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PENN: 5X WOULD BE A TREND

We expect another beat despite flooding in Tunica.

 

 

PENN has been on a hot streak of reporting good results the last 4 quarters; investors liked what they saw and heard from management, pumping the stock up an average of 6% during those four earnings days.  On July 21st, we think we'll see the hot streak continue with a 5th consecutive quarter of good results.  It’s hard to predict another 6% trading day, but if achieved, our Q2 estimates should be a positive for the stock. 

 

For Q2, we are projecting net revenues, EBITDA, and EPS will come in at $714.7MM, $184.5MM and $0.54, respectively.  As the table below shows, this is higher than consensus and company guidance.  The beat would come despite an estimated $5MM hit on EBITDA at its Tunica property from the Mississippi River flooding.

 

PENN:  5X WOULD BE A TREND - PENN2

 

Here are some Q2 highlights and model assumptions for PENN:

  • Q2 sequential market share gains
    • Argosy Sioux City, Hollywood Casino Joliet, Hollywood Casino Aurora, Argosy Lawrenceburg and Argosy Riverside all gained market share on a 12-month rolling basis
  • Table revenues at Charles Town continue to outperform expectations as revenues are now trending well above $12MM/month.  While slot revenues at Charles Town have been disappointing, total win is still +30% YoY.
  • We are estimating 100 bps improvement over last year in property-level margins
  • We believe PENN’s leverage ratio will be at its lowest level since 2009

Currently trading at 8x 2012 EBITDA, PENN appears more expensive than the other regionals.  However, 2012 does not include full EBITDA contribution from its significant developments in Ohio and Kansas.  If we go out to 2013 the valuation drops to a much more attractive 6x.  Although we are cautious on domestic gaming for the 2H of 2011 due to a variety of macro concerns—i.e. low US GDP growth, high unemployment, depressed housing—on a TRADE duration, PENN could have a nice boost as Q2 looks like another great quarter.


Timing Markets

This note was originally published at 8am on July 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There are times when it’s important to invest cautiously, and there are times when it’s important to invest aggressively… A big part of the job is knowing where we are and choosing between those two.”

-Howard Marks

 

Howard Marks is one of the world’s top Risk Managers primarily because he doesn’t have an investment mandate that doesn’t allow him to change. If you can manifest the change you want to see in this industry into your risk management style, I think you can win.

 

The aforementioned quote is one of the many winner’s quotes you’ll find from Marks. It came at the end of an excellent Bloomberg article by Gillian Wee titled “Biggest Distressed Debt Investor Marks Europe After 22 years of 19% Return.”

 

Whether we like it or not (I personally love it), Timing Markets matters – big time. Whether it’s on the long or short side of what you think is a great research “idea”, try putting real risk capital on the line for a decade or more across cycles and you’ll quickly realize this lesson the hard way – there is a huge difference between great research and great risk managed research (timing).

 

Back to the Global Macro Grind

 

After a massive 2-week melt-up across Global Equities, last week ended on a stinky note. By the time it was all said and done, commodity inflation was up a lot more than US stock market inflation last week; and with US style Jobless Stagflation compounding the stinky-ness of it all, the US Equity futures don’t like it this morning either.

 

Reviewing the week-over-week moves where it matters on this front, here’s what happened last week:

  1. US Dollar Index = UP +1.1% to $75.18
  2. Euro/USD = DOWN -2.1% to $1.42
  3. CRB Commodities Index = UP +2.1% to 343
  4. West Texas Crude Oil = UP +1.2% to $96.20
  5. Gold = UP +4.0% to $1541
  6. Copper = UP +2.6% to $4.41
  7. SP500 = UP +0.3% to 1343
  8. UST 2yr Yields = DOWN -17% to 0.39%
  9. UST 10yr Yields = DOWN -5% to 3.03%
  10. Yield Spread (10s minus 2s) = DOWN 7 basis points to +264bps wide

What’s a little squirrely about those 10 moves is that we saw Commodity Inflation in the face of a strong US Dollar. That’s a TRADE though and not the TREND. The intermediate-term TREND that we have been calling for since April has been a Deflating Of The Inflation (Q2 Hedgeye Macro Theme). That’s predominantly driven by a series of higher-lows in the US Dollar Index.

 

Whether it was the 2008 strengthening of the US Dollar or the May-July 2010 period, carry traders of the US Dollar inspired Inflation Trade don’t particularly like it when that happens. Why? Well that’s easy – Timing Markets gets a lot harder when you can’t bank on the Fed bailing you out with another Dollar Devaluation policy. Got an imminent catalyst for QG3?

 

In terms of the Debt Ceiling debate finding a July compromise and QG2 (Quantitative Guessing Part Deux) ending at the end of June, our call has been that for the first time in a long time both US monetary and fiscal policy have bullish US Dollar catalysts.

 

We’ll see if this holds, but the odds are that as Silvio Berlusconi shifts his focus from hot-tubbing to going after the “speculators” in Italy, the Euro should be under duress inasmuch as the US Dollar searches for Waldo. Remember, Timing Markets matters – and to get the US Dollar right, you need to get the Euro right.

 

If you change the duration of the thesis, I can give you a different “research” call for almost everything I am looking at right now. The tricky thing about markets is that they couldn’t care less about the duration of my thesis. I used to get upset about it – now I just deal with it.

 

In terms of positioning for the intermediate-term TREND, I think Deflating The Inflation and a Strong US Dollar is constructive for US, Chinese, and German equities, from a price.

 

Here’s how I am currently positioned from a Global Macro perspective in the Hedgeye Asset Allocation Model:

  1. Cash = 49% (down 3% week-over-week as I add exposure to Global Equities)
  2. International Equities = 21% (China, Germany, Sweden and S&P International Dividend ETF – CAF, EWG, EWD, and DWX)
  3. Fixed Income = 18% (US Treasury Flattener – FLAT)
  4. US Equities = 6% (Healthcare – XLV)
  5. International Currencies = 6% (Canadian Dollar – FXC)
  6. Commodities = 0%

From a timing perspective, I risk managed getting long both Chinese Equities (CAF) and the US Treasury Flattener (FLAT) well. Both of these positions are good examples of expressing a “research” view with solid risk management (timing).

 

As US growth slows, I wanted to express Growth Slowing by being long the compression of the US Treasury Yield Curve. As global growth slows, I wanted to buy the best major growth market in the world (China) while it’s on sale.

 

That’s not to say I haven’t made my fair share of timing mistakes. Two weeks ago I sold my Gold (GLD) position as I thought rising US Treasury Yields could deflate the gold price (historically, that’s when gold underperforms –when real-interest rates are negative). This morning, after the train wreck (9.2% US unemployment), US Treasury Yields are falling again, and Gold is rising (as it should).

 

No one said Timing Markets is easy. But “there are times when it’s important to invest cautiously, and there are times when it’s important to invest aggressively”, and I’ve made it my firm’s responsibility to be thought leaders on the front lines of these Global Macro debates.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1526-1547 (no position in GLD), $91.10-96.93 (we’re short OIL), and 1324-1363 (no position in SPY), respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Timing Markets - Chart of the Day

 

Timing Markets - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 14, 2011

As we look at today’s set up for the S&P 500, the range is 26 points or -0.97% downside to 1305 and 1.01% upside to 1331.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 714

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +964 (+1446)  
  • VOLUME: NYSE 883.56 (4.42%)
  • VIX:  19.91 +0.20% YTD PERFORMANCE: +12.17%
  • SPX PUT/CALL RATIO: 1.86 from 2.24 (-17.10%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 25.48
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.92 from 2.92
  • YIELD CURVE: 2.55 from 2.55

 

MACRO DATA POINTS:

  • 8:30 a.m.: Jobless claims, est. 415k, prior 418k
  • 8:30 a.m.: Advance retail sales, est. (0.1%), prior (-0.2%)
  • 8:30 a.m.: Producer Price Index, est. (-0.2%), prior 0.2%
  • 8:30 a.m.: Net export sales
  • 9:45 a.m.: Bloomberg Consumer comfort, prior (-45.5)
  • 10 a.m.: Bernanke testifies before Senate on Day 2
  • 10 a.m.: Freddie Mac mortgage
  • 10 a.m.: Business inventories, est. 0.8%, prior 0.8%
  • 10:30 a.m.: EIA Natural Gas, est. 79, prior 95
  • 1 p.m.: U.S. to sell $13b in 30-yr bond reopening

WHAT TO WATCH:

  • President Barack Obama may summon congressional leaders to Camp David summit this weekend after yesterday’s negotiations on raising the debt ceiling stalled
  • Gordon Brown urged Ofcom to investigate if News Corp. “fit and proper” to hold 39% stake in BSkyB
  • Facebook now valued at $84b, may hit $100b if it goes public next year: WSJ
  • Secretary of State Hillary Clinton leaves for Libya Contact talks in Turkey

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Bumper Wheat Harvest in Australia May Cool Near-Record Global Food Prices
  • Copper Seen Rallying as China’s Wanxiang Says Biggest User Faces Shortages
  • Gold Climbs to Record on Concern About Fed Stimulus, Europe’s Debt Crisis
  • Brent Crude Falls in London on European Debt, U.S. Credit-Rating Review
  • Soybeans to Gain as China Demand Draws Down Global Reserves, Cargill Says
  • Copper May Climb as Rio Tinto’s Production Drop Fans Concern About Supply
  • Sugar Falls on Bets Five-Session Rally Was Overdone; Coffee Prices Climb
  • Palm Oil Advances to Three-Week High as Cheapness to Soyoil Boosts Appeal
  • Mumbai Blasts Meant to ‘Jeopardize’ $43 Billion Diamond Trade, Group Says
  • China Sets Rare Earth Export Quotas for Second Half of 2011, Ministry Says
  • Commodity Boom Turns Bust for Stillwater Holders on Copper Deal: Real M&A
  • Beef Contaminated by Radiation Intensifies Food-Safety Concerns in Japan

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: wet Kleenex day returns with most of Europe down and FTSE breaking TREND line support of 5909 again; Greece continue to crash

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: Mixed with China leading on the upside, up another +.54% and up 3 of the last 4 days with Japan down 3 of the last 4; India improving

 THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Confusing Them

“If you can’t convince them, confuse them.”

-Harry Truman

 

On the recommendation of my good American friend whose first daughter was born on the 4thof July, I have embarked on reading what my son Jack called the “heavy book” last night – “Truman”, by David McCullough. Whether you are a Republican or Democrat (or neither), you have to love that quote - purely and professionally political.

 

After Truman’s 2ndterm as President of the United States, there was a French storyteller by the name of Charles de Gaulle who suckered the French people into believing that a deficit spending and currency devaluation strategy was the best way to national prosperity.

 

De Gaulle became the 18thPresident of France in 1959 and quickly printed a fresh new fiat currency (issued in January of 1960) that was allegedly going to control ze inflation and spur ze economic growth. Sound familiar?

 

Of course it does.

 

Professional politicians have been obfuscating facts about their policies to devalue their currency and inflate asset prices for eons. By the time the French franc was flipped for another fresh new fiat (the Euro) in 1999, De Gaulle’s Fiat Fool money was worth just north of 10% of the “value” embedded in it at prevailing market prices of 1960.

 

Savvy American politicians introduced this political strategy of “Confusing Them” in the 1970s. Like Bush and Obama, both Nixon and Carter had one thing in common – a modern day Ben Bernanke in Arthur Burns (good ole Art was the last US Federal Reserve Chief to attempt to “monetize” the US Debt, fyi).

 

So from Truman printing US Dollars to finance war (WWII, Korea), to Charles de Gaulle, Richard Nixon, and back again – what have we learned about money printing being a policy to inflate?

 

Obviously a lot.

 

And with this sad and pathetic political reality, like they used to say on my favorite Soap Opera while playing Junior Hockey in Canada, “these are the Days of Our Lives.”

 

Back to the Global Macro Grind

 

Yesterday, the US Dollar Index got hammered for a down -1.1% move as Gold was raging to the upside. Meanwhile, La Bernank (changed from The Bernank in the spirit of his 1960s France) got put on the spot by Ron Paul when asked whether “Gold is money”?

 

Notwithstanding Paul’s marketing challenges in asking concise questions of the Chairman, this one was as simple as simple gets. You can check out La Bernank’s answer to the question on YouTube. Suffice to say, with Gold ripping to a new all-time high in the face of Bernanke Burning The Buck, he didn’t want to tell us he was levered long Gold futures contracts.

 

Rather than listening to card carrying members of the Keynesian Kingdom attempt to explain what the value of money is, I highly recommend reading Niall Ferguson’s “The Ascent of Money.” Give it 30 years and La Bernank will be remembered by the history of money about as kindly as Arthur Burns has been.

 

Qu’es ce qui se passe avec Le QG3?

 

Well, Le Quantitative Guessing Part III caught a bid yesterday as La Bernank opened the door for more of what he’s been doing since becoming the Chairman of the Federal Reserve in 2006 – compromising the credibility of American currency.

 

After about a 3 hour rally, US stocks got tired of the nonsense and sold off aggressively into the close. Why? The People get it – Le QG1 and Le QG2 = Le Inflation Policy, not La Employment.

 

Fool me once, fool me twice…

 

Les Fiat Fools aren’t fooling anyone this week:

  1. Real-time Inflation (CRB Commodities Index) = UP +1.7% for the week to-date
  2. Real-time Stock Market Inflation Returns = DOWN -1.9% for the week to date 

Since Obama, Geithner, and Bernanke can no longer convince markets that Quantitative Guessing is the best path to long-term American prosperity, the only strategy that remains is to attempt to confuse them.

 

Good luck with that.

 

My immediate-term support and resistance ranges for Gold, Oil and the SP500 are now $1, $96.54-100.03, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Confusing Them - Chart of the Day

 

Confusing Them - Virtual Portfolio


YUM - TOP 10 TAKAWAYS FROM THE QUARTER

Post-market, YUM is trading up 3-4% on 2Q11 earnings of $0.66 ex-items vs consensus of $0.61 and guidance of EPS growth of at least 12%, or $2.83 versus prior guidance of at least 10% growth.  Without the amazing sales trends in China, and a lower-than-usual tax rate, the quality of the EPS was suspect. When it’s all said and done, I don’t believe the stock will be up much tomorrow.  Below are ten quick takeaways from the quarter; with more detail to follow tomorrow after the call.

  1. Consolidated revenues gained +9% year-over-year, operating profit declined -2% and pre-tax income increased +1%.  Net income was up 10% and EPS gained +11% y/y.
  2. China was strong with reported system sales growing +34% and sales excluding the impact of FX gaining +28%.  Same-store sales came in at +18% versus consensus of +10.8% (SSS for KFC +17%; Pizza Hut +22% and same-store transactions +21%).  On a two-year basis, same-stores accelerated 11%, up 250pbs sequentially.
  3. Despite these strong sales trends, China restaurant level margins were 19.7% vs 20.1% last year.
  4. YRI was in line with reported system sales +13% and +6% excluding FX (Emerging markets sales +11%; Developed markets +4%).  Same-store sales were +2% versus consensus of +1.6%.  YRI restaurant margins were 12.6% vs 10.5% last year.
  5. The YUM USA was an unmitigated disaster: Comps declined -4% versus consensus -1.6%. (KFC -5%; Taco Bell -5% and Pizza Hut -2%.  Restaurant margin decline 4.4% to 11.8% and operating profits declined 26%.  On a 2-year basis, same-store sales in the USA were -2%.
  6. YUM USA brands are in secular decline.  EBIT growth, on a year-over-year basis, has declined 7 of the last 12 quarters.
  7. USA represented 28.8% of operating profits in 2Q11, down from 41.3% last year.  China grew to 39.7% from 31.2% last year.
  8. The EPS beat was due to lower interest expense and a lower tax rate (the tax rate declined to 16.7% from 23.6%).  Interest expense was down 16.7% YoY.  
  9. Deflating the inflation in China - margin compares get easier in 2H11, while same-store sales should continue to be strong. 
  10. Before long, it will not make sense for YUM to be headquartered in Louisville KY.

 

We will have more details on the quarter and how we think 2H11 will shake out after the call tomorrow.

 

YUM - TOP 10 TAKAWAYS FROM THE QUARTER - YUM CHINA matrix

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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