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UA: Don't Rush To Cover

We’ve had several folks ask this morning for Keith’s levels on UnderArmour. Here you have it…

Just broke through significant TREND.

If you’re short the name, I wouldn’t rush to cover.

UA: Don't Rush To Cover - ualevel


MGM: CASINO LIKELY LAGGED HOTEL IN Q1

Q1 might be a bit of a disappointment for those expecting the start of a big Vegas recovery.  MGM Macau should blow it out.

 

 

As we wrote on April 14th, in “The MGM Rollercoaster”, we believe that after management promises of a strong first quarter and Street room rate surveys showing double digit growth, MGM’s Vegas results may fall short of investor expectations.  We’re a little less than 5% below Street for EBITDA for the quarter. 

 

1Q2011 Detail:

 

We estimate that MGM will report $1.5BN of revenue and $297MM of EBITDA (consolidated EBITDA less corporate & ESO expense plus JV income) which pans out to be 1% and 5% below Street estimates, respectively.

  • We estimate that MGM’s Las Vegas properties will report $1.1BN of revenues and $225MM of EBITDA, in-line and 3.5% below consensus respectively.  While our RevPAR estimates are likely close to consensus, we believe that growth in casino revenues will be disappointing – up very slightly on average.
    • We assume that RevPAR increases 8.6%, driven by a 5.2% increase in rate
    • While cost controls should be strong, we do expect to see operating costs begin to increase YoY after over 2 years of cost decreases. This quarter should also mark the first quarter of YoY increases in EBITDA.
    • Bellagio: $262MM of revenue and $73MM; 8% increase in RevPAR
    • MGM Grand: $193MM of revenue and $37MM of EBITDA; 5% increase in RevPAR
    • Mandalay Bay: $175MM of revenue and $28MM of EBITDA; 10% increase in RevPAR
    • Mirage: $138MM of revenue and $23MM of EBITDA; 7% increase in RevPAR
  • MGM Detroit estimated at $141MM of revenue and $41MM of EBITDA
  • We estimate that Beau Rivage will report $85MM of revenue and $17MM of EBITDA

Non-consolidated Entities:

  • Borgata: We estimate that Borgata will report $177MM of net revenue and $37MM of EBITDA. MGM’s ownership stake is 50%
  • City Center: Excluding condo sale revenue/and forfeitures, City Center is projected at $241MM of revenue and $42MM of EBITDA
    • Aria: $208MM of revenue and $35MM of EBITDA
    • Mandarin: $9MM of revenue and an EBITDA loss of $1MM
    • Vdara: $13MM of revenue and $1.5MM of EBITDA
    • Crystals: $11MM of sales and $6MM of EBITDA
  • MGM Macau should have another stand out quarter.  We estimate that MGM Macau will report EBITDA of $132MM, down sequentially due to low hold in 1Q compared to estimated hold of 3.1% in 4Q10.  We think that MGM Macau is on track for $550MM of EBITDA in 2011.
    • VIP Table drop $22.5BN and hold of 2.7%
    • Mass table win of $143MM
    • Slot win of $53MM

Other stuff:

  • Corporate Expense: $28MM
  • ESO: $10MM
  • D&A: $156MM
  • Net Interest Expense: $251MM

UA: Not Enough for a $78 Stock

 

Solid 1Q From UA, as expected. But in-line with our concerns from yesterday, we wonder if it is enough of a beat for a $78 stock? Our sense is that  the answer is No. Working capital change here is absolutely critical. It’s a key stock driver and is eroding at the fastest rate in 13 quarters.

 

What we liked:

  • This stock needed a beat on a big revenue number. It got it.
  • UA posted +34% growth in a ‘maturing’ US apparel business. New charged cotton business shipped during the quarter and likely contributed more than we modeled. The acceleration on the underlying 2-year run rate is material.
  • Nixing out all the noise behind guidance vs. so-called expectations, the absolute earnings algorithm is exceptional. +36% top line translated into +56% EBIT into +65% EPS. Not many others out there printing those numbers.
  • UA took up guidance – by MORE than the 1Q beat – so early in the year speaks to confidence in 2H numbers.

 

What we did not like:

  • Of the $0.04 beat, $0.02 is given back in 2Q due to the shift in marketing. So net/net, we’re looking at a $0.02 beat here – which is not huge relative to $78 worth of expectations.
  • Inventories up +68% versus sales +36%. Check out the SIGMA. 24.5 days increase in inventory on hand is the greatest swing we’ve seen since 4Q07 (yes, 13 quarters ago). Days Receivable were up for the first time in  -- yes, you guessed it – 13 quarters. Unfortunately, days payable continues to decline as UA can’t (not surprisingly) push back on vendors – especially with incremental growth coming out of the cotton side of the business. This stock has historically traded on two factors – top line momentum, and working capital changes. Check out the stock from Oct ’07 through 2Q08 – either absolute or relative to the market.
  • The company beat on revenue, missed Gross Margins, and made up for it on SG&A. This is a name that we never ever ever ever want to see make or beat expectations because of SG&A.  There was a $2mm shift in spending from 1Q into 2Q – or about $0.02 per share – which gives us some relief. Also, let’s be fair – I don’t want to beat the company up for leveraging SG&A on a massive 36% top line growth number. If we account for the shift in marketing spend, we’re looking at 34% SG&A growth vs. 36% top line. But the bottom line is that UA has proven that they can translate marketing spend into profitable top line growth, which is a rarity in this business. Given that it is at a critical juncture in its growth right now, we need to watch this one like a hawk.
  • I wouldn’t really call this one a ‘dislike’ but let’s not forget that this is the first quarter where UA has its hats and accessories business in-house instead of with a licensee. That likely accounted for about 6% boost in top line growth right there. These little items need to be considered when we’re looking at a hyper multiple stock.

 

The bottom line is that I still 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. Perhaps this quarter is the event. We’ll see.

 

More to come, if warranted, after the call.

 

UA: Not Enough for a $78 Stock  - UA S 4 11

 

 


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THE M3: HOTEL DEMAND; HIGHER CHINESE BANKS CAPITAL RATIO

The Macau Metro Monitor, April 26, 2011

 

 

EASTER EFFECT FUELS HOTEL DEMAND TILL MAY DAY HOLIDAY Macau Daily News

The Macao Hoteliers and Innkeepers Association says that Macau hotels were fully occupied during the Easter holiday. The room rates did not see a sharp increase and were maintained over last year’s level.  Some three to four‐star hotels raised room rates by 5%‐10% to around MOP1,000 to MOP2,000.


CHINA SAID TO RAISE BIGGEST BANKS' CAPITAL ADEQUACY TARGETS Bloomberg

According to sources, the China Banking Regulatory Commission (CBRC) told Industrial & Commercial Bank of China, China Construction Bank, Bank of China, and Bank of Communications to raise their ratios from 11.5% to 11.8%, while Agricultural Bank of China was told to raise its ratio from 11.5% to 11.7%.


TALES OF THE TAPE: PNRA, BWLD, PEET, SBUX, CAKE, SONC, BJRI, PNRA, KONA, CHUX

Notable news items and price action from the past twenty-four hours along with our fundamental view on select names.

  • PNRA shares gained 3.9% on accelerating volume.  Next to BWLD, PNRA is the best performing restaurant stock over the past thirty days. 
  • PNRA and BWLD report earnings today after the close.
  • PEET was downgraded to “Neutral” from “Outperform” at Robert Baird.  The twelve-month price target is $48 per share.
  • SBUX CEO Howard Schultz, responding to questions regarding his succession at a press briefing in Shanghai, said that he is “not going anywhere soon”.  He also stated that he expects the Via brand instant coffee to be a “billion-dollar” business in a “short number of years”, according to Bloomberg News.
  • CAKE traded higher on accelerating volume while EAT gained 0.9% on flat volume.
  • SONC, BJRI, CAKE, and PNRA were the only four stocks that traded with a gain in volume versus the thirty-day average.  In general, there was little volume in the restaurant space – or broader market for that matter.
  • KONA and CHUX traded down -2.6% and -3.6%, respectively, on accelerating volume.
  • MCD - raises prices by 2% in HK on wages: HKET

TALES OF THE TAPE: PNRA, BWLD, PEET, SBUX, CAKE, SONC, BJRI, PNRA, KONA, CHUX - stocks 426

 

Howard Penney

Managing Director


Currency Rodeos

This note was originally published at 8am on April 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A national debt, if it is not excessive, will be to us a national blessing.”
- Alexander Hamilton

 

Like Keith, I’m a born and bred Canadian.  Despite my nationality of birth, after living in the United States for upwards of the last fifteen years, I can quite confidently say this is a great country.   At Hedgeye, we spend a lot of time critiquing the political leadership in Washington, DC in our research, but that shouldn’t be confused with a general critique of the United States. I’ll say it again, this is great country. 

 

In 1999, the 106th Congress passed a bill that allocated federal funds to renovate the Hamilton Grange, which was Alexander Hamilton’s family home.  In that bill, Congress indicated that this preservation was to “honor the man who more than any other designed the Government of the United States.”  At times, we’ve sided more with the Jeffersonian philosophy as it relates to governing, but there is no disputing Hamilton’s influence on the founding of this nation.  Indeed, as the first Secretary of the Treasury his words continue to have relevance in fiscal and monetary policy discussions.

 

Setting aside the discussion of the extent to which the government should be involved in our lives, I think we would all agree that government does have its place and can, with the right leadership, do great things.  In fact, to Hamilton’s point, based on a government’s ability to tax and borrow (if done prudently these don’t have to be bad words!) it can build infrastructure and provide appropriate social services, which make the outcome of any government debt a “national blessing.” That is, if its use is not “excessive”.

 

Late last week in our Q2 quarterly theme call, we called for a potential crash in the U.S. dollar.  Once again, we didn’t make this call because we lack American patriotism, but rather because of the fundamentals.  Stepping back for a second, though, we should frame up what exactly a crash means for a currency.

 

In the last 30 years, the largest annual decline in the U.S. dollar index was -18.5% in 1985, while the average decline for that period was 0.11%.  In the year-to-date, the U.S. dollar index is down -6.6%.  So, we are four months into 2011 and the U.S. dollar is already down close to 1/3  of its largest annual decline ever.  Our view is that the U.S. dollar could decline potentially another -5% through the course of the quarter and roughly -10%-ish through the course of the rest of the year.  If this occurs, it would be the largest annual decline for the U.S. dollar index in 30-years and that, my friends, is a crash.

 

This morning, we are seeing a continuation of this move with many currencies, once again, trading up close to a percent versus the dollar.  Interestingly, even in Europe, where sovereign debt woes continue to accelerate, the currencies are strong this morning with the British Pound up +0.92% versus U.S. dollar and the Euro up +0.73%.

 

We certainly get that being bearish on the U.S. dollar at this point isn’t exactly a contrarian call, but, to be fair, we’ve traded the U.S. dollar in the Virtual Portfolio 20 times since the firm’s inception and have been right 20 times. In addition, of the 46 currency positions we’ve taken in the Virtual Portfolio over the same duration, we booked a gain on 41 of them. Clearly, this isn’t our first Currency Rodeo. That said, according to a recent survey by Bank of America, all but 6% of their global clients are bearish on the U.S. dollar, which is not inconsistent with some of our internal surveys.  In addition, Barclays reported the commodity assets under management have reached an all-time high at $412BN.

 

Being long commodities is in many respects the same trade as being short the U.S. dollar, and we’d be remiss to not at least factor into our models that the investment community is leaning hard in one direction.  But the question remains: is consensus bearish enough on the dollar?  Our answer on this, until the facts change, is “no”.

 

As we analyze the U.S. dollar versus global currencies, we focus on three key factors: debt, deficit, and interest rates.  Currently, the U.S. dollar lines up negative on all three of these fronts, specifically:

 

1.  Excessive debt – In the last couple of years, it has become cool to quote Reinhart and Rogoff and bandy about sovereign debt-to-GDP ratios, so this isn’t new, but according to usdebtclock.org, the United States has a debt-to-GDP ratio of 96%.  This is negative for GDP growth, which is negative for the U.S. dollar as slower growth leads to longer term accommodative monetary policy and higher than expected fiscal deficits.  Further, the United States’ future debt trajectory is much steeper than any of its “AAA” peers (Canada, United Kingdom, Germany and France) due to a lack of a credible deficit reduction plan.  To add insult to injury, the politicians in Washington will once again debate increasing  the debt ceiling in mid-May while global currency traders watch real-time;

 

2.  Long term deficit – This year the United States federal government will run a deficit north of $1.5 trillion dollars, which is more than 10% of GDP.  (This is slightly better than Sierra Leone.)  The real issue with the deficit is a lack of a credible plan to reduce the deficit going forward.  While many nations globally have already begun austerity programs, the United States has no plan and the recently approved $38 billion spending reduction for the duration of this year is only likely to have a real benefit of some $380 million.  President Obama has given June as the time frame by which he hopes to have an agreement on a long term budget, but our view is that based on how far apart the Democrats and Republicans are on the tenets of the plan, this time frame will be blown threw;

 

3.  Monetary policy bifurcation - Simply put, interest rates and perceived future interest rates move currencies.   Almost every major modern nation in the world has either tightened policy (witness Sweden and China most recently) or is reporting data that suggests tightening is imminent.  In contrast, not only is the United States still implementing Quantitative Guessing Part II, but recent signals out of the Federal Reserve suggest we could see a version of QE-lite after June, so we think the U.S. Dollar will fall victim to additional easing in the face of the world tightening.

 

In order to shift our investment view on the U.S. Dollar we need to believe that these factors will improve absolutely and relatively and, as of yet, it is hard to make that case.  Meanwhile, the U.S. dollar index continues to be in a bear market in our quantitative models.

 

Currently in the Virtual Porfolio we are long the Canadian dollar, long the Chinese Yuan, and long the British Pound. We covered our short position in the U.S. dollar (UUP) yesterday.   This isn’t about politics or patriotism, but risk management.

 

Enjoy the long weekend with your families.

 

Keep our head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Currency Rodeos - Chart of the Day

 

Currency Rodeos - Virtual Portfolio


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
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