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MAR Q2 COMMENTARY

Not awful but looks like a slight slowdown in RevPAR.

 

 

Relative to whisper expectations, Q2 RevPAR and Q3 RevPAR guidance is probably a little disappointing.  As many of you know, we’ve had been anticipating a June/July RevPAR slowdown based purely on the sequential math of absolute dollar RevPAR and historical seasonality.  Admittedly, we had expected a bigger slowdown which makes us a little more positive on the stocks actually, but only after the Street absorbs the lower expectations.  Assuming our macro view doesn’t get any worse, look for us to get more constructive on some lodging names as we move into late summer.

 

 

MAR 2Q11 Review

Revenue was $2MM lower than our estimate – with fees coming in $8MM light and somewhat offset by owned,  leased corporate housing and other and timeshare coming in $3MM and $4MM better, respectively.  Lower revenues were offset by lower SG&A, taxes, and share count, resulting in an in-line EPS number.

  • System-wide rooms came up short of our estimate because they included Cosmo rooms in the base
  • Fee revenues were $8MM lower than our estimate and $1MM below the low end of company guidance. The miss was across base, franchise and incentive fees – the company blamed lower incentive fees on weak ME and Greater D.C. areas.
  • Owned, leased, corporate housing and other revenue net of expenses ($29MM) was in-line with our estimate and at the higher end of company guidance.  Margins were negatively impacted by a $4MM YoY decline in termination fees.  Branding fees weren’t disclosed.  It appears that food, beverage and other revenues declined 16% YoY – not inconsistent with the 20% decline we saw last quarter – likely as a result of higher rate driven by more giveaways (free internet, free parking, complimentary breakfast, etc)
  • Timeshare sales and services revenue, net of direct expenses of $43MM missed the low end of company guidance by $7MM.  MAR attributes the miss to lower interest income on a smaller mortgage portfolio and higher productions costs as well as a higher percentage of deferred revenue.

Other stuff:

  • G&A of $159MM was $6MM below the low end of company guidance and would have been even lower if not for several ‘one-time’ items
    • $7MM of higher legal fees
    • $5MM payment to the performance of one hotel
    • $3MM of transaction related expenses associated with the spin-off transaction
  • Interest expense of $37MM was also lower than our estimate – MAR sited higher capitalized interest as part of the reason behind the decline

 

EBITDA guidance for the full year was lowered by $20-35MM – driven by

  • $10MM decrease in fees
  • $10MM decrease in net timeshare sales and service revenue (deferred revenue and lower interest on smaller mortgage portfolio)
  • $5MM increase in SG&A

Somewhat offset by

  • $5MM higher net owned, leased, corporate housing and other revenue
  • Lower share count (buyback)
  • Lower tax rate
  • Lower interest expense (higher capitalized interest)

TALES OF THE TAPE: YUM, SBUX, MCD, RUTH, RT, BWLD, BJRI

Notable news items and price action pertaining to the restaurant space as well as our fundamental view on select names.

 

MACRO

 

The performances of the QSR stock yesterday continue to suggest that business trends continue to remain strong ad that this should be a strong earnings season.  The food processors continue to struggle with high commodity prices.

 

TALES OF THE TAPE: YUM, SBUX, MCD, RUTH, RT, BWLD, BJRI - subsectors 714

 

 

Lower energy prices and a downshift in the domestic economy have taken the edge off U.S. import prices, as they fell 0.5% in June. Imported food and beverage prices fell 1.9% in June, larger than the 0.7% decline in May.

 

This morning, jobless claims were above 400k yet again, coming in at 405k.  While this was below consensus at 415k, and the week prior’s revised 427k, it shows that the employment scenario is still far, far away from improving meaningfully.  4-week rolling claims declined slightly week-over-week but remain elevated at 423k. 

 

TALES OF THE TAPE: YUM, SBUX, MCD, RUTH, RT, BWLD, BJRI - initial claims

 

 

QUICK SERVICE

  • YUM beat expectations on the back of outstanding +18% same-restaurant sales growth in China.  Margins in China were down, however, and the consolidated tax rate was lower-than-usual, providing a boon to earnings.  YRI comps were up +2% and the U.S. comps declined -4%.  The earnings call will take place at 9:15 am.
  • YUM’s KFC was mentioned, alongside KO, as two companies that sent representatives to North Korea earlier this month to discuss opening branches in Pyongyang.
  • SBUX has debuted a new kiosk concept at the JW Marriott Indianapolis.  According to a company release, the new kiosk will feature the full Starbucks menu.
  • MCD has prevented Russian authorities not to double its tax bill by persuading them that its outlets are supermarkets rather than restaurants.


FULL SERVICE

  • RUTH, RT, BWLD, and BJRI all gained on accelerating volume.

TALES OF THE TAPE: YUM, SBUX, MCD, RUTH, RT, BWLD, BJRI - stocks 714

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


THE M3: S'PORE Q2 GDP; MAY PACKAGE DATA

The Macau Metro Monitor, July 14, 2011

 

 

ECONOMIC GROWTH EASED IN SECOND QUARTER 2011 MTI

S'pore Q2 GDP growth slowed to 0.5% YoY, missing analyst expectations of 1.5% growth. On a seasonally-adjusted basis,  the economy contracted by 7.8% QoQ (consensus at -1.9%).  But MTI said, "tourism-related sectors such as hotels and restaurants continued to register healthy growth due to strong visitor inflows."

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MAY 2011 DSEC

Visitor arrivals in package tours increased by 2.2% YoY to 582,596 in May 2011.  Visitors from Mainland China (431,562); China (31,321); Hong Kong (25,170) and Republic of Korea (21,055) increased by 2.2%, 47.1%, 23.6% and 43.1% respectively.

 

Total number of available guest rooms of hotels and guest-houses increased by 1,945 (+9.9%YoY) to 21,518 rooms, attributable to the opening of new 5-star hotels.  Hotels and guest-houses received 689,495 guests in May 2011, up by 5.9% YoY, with the majority coming from Mainland China (54.3% of total) and Hong Kong (18.5%). The average length of stay of guests decreased by 0.01 night to 1.5 nights.The average occupancy rate of hotels and guest-houses was 82.0%, up by 4.1% points YoY.



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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


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