POSITION: Short SPY
I feel like I am watching a rewind of the February 2011 top, but scarier. This time, I can’t count how many people are telling me to just buy US Equities because a Crashing Currency doesn’t matter, yet…
Why are stocks up +4% in a straight line since last Monday? I think the answer to that is crystal clear – The Chase into month-end performance reporting is officially on, because The Bernank said it’s on. Nice trade. We had the call on his being Indefinitely Dovish right (long Gold, Oil, and The Inflation), but short SPY wrong.
What are my catalysts and why am I staying short SPY? Gravity, time, and price.
- Gravity = my quantitative risk management model (grounded in chaos theory) that I have used since founding the firm accepts mean reversion as the highest probability risk management strategy to repeat with discipline. That doesn’t mean it always works – it just means it works a lot more than it doesn’t.
- Time = the macro calendar of catalysts picks up, big time, in the second week of May when Geithner is going to face a generational debate on the debt ceiling and not being able to finance the debt without legislation. If the US currency crash is going to happen in my lifetime, I’ve said it will be in Q2 of 2011. The Currency Crash may already be in motion – but it won’t end well for anyone if it looks like Q208.
- Price = the inverse relationship between the SP500 and the VIX has been one of the highest quality contrarian signals I’ve leaned on since 2008. It’s almost autopilot at this point to sell SPY at 15 VIX. The risk obviously is that Pavlov’s bell stops ringing here – but it hasn’t yet.
If the SP500 can grab 1367 before it corrects, that will be a 3.3 standard deviation move in my risk management model on my immediate-term TRADE duration – doesn’t happen very often, but anything can happen.
Keith R. McCullough
Chief Executive Officer
In preparation for the BYI FQ3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its pre-annoucement on April 7, BYI’s Investor Day, FQ2 earnings call and other releases.
- “Short-term market conditions remain difficult, with the timing of large systems implementations becoming more challenging to predict. However, we continue to be pleased with the strong performance in our gaming operations business, the initial acceptance of our new Pro Series cabinets, and our business-specific initiatives. Our systems outlook remains strong, and this month we will begin selling the first ALPHA 2™ titles Playboy Hot Zone and Ole Jalapeños.”
- 3Q EPS (ex impact of refinancing and stock tender/repurchases): $1.82-1.95; 4Q EPS higher than 3Q EPS
- Lower than expected systems revenue caused from the timing of decisions for large installations, and lower than expected gross margins in gaming equipment due to a higher than anticipated mix of Pro Series cabinet sales.
- Will not achieve $205MM in systems revenue for fiscal 2011
- $700MM of new senior secured credit facilities comprised of a $400MM, 5-yr revolving credit facility and a $300MM, 5-year term loan (collectively, the “Credit Facilities”).
- $50 million sublimit for the issuance of standby letters of credit, a $10 million sublimit for swingline loans and a $150 million sublimit for multicurrency borrowings in Australian Dollars, Canadian Dollars, and Euro
- Initial pricing: LIBOR +175bps (assuming a gross leverage ratio of 2.0)
- Will have $150MM of undrawn availability under new revolver.
- Tender offers expires on May 6
- Repurchased ~ 898,000 shares for a total of $35.1MM, leaving $27.3MM available under its existing share repurchase plan
- Increased repurchase program to $550 million minus the amount repurchased in the tender offer (which is expected to be $400 million).
FQ2 CALL AND INVESTOR DAY YOUTUBE
- "We now expect fiscal 2011 System revenues between $205 million to $215 million. As we have been guiding, this will equate to approximately 60% of our Systems revenues occurring in the back half of fiscal 2011."
- "Based on the expected timing of current deals, we already have signed commitments for close to two-thirds of the back-half revenue."
- "We continue to maintain our maintenance revenue guidance of $63 million to $65 million for fiscal 2011."
- "We now expect that our effective rate for the remainder of fiscal 2011 will be between 35% and 36%."
- "Over the next few quarters, our working capital will be used to invest in new gaming operation assets, our expansion into Italy and Australia and to supply approximately 50% of the floor at Aqueduct, all of which we will expect
to begin to generate returns in the second half of calendar 2011."
- “We continue to focus on international expansion opportunities, and expect to obtain regulatory approvals to begin selling our games in Australia within the next 30 days. The Italian VLT market has been initially seeded by a few European manufacturers, and the performance numbers are exceeding expectations. This has led us to favor initial deployments of more recurring revenue units versus up-front sale revenue games.”
- "We sense some optimism from our customers but remain cautious for replacement games for the remainder of this fiscal year."
- [Systems revenue] “We are forecasting further increases in the upcoming quarters.”
- “We expect DM and our recently re-engineered game monitoring unit to drive in-game hardware revenue increases during the upcoming quarters.”
- “We currently expect fully-diluted EPS of $2.00 to $2.15 per share versus our last guidance of $2.05 to $2.30 per share.”
- “Now, due to this anticipated stronger net win, we expect most of our Italy arrangements to be recurring revenue with very little profit in fiscal 2011. However, this bodes well for our Italy revenues for our fiscal year 2012 and beyond.”
- “Canada’s Systems revenue should also begin in the second half of this calendar year.”
- “Canada’s not signed, and we don’t expect signing for several more months.”
- “So we’ve been buying back roughly $20 million a quarter, so I’ve got that currently in our EPS range for the back half of the year.”
- “Our ALPHA 2 games are beginning to roll out. iDeck has already rolled out and is showing great performance improvement for us. We’ve just got approval now for our first new WAPs in a long time. Cash Wizard goes out starting next month (March).”
- “And on System products, iVIEW DM we’re confident of a couple more signings of casinos for iVIEW DM here in the next 60, 90 days. And the bonusing products are beginning to hit the field. If the application’s right, View DM will obviously be sold as the casinos adopt iVIEW DM. But good strong interest for iVIEW DM, where we would expect to see revenues.”
- for that beginning in the March quarter.
- “Other opportunities in Canada?” “Yes.”
- [New WAP games] “The beautiful thing about Wide-Area Progressive games is that they’re always a percentage of coin-ins because we fund the top jackpot. Hence, traditionally with all our competitors, the higher revenues from those types of games, so they’ll follow the same pricing model as that.”
- “No deterioration in the last three months, in visibility.”
- [Cash Spin] “It’s still going up and around 45 degrees on our charts, which is pretty much where it started. It but that’s why we timed games like Hot Spin and things like that to replenish it.”
- “Total CapEx for this year is actually going to be up over last year."
- Service revenues have increased from $3MM to $6MM per quarter--upgrades/add ons, etc. As they penetrate smaller casinos - which have smaller IT departments, they require more outsourcing of services.
- Wants Software to Services revenue ratio to be 1:1
- Additional opportunities include:
- If BYI can capture 30% of their domestic competitor biz, they can add 120k slots to their system, which would equate to a $420MM opportunity.
- If BYI can capture 50% share of the new casinos, then BYI can add 70K slots, representing a $245MM opportunity.
- All-in, they think they have a $1.8BN addressable opportunity in systems.
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In-line Q1 and guidance.
“The outlook for the rest of the year looks promising as we view the events of the past few months as not having derailed the overall global economic recovery. For example, our group and transient bookings remain robust. As such, we remain cautiously confident for 2011 and are bullish about our long-term prospects.”
- Frits van Paasschen, CEO
HIGHLIGHTS FROM THE RELEASE
- "During the quarter, the Company signed 29 hotel management and franchise contracts representing approximately 8,700 rooms and opened 21 hotels and resorts with approximately 5,200 rooms... Eleven properties (representing approximately 3,400 rooms) were removed from the system during the
quarter.... At March 31, 2011, the Company had approximately 350 hotels in the active pipeline representing approximately 85,000 rooms."
- "Special items in the first quarter of 2011, which totaled $33 million (pre-tax), primarily relate to a charge associated with the Company’s minority investment in a hotel in Tokyo, Japan following the earthquake in March 2011. Excluding special items, the effective income tax rate in the first quarter of 2011 was 21.0%"
- "Revenues at Starwood branded Same-Store Owned Hotels in North America increased 6.5% while costs and expenses increased 4.6% when compared to 2010. Margins at these hotels increased approximately 150 basis points."
- "Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 8.5% (6.9% in constant dollars) while costs and expenses increased 7.4% (6.3% in constant dollars) when compared to 2010. Margins at these hotels increased approximately 90 basis points and were negatively impacted by approximately 120 basis points due to continued increase in the gap between inflation and currency devaluation at the Company’s Latin America hotels."
- Owned hotels: "First quarter results were negatively impacted by pre-opening costs at the new leased W London Leicester Square, the effect of the earthquake at the new leased St. Regis Osaka, one renovation
and one asset sale."
- "Originated contract sales of vacation ownership intervals increased 6.5% primarily due to improved sales performance on existing owner channels and increased tour flow from new buyer preview packages. The number of contracts signed increased 7.8% when compared to 2010 and the average price per vacation ownership unit sold decreased 1.4% to approximately $16,500, driven by inventory mix."
- Capex in the Q: $40MM of maintenance and $33MM of development spending.
- "Net investment spending on vacation ownership interest (“VOI”) and residential inventory was $16 million, primarily related to the St. Regis Bal Harbour project."
- "On April 6, 2011, the Company completed the sale of one wholly-owned hotel for cash proceeds of approximately $110 million. This hotel was sold subject to a long-term management contract."
- Guidance for 2Q:
- Adjusted EBITDA of $245-255MM (consensus of $259MM)
- EPS: $0.42-$0.46
- WW RevPAR SS Operated Hotels: 7-9% constant dollars (+200bps for FX)
- WW Branded SS Owned Hotels: 8-10% in constant dollars (+400bps for FX)
- 10-12% growth in fees and income (-200bps impact from ME & Japan)
- VOI / residential earnings: Flat YoY
- D&A: $79MM
- Interest expense: $58MM
- Income from continuing ops: $82-90MM
- Tax rate: 24%
- FY2011 revisions from last quarter:
- Reflect the benefit of FX/ ie weak dollar on RevPAR
- EPS +5 cents due to lower below EBITDA line items
- VOI earnings +5MM
- SG&A YoY +2%
- D&A -5MM
- Interest expense -5MM
CONF CALL NOTES
- Despite global turmoil, their view of the lodging recovery remains unchanged
- Occupancies at their hotels are now above peak 2007 levels
- For the first time, rate contributed as much to RevPAR as occupancy
- Annualized delinquencies and defaults in VOI have returned to 2007 levels
- Group pace for 2011 is on track to be up double digits and 2012 business is on track to be better than 2011.
- NA booking from outside of NA grew 20%
- Achieved high single digit growth in corporate negotiated rates
- Mid week occupancies are approaching peak levels in gateway cities
- While leisure demand is likely to be somewhat impacted by rising fuel prices, business travel is not really elastic
- Their customers tell them that they plan to travel more in 2011 than 2010
- NY suffered from a 7% increase in supply this year. Already for Q2 they are seeing occupancies build - but they also contributed to the supply growth. NY also suffered from weather.
- Their websites drive 3x as much bookings for them than 3rd party sites. 50% of their bookings come directly to them (call centers etc)
- SPG members account for 47% of their stays. SPG guests are 50% of Aloft and Element guests
- $5MM impact from Japan and ME in the quarter
- Japan: Their St. Regis in Osaka will lose $7-8MM this year vs expectation of B/E results
- $20-25MM impact on EBITDA
- China RevPAR up over 20% - China is their second largest country concentration after the US
- India- have 32 operating hotels with 4 more to open. Goal of 100 operating hotels by 2015
- Asia ex Japan continues to be a major contributor to their growth
- ME: have 24 hotels across the affected countries. Expected to earn 15MM in fees and now expect that to be cut in half, earning no incentive fees. They are seeing strong growth in sub Sahara Africa.
- Booking pace in Europe was strong
- Mexico has been negatively impacted by drug wars and violence. However, they are bullish long term on Mexico
- Owned margins declined as much as 400bps in Argentina
- Gained 300bps of share across all their brands
- In Q2, expect occupancies in the 90s in NY and large rate increases
- WW RevPAR is still 10% below peak levels
- Group business comments relate to NA - obviously, they have more hotels in NA than they had a few years ago. However, most of growth in NA has been limited service not group hotels. That helps comparisons between 2006/2007 and 2011/2012
- Most transactions are rifle shot deals
- As they get into the middle of the cycle, they are more likely to pursue more sales of their assets or a larger transaction. They are in the market testing asset sales.
- Why is their SG&A guidance higher? Impact of FX - dollar is weaker and 1/3 of their SG&A is in Euros and Asian currencies
- Weakness in Japan and ME is offset by better results in other parts of the world. NA - despite lapping some very difficult comparisons, in 2Q their RevPAR is tracking in-line with 1Q results
- NA RevPAR is impacted by a Canadian and Mexican currency. NA would have 9.3% ex FX affects.
- Aside from NY, London has had 3-4% supply growth. They just opened the W in Lester Square and its been one of the strongest openings.
- Franchise revenue growth has to do with Aloft ramp and just new hotel openings
- Aloft is ramping faster than they expected when they launched the brand a few years ago.
- What percentage of their mix is still in the discount channels?
- Their revenue management tools are giving them more insight into demand at their properties allowing them to effect mix to their benefit
- OTA business peaked at 6-7% was about 3% in 2007
- Government is about 3% of their business and was about 2% at their prior peak
Kona reported strong sales and earnings last night after the market close, confirming our bullish thesis on KONA.
KONA reported a 7.6% increase in 1Q same-store sales after the close yesterday, bringing the two-year average trend to a very strong +2.6%. This two-year numbers constitutes a sequential gain of 350 basis points from 4Q10. Looking to 2Q11, the company is guiding to a conservative 5% print for same-store sales.
Overall, restaurant sales increased 12.3% and restaurant operating margin increased to 14%. The company stated, in its earnings release, that the company is being impacted by commodity costs but top-line sales have aided management in gaining leverage over these costs and improve profit margins. Net loss for the quarter was $0.01 per share and the company is guiding to earnings in the second quarter of $0.02 to $0.04 per share.
See our not from 04/14 titled, "KONA - GAIN ALPHA ON THE KONAVORE DIET", for detail on why we think the stock could trade between $7.50 and $8.00 in the next 12-18 months.
Huge Q1 but significant guidedown for Q2-Q4. Strange.
“The year started off with a roar — strong bookings, low costs and solid profits — and in the first quarter every one of our brands exceeded its forecast. Unfortunately, the events in Northern Africa and Japan have turned what was shaping up as a spectacular year into merely a very good one. Nonetheless, other than adjustments for fuel pricing, our earnings guidance for the year is essentially intact despite these dramatic geopolitical events. The demand for the majority of our products has remained quite strong and even the impacted itineraries have begun to improve.”
-Richard D. Fain, chairman and chief executive officer
HIGHLIGHTS FROM RELEASE
- Improvement in both ticket and onboard revenue yields and across all major product groups.
- Costs were controlled; Due to timing, some costs shifted to later in 2011.
- At the pump fuel: $511/metric ton
- Fuel option portfolio increased by $24.2MM ($0.11 EPS) and the associated gain was booked to Other Income/(Expense)
- Q2 guidance:
- EPS $0.40-0.45 vs consensus at $0.56
- Net yields:
- Reported: +5% vs consensus at +5.1%
- Constant currency: +1 to 2%
- Reported: +5%
- Constant currency: +3%
- Ex-fuel reported: +4 to 5%
- Ex-fuel constant currency: +2%
- Fuel: 317K metric tons
- Fuel expenses: $189MM
- FY 2011 guidance
- Net yields:
- Reported: +5 to 7% (previously +4 to 6%) vs consensus at +4.9%
- Constant currency: +3 to 5%
- Reported: +5 to 6%
- Constant currency: +4%
- Ex-fuel reported: +4 to 5%
- Ex-fuel constant currency: +2 to 3%
- Fuel: 1.326M metric tons
- Fuel expenses: $770MM
- Three significant factors have influenced the company’s outlook on yields: geopolitical events, the weakening of the U.S. Dollar and increased tour activities.
- Two of the factors influencing the company’s yield outlook, currency exchange rates and increased tour activities, are also affecting NCC guidance.
- Net yields:
- Higher food and transportation costs offset by savings initiatives in other areas
- Fuel hedges: 56% for the remainder of 2011 at $75 bbl; 55% hedged for 2012 at $86 bbl; 40% hedged in 2013 at $91 bbl; 10% hedged in 2014 at $103 bbl;
- WTI Fuel options at strike prices ranging from $90 bbl to $150 bbl cover an additional 44%, 25%, and 11% of estimated consumption in 2011, 2012 and 2013, respectively.
- The slowdown in Mediterranean bookings following unrest in Northern Africa have returned to normal levels as a result of lower pricing.
- Caribbean and Alaskan itineraries continue to show better than expected YoY improvement
- Cash + undrawn RC: $1.6BN
- Capex: $1.1BN, $1.2BN, $500MM and $1.1BN in 2011, 2012, 2013, and 2014, respectively
- Capacity increases: 7.5%, 1.4%, 2.2% and 0.7% in 2011, 2012, 2013, and 2014, respectively
- Managing through geopolitical events effectively
- Over less few weeks, bookings in Mediterranean returned back to normal at lower pricing
- Europe: expect yield increase in mid-single digits
- Improvements in 1Q will continue into rest of 2011
- Expect 2011 to be almost as strong as originally hoped
- Strength in Caribbean and Alaska offset weakness from reduced bookings from Japan and Egypt
- Focus on improving pricing; +1% in pricing improves EPS by 25 cents
- Capex estimates have been raised due to Project Sunshine, refurbishments, and green technology investments
- Close-in bookings higher than expected particularly in Caribbean and Brazil
- Fuel costs: $2MM better than expected due to swap gains
- $24MM gain on Mercury sale: will be recognized in an extended period
- Higher fuel prices: 30 cents impact
- Geopolitical impact: 20 cents on EPS and -1% on yields
- 10% in fuel price translates into $30MM in costs, ex fuel option impact
- Japan/Egypt will be felt in 2Q
- Increased Pullmantur Tour activity primarily in 2H 2011
- Low European itinerary visibility for 2012
- Celebrity Silhouette: final stages of construction; will sail in July
- Celebrity Constellation: onboard/ticket revenues have been good
- Celebrity ships: volume and prices were stronger than expected
- Celebrity Millennium (2012-2013): will go to Far East (will be solsticized)
- Ex. currency, Pullmantour expansion, and geopolitical impact, everything else is same as in January
- UK prices substantially higher YoY; Expect successful UK market this summer
- Sourcing mix in Europe: US passengers less than 25%
- Much fewer people flying to cruises
- Direct air passengers less than 10%
- Mediterranean: still discounting but volume is back; pricing is relatively stable now
- When will yields peak?
- Cannot provide rolling 12-month bookings but quarterly, it has been linear
- Have raised prices in Alaska, Caribbean, and Bermuda as well as Northern Europe
- Caribbean: outlook positive
- G&A: very controlled; but maybe more marketing expense to drive top line
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