gaming system solution and Jackpot Explosion, the first themed application in the Ultra Hit Progressive (“UHP”) Portal application family.
    • “Our initial beta placements have clearly demonstrated the incremental value of a Portal application interoperating with a base game, with coin-in premiums averaging 35%-to-40% across more than 270 Bluebird2, Bluebird xD and upgraded Bluebird gaming machines at 12 casinos.”
    • Anticipates initial installations of WAGE-NET and Jackpot Explosion in Native American casinos in California that are currently running beta-tests of the products, followed by other tribal and commercial casinos among the 12 casinos presently acting as beta-test sites.
    • Recently began a WAGE-NET/Jackpot Explosion field trial in Nevada at a popular Las Vegas casino



  • “We remain on track to further improve Bluebird xD gross margins on a quarterly sequential basis throughout fiscal 2011...We continue to expect that the Bluebird xD gross margin will attain parity with Bluebird2 gross margin in the June 2011 quarter.”
  •  “With the growth anticipated in the installed base during the next two quarters, we believe that the average installed base for the full year will be a couple hundred units higher than fiscal 2010 but will be somewhat below the low end of our original guidance range we provided in August 2010.”
  • “With ... new participation products launching in the current quarter such as YAHTZEE, Revenge From Mars/Attack From Mars and the new PRICE IS RIGHT video game and additional new participation products in the June quarter, we expect further growth in the installed footprint throughout the remainder of fiscal 2011, helping to continue our strong momentum as we head into fiscal 2012.”
  • ”We expect to see further incremental increases in depreciation in the March and June quarters as we continue this transition in our installed-participation base and selectively invest in other high return lease opportunities.”
  • “In the March and June 2011 quarters, we expect our effective consolidated income tax rate to be in a range of 35% to 36%, inclusive of the ongoing R&D tax credit benefit and the small impact from the increase in the Illinois state corporate income tax rate.”
  • “With respect to international markets in general, our recent discussions with casino operators here suggest that the environment in Europe is stabilizing and could translate in a more positive sentiment for capital spending much later this calendar year. In the interim, we continue to see strength in Latin America, Asia and Australia.”
  • “We now expect to place our first units on a lease basis in Italy early in the September quarter after we complete the certification process.”
  • “In Illinois, we expect to hear shortly who’s been awarded the central system contract for the VLTs following a resubmission of bids back in early December. Following the announcement and signing of that contract and the awarding of licenses, we expect to generate our first sales in the second half of calendar 2011.”
  • “Our accelerating launch schedule throughout calendar 2011 followed in early calendar 2012 by the expected launch of the highly anticipated first games based on a next generation CPU-NXT3 operating system along with having the highest daily revenue amongst our competitive set provides WMS with the opportunity to generate enhance value from the meaningful opportunities to expand our share of the participation business.”
  • “I’m very confident that the participation business will get back on track in Q3. We will have a significant ramp up in Q4 based on the product launches and particularly in the WAP area.”
    • “We’ve got 12 new G Plus deluxe games for sale that are coming out over the next few months. Those games, we’ve already got four approved and there’s eight more coming. They’re doing spectacularly well for the additional placement so that gives us great confidence.”
  • “Used games, as Scott mentioned, is about 240 basis points off of our product margin and it’s about 100 points more than we had anticipated. So that the strong demand for our Bluebird1 trade-ins is actually a good thing because we’re starting to harvest our own market share replacement cycle.”
  • [UK online wagering marketing] “We’ve started initially rolling out some of the marketing programs as of last week, I believe, and we’ll start to ramp that up more aggressively in February, March and April. So we will get more aggressive as the year goes on but, again, as we guided before, those revenues for fiscal ‘11 will be deminimus.”

TGT: Near-Term Oversold

Keith covered Targ-eh (again) this morning, booking another gain on the short side of a name we've been bearish on all year. The stock is immediate-term TRADE oversold here.


TGT: Near-Term Oversold - 4 25 2011 11 51 04 AM

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PNK should continue its string of strong quarters and keep up the regional momentum started by PENN.



We are projecting EBITDA of $63.5 million, significantly higher than the Street at $60.2 million.  Our EPS estimate of $0.08 is also meaningfully ahead of the Street's $0.05.  On a year over year basis, L’Auberge and New Orleans should be the standout properties on an EBITDA basis with a full quarter of contribution from River City driving most of the company-wide year over year gain.  Secular margin growth remains a story company-wide.  PNK generated 3 straight quarters of property level margin improvement and we believe at least 4 more straight quarters remain.


As can be seen from the following chart, regional gaming trends have picked up considerably sequentially with March being the standout of the quarter.  Whether March benefited from pent up demand as a result of tough weather in January and early February remains to be seen although we are hearing anecdotally that April has been a pretty good month.  We track trends on a sequential basis, seasonally adjusted.




April may end up at HK$19-20BN



Macau slowed in the past week and we would expect further slowing as we approach the May holidays.  As of April 24th, table gaming revenues month to date were HK$15.5 billion.  Adding a projection for the last 6 days of the quarter and a full month of slots, we estimate total April gaming will finish at HK$19-20 billion, up 44-52% YoY.


In terms of market share, MPEL lost some share in the past week but is still trending well above its 3-month trailing average.  Here are the shares:




It matters when hold is volatile.



We recently cautioned our clients that MPEL may not hit the whisper Q1 EBITDA numbers of over $140 million.  Despite strong top VIP volumes, low hold may crimp margins since at least half of MPEL’s junkets are paid commissions based on volume, rather than revenue.  In these instances, MPEL bears the risk of hold fluctuations.


Currently, we are projecting company EBITDA of $131 million which is actually up from our recent estimate of $126 million but below the whisper expectations and below our previous estimate of $144 million.  We had previously thought that most of the CoD’s junkets were compensated on a rolling volume basis but now believe that it is closer to 50/50 revenue share.  Thus, the bottom line impact of March’s low hold is not as significant as we thought- however, our conclusion remains the same.

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